When Will the Unemployment Rate Reach 6.5%?

November 06, 2013 | David Hernandez, CFA, Director of Traditional Manager Search

This week we examine when the unemployment rate may hit the Fed’s 6.5% target, courtesy of the Federal Reserve Bank of Atlanta’s Jobs Calculator™. The chart above shows the average monthly change in payroll employment needed for the unemployment rate to hit 6.5% at the listed months. For example, if the average monthly change is 190,000, we can expect to hit the Fed’s target around October 2014. These calculations assume the current labor participation rate of 63.2% remains constant.

Over the last 24 months the average number of new net jobs created each month in the U.S. has been 181,750. If that number persists, the Fed’s target of 6.5% will be reached in December of 2014 at which point investors may prepare for an increase in the Fed Funds rate. However, the unemployment rate does not exclusively capture labor market conditions and the Fed will undoubtedly look to other metrics including the labor force participation rate. Since 2008 the participation rate has fallen from 66.2% to 63.2%, a 35 year low. This unparalleled drop has unfortunately been a major driver in the unemployment rate’s downward movement and clouded labor market conditions. For this reason among others, economists have begun questioning whether the Fed will lower its target for unemployment and investors would be wise to not solely rely on the headline number to determine the health of the labor market.