When Will the Unemployment Rate Fall?
Dec 14th 2012 10:20AM
Updated Dec 14th 2012 10:36AM
Federal Reserve Chairman Ben Bernanke may as well have said that interest rates will remain low until pigs fly, or until he's named the Queen of England, or until the unemployment rate falls.
Wait -- what's that? He did say one of those things? Oh, boy.
Apparently, the Fed will keep rates low until the unemployment rate hits 6.5%, so long as inflation stays below 2.5%. With job creation trudging uphill like a train with low self-esteem, does this mean it will be eons before we see higher interest rates?
A few forecasts
Let's see if we can find a prediction for when we might hit 6.5% unemployment from the current 7.7%. The Fed itself predicts unemployment through the median responses from a survey of professional forecasters:
|Year||Forecast Unemployment Rate|
Gulp. Moving on, how about the Wall Street Journal-Economist poll:
|Month||Forecast Unemployment Rate|
Well, that doesn't look any better. What does the Congressional Budget Office say?
|Year||Forecast Unemployment Rate|
Finally! Keep in mind that this forecast is based on current policy, meaning the tax cut expirations and budget cuts of the fiscal cliff, which leads to the increase in unemployment next year. However, we see that unemployment might fall to 6.5% sometime between 2016 and 2017.
Still, with many anticipating a deal in Congress to avoid the fiscal cliff, the above forecast might be skewed in one way or another. So let's look at one more forecast for good measure. What does the International Monetary Fund think?
|Date||Forecast Unemployment Rate|
The IMF study forecasts that the U.S. will hit 6.5% unemployment in 2016. So the Fed could raise rates around 2016. But of course, while short-term forecasts of unemployment will likely be accurate, events and factors that we haven't considered could affect us before 2016 arrives. Let's look at Japan, for instance.
Japan's fight against interest rates
The Bank of Japan's interest rate dove to less than 1% in 1995, and the bank has since struggled to raise it:
Take this quote from a 2007 Economist article:
No surprise then that that the BoJ decided to forgo a rate raise at a meeting on October 31st. That may seem sensible. The bank is scarred by the memory of raising rates by a meagre 0.25% in August 2000, only to see a nascent economic recovery falter, forcing it to reverse tack and lower rates again.
From the bursting tech bubble, which forced Japan to reduce rates, to the mortgage crisis, to the 2011 earthquake, Japan encountered many unforeseen events. So while the Fed's linkage of its policy to unemployment is meant to give a clearer expectation of when it will raise rates, the target unemployment rate is too far in the future to make the picture any clearer. The Fed's earlier plan of keeping rates low until 2015 still seems to be holding up, but anything beyond that is still up for debate.
What this means for you
The Fed rate can greatly affect mREITs -- those companies that hold mortgage debt and make money off the spread between interest rates. Although some believed that the Fed's guarantee of low rates would spell continued returns for mREIT investors, plenty of the most popular mREITs' share prices are down since that January announcement. Annaly Capital is down almost 15%, Anworth Mortgage Asset is down 10%, Chimera Investment and Hatteras Financial are both down 7%, and CYS Investments is down about 5%. Of course, with dividend payouts added in, these companies' returns even out. But all lag the S&P 500's return of about 10%. Along with worrying about the Fed's moves, these companies are fighting against mortgage prepayments and banks taking more of the interest rate spread.
More broadly, low interest rates will keep savers looking for places to earn higher returns. Low rates have also led many pension funds that typically invest in treasuries to earn lower returns, with the largest 100 public pensions in the U.S. now sporting $1.2 trillion in unfunded liability. And many wonder how low rates will limit the Fed's options if another recession comes along.
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The article When Will the Unemployment Rate Fall? originally appeared on Fool.com.Fool contributor Dan Newman has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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