High Unemployment May Ensure Low Rates For Years

“The most important part of the Federal Reserve-watching game is now this: figuring out how long it will take for the unemployment rate to drop to 6.5 percent. That’s the benchmark that the Fed’s rate-setting Open Market Committee pegged in December as the one that will prompt it to begin raising the Fed funds rate, now set between 0 and a quarter of a percentage point.

Two new pieces of research — one from Morgan Stanley, one from CNBC — suggest it could be years, in fact, at least a half a decade, before the economy hits that mark. Both projections require a series of assumptions that are unlikely to be accurate: principally that there is no recession over an extended period and that job growth or economic growth remains steady. But they are still useful as a way to think about how long the Fed could keep rates on hold and, by extension, how long before the Fed stops buying assets through quantitative easing. The Fed has said that it would do so “if the outlook for the labor market does not improve substantially,” a phrase that has been taken to mean some unemployment rate below the current level of 7.8 percent but above the 6.5-percent trigger for raising rates.

Here are two different ways of projecting how long it could take until that 6.5-percent unemployment rate is reached….”

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