Unemployment Rate May Reach 6.5 Percent Sooner Rather Than Later

Unemployment Rate May Reach 6.5 Percent Sooner Rather Than Later

Interest rates will be kept at a near zero level by the Federal Reserve until the unemployment rate reaches of 6.5, which may happen in the middle of 2015.

However, the target date for the lower unemployment rate may be closer than what the Fed has predicted, according to a number of economists. Currently, the unemployment rate is at 7.7 percent, which has gone down from the 9 percent in September 2011. The mid-2015 target for the 6.5 percent rate is longer than what it took for the rate to go down at a similar amount, according to Barclays economist Dean Maki.

Maki indicated that the people who became unemployed since 2007 and are currently looking for work may be the reason for the economic forecast of the Fed. The unemployment rate will increase if these people cannot find jobs immediately.

But Maki indicated that a number of these people may have already retired and may stay retired, which means that the unemployment rate may go down to 7.1 percent near the end of next year. This means that the Fed target may be reached in the first half of 2014.

The unemployment rate may go down as the economy improves according to Joel Naroff, an economist. This will compel the Fed to end its low interest rates policy by purchasing bonds.

Discussions among economists have focused on where the people who left the labor force are. Naroff and Maki forecast an 8 percent unemployment rate for November last year. This forecast is better than the Fed forecast, which indicated that unemployment for November will be from 8.1 percent to 8.9 percent.

Even with the positive outlook of Naroff and Maki, some economists have a similar outlook as the Fed. According to Mark Zandi of Moody’s Analytics Nigel Gault of IHS Global Insight, the labor market will see an influx of workers. The unemployment rate will go down slowly even as an improvement will be noted near the end of next year.

It remains to be seen if the interest rate policy of the Fed will be modified once the unemployment rate goes down. Rick Rieder of BlackRock indicated that the Fed has not given its commitment to increase interest rates once the 6.5 percent target is reached. It may keep the same interest rate if the number of workers entering the labor market is low.

Gault added that the low rates can be maintained by the central bank if wage growth is slow even if the target for the unemployment rate is reached. This will give the bank some flexibility to make any necessary adjustments.

Posted by James Fried on Wednesday December 19 2012, 5:23 AM EST. Ref: USA Today. Link. All trademarks acknowledged. Filed under Finance. Comments and Trackbacks closed. Follow responses: RSS 2.0