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THE TRIGGER FOR A CHANGE IN FED POLICY WOULD MOST LIKELY BE A RISING UNEMPLOYMENT RATE.


Figure 5: New Unemployment Claims 3-Month Moving Average


Source: Chart Created by CME Group Economics -Bloomberg Professional (INJCJC)


Figure 6: Conflicted Probability Distribution for where the Federal Funds Rate will end 2020


THE FED’S POSSIBLE RESPONSE TO A RECESSION With this background on negative rates and negative yielding debt, it is now time to turn our attention to the Fed and what it might do if a recession developed. Would the US Fed follow the ECB and BoJ into negative rates for overnight deposits held at the central bank? Not likely. The trigger for a change in Fed policy would most likely be a rising unemployment rate. The unemployment rate ended Q3/2018 comfortably below 4%, at 50- year lows. If, for whatever reasons, the unemployment rate started to climb above 4% and appeared headed higher, we think the Fed would move abruptly to cut rates to 0% to 0.25% in just one or two big moves, and the Fed would also probably re-start its buying program of long-dated US Treasury notes and bonds. As most economists know and the Fed appreciates, once the job market turns in a negative direction, the recession has already started and the job losses come thick and fast. Unlike the slow grind of rates on the way up as an economy recovers from a recession and starts to expand again, when an economy enters a recession, the Fed typically moves quickly. Although, one of the challenges is that by the time the labor market is in turmoil, the economy is already 3-6 months into the recession.


Blu Putnam E: bluford.putnam@cmegroup.com


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.


Source: Chart Created by CME Group Economics


25 | ADMISI - The Ghost In The Machine | November/December 2019


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