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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: mishedlo who wrote (9136)7/13/2004 5:44:10 AM
From: zonder  Read Replies (1) of 116555
 
the data suggest that the Fed may have tightened too soon, and is actually “ahead of the curve”. The most compelling argument for this is derived from the broadest measure of performance in the labor markets

The Fed does not, and should not, determine interest rates with regards to the level of unemployment. Tightening through interest rate hikes serves to control inflationary pressures. It is not an efficient tool to boost employment, and is hence not used as a means to regulate the level of employment in a country.

I kind of remember something called the Phillips Curve that shows unemployment is negatively correlated with price inflation. In fact, if we look at history of previous tightening cycles in the US (below), we see that unemployment declines DESPITE interest rate increases (that lower inflation).

...........UNEMPLOYMENT........FED RATE

1976...........7.8%.................4.75%
1979...........6.0%.................15.5%

1983...........10.1%................8.5%
1984...........7.5%.................11.75%

1987...........6.3%.................6%
1989...........5.2%.................9.75%

1994...........6.6%.................3%
1995...........5.6%.................6%

1999...........4.3%.................4.75%
2000...........3.9%.................6.5%

[I quickly compiled the data above from a couple of sources - there might be an error somewhere in there, feel free to validate it all]
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