UNEMPLOYMENT / FED FUNDS RATE - PLAY BOOK
Updated
UNEMPLOYMENT / FED FUNDS RATE - PLAY BOOK
This post I intend to explore with you the cyclic relationship we can observer between:
1) US Unemployment Rate (BLUE),
2) 21D SMA (Orange) based in unemployment data, and
3) Resultant Recessions (Gray Bars)
Historically, the general play book / sequence of events suggest once we break the 21 Day SMA (orange line), it is the start of unemployment unwinding and we lead into a recession.
As the 'FED FUNDs RATE' is the artificial tool used to 'Guide' the credit market (politically correct explination), the obvious question then is;
"What is the relationship / behavior of interest rates historically with this trend? Are we experiencing similar behaviour to the last 30 - 40 years?"
The Red line show the FED funds rate on the chart. The below sequence of events show how these variable play with each other:
The story goes: the FED increases the 'FED FUNDS RATE' (aka interest rates) because low periods of interest rates is resulting in a 'HOT' economy and causing inflation (i.e. market forces the FEDs hand to raise interest rates as the return for lending money to credit markets does not match the current risks).
At some point during interest rate rises:
1) FED rise in interest rates is held constant (the lagging effect of higher rates start to hit the economy resulting in slowing down economic activity - i.e. spending)
2) Record low unemployment starts to rise (Cross of 21D SMA historically has signaled a point of no return)
3) Fed start to drop rates due to employment increase, deflationary market disruption
4) Unemployment begins to rapidly increase
5) Recession
WHERE ARE WE NOW?
According to this play book, we are in currently in step 2 and approaching point 3.
If you find this post interesting, you may find my discussion around the 2 Year Treasury Bond Yield vs FED Funds Rate interesting.
This relationship is what I was using to speculate interest rate rises before they happened, and that they would be higher than people were expecting when there was talk of rates rising...
The Market in all cases will eventually win...
This post I intend to explore with you the cyclic relationship we can observer between:
1) US Unemployment Rate (BLUE),
2) 21D SMA (Orange) based in unemployment data, and
3) Resultant Recessions (Gray Bars)
Historically, the general play book / sequence of events suggest once we break the 21 Day SMA (orange line), it is the start of unemployment unwinding and we lead into a recession.
As the 'FED FUNDs RATE' is the artificial tool used to 'Guide' the credit market (politically correct explination), the obvious question then is;
"What is the relationship / behavior of interest rates historically with this trend? Are we experiencing similar behaviour to the last 30 - 40 years?"
The Red line show the FED funds rate on the chart. The below sequence of events show how these variable play with each other:
The story goes: the FED increases the 'FED FUNDS RATE' (aka interest rates) because low periods of interest rates is resulting in a 'HOT' economy and causing inflation (i.e. market forces the FEDs hand to raise interest rates as the return for lending money to credit markets does not match the current risks).
At some point during interest rate rises:
1) FED rise in interest rates is held constant (the lagging effect of higher rates start to hit the economy resulting in slowing down economic activity - i.e. spending)
2) Record low unemployment starts to rise (Cross of 21D SMA historically has signaled a point of no return)
3) Fed start to drop rates due to employment increase, deflationary market disruption
4) Unemployment begins to rapidly increase
5) Recession
WHERE ARE WE NOW?
According to this play book, we are in currently in step 2 and approaching point 3.
If you find this post interesting, you may find my discussion around the 2 Year Treasury Bond Yield vs FED Funds Rate interesting.
This relationship is what I was using to speculate interest rate rises before they happened, and that they would be higher than people were expecting when there was talk of rates rising...
The Market in all cases will eventually win...
Comment
I have created this companion post to allow for easy exploration of this relationship with respect to the S&P500.
Comment
Please note the below TYPO in the original post;“3) FED start to drop rates due to increases in UNEMPLOYMENT, and the resultant deflationary market disruption.”
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