Onset of Fed Rate Tightening: Historic Examples

April 14, 2010

Fed Chairman Bernanke’s remarks before the Joint Economic Committee today sent mixed signals — on the one hand failing to say that rates will probably stay at current exceptionally low levels for an extended period but on the other dwelling on the prospect of very high unemployment and long-term unemployment continuing.  I would put more weight on the latter than the former.  The “extended period” language had become a rut, eroding the central bank’s flexibility in action and in communication, and some policymakers had come to view the phrase as a mounting hindrance.

A second reason for not anticipating a rate hike in the near term emerges from a comparison of unemployment and CPI inflation now to where such were in the months when fed funds rate tightening cycles occurred in the past 22 years.  Note that the jobless rate of 9.749% could not have been any higher without getting rounded up to 9.8%.

  Fed Funds Jobless Rate CPI Core CPI
03/88 6.50% 5.7% 3.9% 4.4%
02/94 3.00% 6.6% 2.5% 2.8%
06/99 4.75% 4.3% 2.0% 2.1%
06/04 1.00% 5.6% 3.3% 1.9%
04/10 0.25% 9.7% 2.3% 1.1%

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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