US Unemployment Rate Likely To Undershoot The Fed’s Forecast

The average pace of US unemployment rate declines has hovered near 0.8% per year, during the entire recovery period. Yet, the FOMC forecast assumes that the trajectory will flatten out dramatically over the coming quarters.

The latest Summary of Economic Projections (SEP) shows the rate declining by just 0.25% over the next six months, and by only 0.25% during all of 2016. Moreover, the Committee envisions no progress thereafter. Once it reaches 5% - or the lower end of the Fed's estimated NAIRU range, the jobless rate is expected to flatten out. It would be very unusual for the progress to stall so soon after reaching the longer-run equilibrium rate.

"Overall, job growth is expected to average at 225k/month over the next four quarters for the unemployment rate to drop to 5.1% by the end of this year, with a cyclical trough of 4.3% to be reached in late 2017", says Societe Generale.

In the last four economic expansions, the unemployment rate troughed on average 0.8% below NAIRU. For the current cycle, this would imply a bottom around 4.2% The FOMC's forecast is predicated on two assumptions:

Productivity growth will recover after a two-year lull, leading to a slowdown in the pace of hiring.
The participation rate will rise modestly as tighter labor market conditions lead to a return of discouraged workers.

"The FOMC would react essentially with only two choices: lower NAIRU, or raise the "dots." Te risks are skewed toward the latter", added Societe Generale.

Source : FX-Primus

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