Background on the Chicago Fed and Its Unemployment Model
The Federal Reserve Bank of Chicago (Fed) has been using a unique model to estimate the U.S. unemployment rate, leveraging private data sources since government statistics became unavailable due to the ongoing federal shutdown. This model, which typically relies on official unemployment data as a reference point, now uses private sector information to estimate monthly changes in the unemployment rate.
The Impact of the Government Shutdown on Unemployment Estimates
The Chicago Fed acknowledges that the ongoing government shutdown may gradually diminish the reliability of its model, as it cannot access the official unemployment rate for comparison. Instead, they use their previous “real-time” estimate as a reference, which might introduce some level of inaccuracy that could worsen over time.
However, Chicago Fed economists assert that the impact on their estimates will likely be “modest” within a one-to-three month timeframe.
October Unemployment Estimate and Market Context
According to the Chicago Fed’s October estimate, the U.S. unemployment rate remained steady around 4.3%. This figure aligns with other indicators, such as a slight increase in state unemployment benefit claims, suggesting that the U.S. labor market has cooled but is not in a freefall.
Fed’s Interest Rate Decision
The Federal Open Market Committee (FOMC) is set to meet this week, and market expectations are that they will lower the target federal funds rate by a quarter percentage point. This move aims to safeguard against a significant rise in unemployment, given the current economic climate.
Key Questions and Answers
- What is the Chicago Fed’s unemployment estimation model? The Chicago Fed uses a private data-driven model to estimate monthly changes in the U.S. unemployment rate, relying on various private sector sources that align well with different labor market aspects.
- How has the federal shutdown affected unemployment estimates? The ongoing shutdown has made it difficult for the Chicago Fed to access official unemployment data, potentially introducing inaccuracies into their estimates over time.
- What does the October unemployment estimate suggest about the U.S. labor market? The Chicago Fed’s 4.3% unemployment estimate for October indicates that the U.S. labor market has cooled but is not in a severe downturn, supported by other indicators like slightly increased unemployment benefit claims.
- Why is the FOMC expected to cut interest rates? The Federal Open Market Committee anticipates lowering the target federal funds rate to protect against a substantial increase in unemployment, given current economic conditions.
