When the Federal Reserve’s Open Markets Committee (FOMC) last met in April, the unemployment rate was on a declining path – having fallen to 8.2% in March from 9.1% the previous August. Against this backdrop, the Committee was modestly sanguine on prospects for job growth going forward. “The unemployment rate will decline gradually,” it predicted, “towards levels that it judges to be consistent with its dual mandate,” without need for new monetary stimulus measures.
The two broken lines in the figure above show the upper and lower bounds of the “central tendency” of the Fed’s April unemployment forecasts – that is, the range of forecasts excluding the top and bottom three. The three dotted lines show the trend of the unemployment rate if the pace of the decline in the number of unemployed people in the three months prior to March, April, and May, respectively, were to continue. As can be seen by the May trend line at the top, the employment picture has clearly deteriorated since the FOMC met in April, and is above the most pessimistic of its “central tendency” forecasts. This suggests that there will be significant pressure from within the Committee for further easing when it meets this Tuesday and Wednesday, June 19 and 20. We believe this will take the form of extending “Operation Twist,” its program launched last September to push down long-term interest rates by buying long-term bonds using the proceeds of shorter-term bond sales.