The Federal Reserve’s is expected to extend its easing measures until the job market improves “substantially”, the stated goal is a decline of the unemployment rate to 6.5%. One can use the unemployment rate model to provide an estimate of the future unemployment rate (UER). This model suggests that the unemployment rate will decline to 7% by the end of 2013, and to 6.5% by the middle of 2014; the implication being that the Fed could abandon its easing measures fairly soon, which should affect bond and stock prices adversely.
We can anticipate the Federal Reserve’s easing measures to end fairly soon, possibly in the fourth quarter this year, when the UER is expected to be 7% according to the model.
The St. Louis Fed president said he expects the U.S. unemployment rate, 7.9 percent in January, will drop to the “low 7s” by year’s end, which he said would meet the Federal Open Market Committee’s test of “substantial improvement” in the labor market needed to end purchases. “Almost anybody would have to say that would be substantial improvement compared to where we were at the time of the launch of QE3,” he said. [Bloomberg]
One can expect the stock market to react negatively to this event, and rising bond yields will cause bond prices to decline as well. One should also keep in mind that a new recession may start in the beginning of 2016.
Chosen excerpts by Job Market Monitor
via When Will the Fed’s Easing Measures End? The Unemployment Rate is the Key.
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