Liesman looks at the Federal Reserve guessing game. His article is titled "The Fed Guessing Game: Funds Rate to Rise, but When?" He explains that the Federal Reserve Open Market Committee has decided that it is going to increase the current federal funds rate once the unemployment rate in the economy reaches the level of 6.5%. The current rates are about zero to a quarter percentage point. However, the economists are arguing that it is going to take a long time until the unemployment rate in the economy reaches the trigger level. Accordingly, two streams of research have tried to identify the time when this level of unemployment will be reached in the United States’ economy.
The first research has been conducted by Morgan Stanley. This research estimates that under the job growth rate of 150,000 jobs per month and with participation rates at current levels, which are 63.6%, it will take approximately 6.58 years to arrive at the target unemployment rate of 6.5%. However, if the participation rates go down or up, this time will also lessen or rise respectively. On the other hand, CNBC also conducted its estimate of the time of reaching the trigger unemployment level. It found that the growth in gross domestic product (GDP) was linked to reducing unemployment. Accordingly, it has given a range of GDP growth rates, their corresponding decreases in unemployment rates, and the time it will take to reach the trigger unemployment level of 6.5%. With GDP growth rate at 4%, unemployment will reduce by 1.03% per annum, and the target rate will be achieved in 1.3 years, starting from second quarter 2014 (Liesman).
The story tells of the macroeconomic principle of the relation between unemployment rate and the growth in GDP. It tells that the unemployment rate in the economy shrinks as the GDP growth rate shoots up. Unfortunately, we have not studied the relationship between unemployment and GDP growth rates in our class (McConnell, Brue, and Flynn).