Perspectives Blog

A question for Jackson Hole

Zach Pandl, Portfolio Manager and Strategist | August 20, 2014

…o learn more at this week’s Jackson Hole conference. A consensus among Fed officials holds that the standard U3 unemployment rate—now at 6.2%—“considerably” understates slack in the labor market. As a result, policy should focus on broader measures like the U6 unemployment rate—which includes discouraged workers and part-time workers who would prefer full-time work—or statistical estimates of the total “employment gap” (such as that from economi…

U.S. rates – An intriguing six point three

Zach Pandl, Portfolio Manager and Strategist | June 9, 2014

Fed and consensus unemployment forecasts are likely to come down after last week’s jobs report. It is not obvious what lower unemployment rate forecasts mean for U.S. monetary policy. June FOMC meeting should shed light on Fed’s worldview—in particular, whether the U3 unemployment rate still matters. The latest jobs report may look pretty bland on the surface, but I can assure you that it will generate plenty of intrigue among close observers…

Gaps, not growth

Zach Pandl, Portfolio Manager and Strategist | February 25, 2014

…GDP growth) where beta is the Okun’s Law coefficient. The relationship is also commonly written in terms of the unemployment gap—the difference between the unemployment rate and its structural rate. Okun’s Law is at the center of today’s biggest policy debate. Since the recovery began in the second half of 2009, GDP growth has increased at an average annualized rate of just 2.4%. Before and during the recession, most economists thought that pote…

Slack and inflation

Zach Pandl, Portfolio Manager and Strategist | July 21, 2014

…sk that inflation eventually overshoots the Federal Reserve’s target. In recent decades that target was “minimum unemployment,” with the minimum defined as the rate consistent with stable inflation. Judging by this standard, the unemployment gap today is less than one percentage point, implying a small amount of remaining labor market slack and only modest downward pressure on inflation (Exhibit 1). However, the most recent recession and slow rec…

U.S. rates — Data dependence

Zach Pandl, Portfolio Manager and Strategist | June 23, 2014

…art of the June FOMC meeting was the fact that the funds rate outlook once again responded to the decline in the unemployment rate. This evidence of data dependence suggests the period of shifting goalposts is ending. In Exhibits 2 and 3 we show the committee’s central tendency forecasts for the year-end unemployment rate and fed funds rate at the time of each FOMC meeting. Until this year, almost every forecast update involved lower unemployment

Volatility and Goodhart’s Law

Zach Pandl, Portfolio Manager and Strategist | May 21, 2014

…not hard to understand why. In her speech to the New York Economics Club, Fed Chair Yellen said that besides the unemployment rate, the committee will need to consider the share of workers on part-time schedules, the fraction of unemployment which is long-term, the participation rate, and wage growth. But Fed officials neither provide targets for these variables nor give indications about how they will deal with contradictions. Thus the natural t…

U.S. rates – Waiting for the sound

Zach Pandl, Portfolio Manager and Strategist | May 5, 2014

…annualized growth) We have also seen further improvement in the all-important “gaps”—the difference between the unemployment rate and its structural rate, and the difference between inflation and the Fed’s target. Since the end of last year, the unemployment rate has declined to 6.3% from 6.7%, a period over which the labor force participation rate (LFPR) was unchanged at 62.8% (the LFPR rose in December through March but reversed those gains in…