With the Federal Reserve continuing its tightening, it is interesting to look back at the relationship between job creation and the federal funds rate, the Fed’s flagship means of “controlling” the economy.
Let’s start by looking at a graph from FRED which shows both the federal funds rate and the percent change in total non-farm employees on a year-over-year basis going back to the beginning of the latest expansion:
Let’s look at previous economic expansions to see if the same relationship holds:
1.) Expansion from December 2001 to November 2007:
As interest rates rose from 1 percent to 4.59 percent, the rate of job creation grew from1.22 percent to 2.16 percent in March 2006, however, job creation rates dropped rapidly to 1.64 percent as the federal funds rate reached 5.24 percent in July 2006. By the time that the Fed began to lower rates in July 2007, the year-over-year job creation rate had dropped to 1.11 percent, nearly half the rate at the peak in March 2006.
2.) Expansion from April 1991 to February 2001:
3.) Expansion from December 1982 to June 1990:
While I won’t go into detail on this expansion, the relationship between rising interest rates and dropping job growth rates is still apparent, particularly after the interest rate peaks in 1984 and 1989.
4.) Expansion from April 1975 to December 1979:
In addition, if we look at the relationship between the two economic variables, we can see that the rate of job creation since the Great Recession has been relatively modest by historical standards, despite the Fed’s “heroic” measures:
From this posting, we can see that the Federal Reserve and its use of the federal funds rate to both heat up and cool down the economy is actually quite efficient, however, there is a very heavy price to pay. Even during economic expansions, as the Federal Reserve tightens, the rate of job growth declines, sometimes significantly. The current expansion is no exception; job creation rates have dropped by nearly one-third since the Fed began to tighten in early 2016. If previous trends hold, as the braintrust at the Fed continues to raise interest rates in 2018, we can expect to see the rate of job creation drop by 50 percent from the levels last seen in early 2015. Unfortunately, central bankers don’t pay the price for an economy that is creating fewer jobs as their employment is pretty much guaranteed.
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