The timing of the Fed exit strategy

June 15, 2009

When will the Federal Reserve begin to execute its exit strategy? Well, as far as the interest rate component goes, keep an eye on the job market.  At least that is how economists John Ryding and Conrad DeQuadros see things:

It is an empirical fact that since the Fed adopted interest rate targeting, it has never made the first move to hike rates after a recession until the unemployment rate had peaked. Although the funds rate target is unusually low, at 0%–¼%, it is also the case that the unemployment rate is unusually high, at 9.4%, and expected (by both ourselves and the Fed) to move higher. In the post-war era, only the 1981-82 recession has seen a higher unemployment rate than the current rate and that recession was accompanied by a rapid disinflation from 10.4% at the start of 1981 to 4.7% at the start of 1983.

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