Tom McKay

From Deutsche Bank on the US unemployment rate: Our analysis suggests that at least 50-60% of the decline in the participation rate is due to longer-term, structural factors, such as demographics and we expect the participation rate to continue to decline gradually. As a result, we anticipate that the participation rate will remain between 63% and 63.5% through the end of 2014, with realizations below the current level of 63.3% most likely. Under our most likely scenario, the unemployment rate hits the Feds 6.5% threshold for rate hikes before 2015, ahead of FOMC median projections. However, we believe that this will cause a communication headache rather than an earlier than anticipated tightening, as the Fed downplays the declining unemployment rate, and instead highlights continued weakness in the participation rate, employment-population ratio, and other labor market indicators. We see the first rate hike coming in 2015 H1.


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