Unemployment and the Fed Funds Rate

Good morning,

The economic calendar presents a quiet picture today with only the Department of Labor’s release of its weekly Jobless Claims report. The report showed an unexpected increase in the number of people filing for unemployment insurance along with the number of people already in this program. The weekly Initial Jobless Claims report showed a 19,000 increase from the previous period to 479,000. Analysts’ expected a 455,000 reading for the week. The previous week’s report was upwardly revised from 447,000 to 460,000.

Similarly, the Continuing Claims report also showed a higher than expected reading at 4.537 million. Furthermore, the revised number for the previous week showed a 6,000 increase to 4.571 million. Meanwhile, the 4-week moving average number of Initial Claims rose to 458,500, an increase of 5,250 from the previous period. This weaker than expected Jobless Claims report will set the tone for tomorrow’s release of July’s change in Nonfarm Payrolls, expected at -65,000 for the month as well as the unemployment rate which analysts expect will increase 0.10% to 9.60%.

Data Source: Bloomberg L.P. Chart by the Fixed Income Strategies Group RBC WM

Although the consensus among Fed watchers is that the Fed will hold interest rates steady in the 0.00 – 0.25% range with a “risk to growth” assessment; market participants will watch for any surprises in Friday’s unemployment rate. With the stabilization of the financial markets and contained inflationary pressure, the unemployment rate has taken center role as Fed officials pursue their mission of “promoting maximum employment and price stability” (Bernanke Semiannual Monetary Policy Report to Congress 02/24/09). Therefore a significant improvement in the unemployment rate could indicate a faster than anticipated change in monetary policy. Currently, according to the Bloomberg Federal Fund Implied Probability chart, no potential rate changes are expected at the August 10 FOMC meeting and it is not until 01/26/2011 when there is a small (21.70%) probability the Fed could increase rates to 0.50% - 0.75%.