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Now what

Now that it seems the Fed is ready to adjust monetary policy, perhaps it’s time to review what happens when they do. In the chart below you can see the last 24 years of Fed funds rate vs the U.S. unemployment rate. As you can see, over the past three interest rate cycles, whenever the Fed lowered rates, unemployment went up. During the great financial crisis, unemployment reached 10%, and went up quickly. In this cycle, it wouldn’t be surprising to see unemployment rise above 6-7%, even in a scenario of soft landing, since on top of an economic slowdown, this time we are betting on AI and the automation of many jobs, particularly the manufacturing ones. Companies will have an incentive to expand their margins by using technology to gain afficiency at the cost of reducing headcount. If on top of that, there is a recession, the spike in unemployment will be more pronounced.


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