Unemployment → Fed funds rate

Common explanation (Cause · opposite direction): When unemployment rises, the central bank cuts rates to support jobs (its dual mandate).

This issue: Unemployment at 44 (neutral), Fed funds rate at 72 (warm) — at least one is in the neutral range (40⁠–⁠60), so we make no call this issue.

Hot and cold describe position, not good or bad: warm does not mean a fall is coming, and an extreme reading does not mean a quick reversal. We describe history only, with no buy or sell advice.

Where it stands now

Where the two indicators stand this issue

Unemployment: 0.33 percentage points below its 10-year average, about as far below as usual. Fed funds rate: 1.31 percentage points above its 10-year average.

Tests

Does this link hold up?

Common explanationWhen unemployment rises, the central bank cuts rates to support jobs (its dual mandate)Source: Federal Reserve Board, “Monetary Policy: What Are Its Goals? How Does It Work?” (2021).
Tested against our dataAgreement between the positions of Unemployment and Fed funds rate (3-month lag), measured in the direction of the common explanation: +0.30 (an opposite-direction link: the raw correlation is −0.30, and a negative correlation fits, so the sign is flipped). Looking at every 5-year period (shifted one year at a time), the two moved in that direction in 43 of 48. Weak or inconsistent
Periods when it did not holdAcross 48 5-year periods, out of step in 1980⁠–⁠1989.

History

The two lines, overlaid

Data: US Bureau of Labor Statistics, via FRED (Federal Reserve Bank of St. Louis); Federal Reserve H.15, via FRED (Federal Reserve Bank of St. Louis). Positions: our calculation.

UnemploymentFed funds rate

Limits

What this card cannot tell you

Moving together does not prove that one causes the other.
Links change over time; periods when this one did not hold are listed in full.
This is the historical record, not a forecast.

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