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How long will unemployment keep money market rates down?

September 28, 2010

By Barbara Marquand | Money Rates Columnist

Today's stubbornly high unemployment rate could go even higher in the next nine months, even without a double-dip recession, Federal Reserve Bank of San Francisco economists say.

In a Sept. 27 "Economic Letter," economists David Lang and Kevin Lansing point to forecasts by the Chicago and Philadelphia Federal Reserve Banks that predict real U.S. GDP growth through the first half of next year will remain at or below potential.

"If these forecasts prove accurate, then the historical relationship between real GDP growth and the labor market suggests that the unemployment rate could rise by as much as 0.5 percentage point during this period," they write.

That's bad news for anyone hoping for a rise in savings rates for CDs, money market accounts or savings accounts. The economy has to pick up the pace befor such rates are likely to go up.

The dreaded double dip

In an August "Economic Letter," Federal Reserve Bank of San Francisco economists Travis Berge and Òscar Jordà estimated the chance of a double-dip recession at around 50 percent. But even if the economy avoids another recession, Lang and Kensing argue that real future economic growth might be too weak to keep unemployment from going up.

The U.S. economy has grown for four consecutive quarters since the recession ended in June 2009, but that growth has been relatively weak, Lang and Lansing point out. Sales of goods and services produced domestically rose just 1.1 percent on average.

"Due to the severity of the recession and the lackluster nature of the recovery so far, the level of real GDP at the end of the second quarter of 2010 was still 1.3 percent below the pre-recession peak reached more than 2.5 years ago," they write.

Yet the Congressional Budget office estimates the economy's potential annual growth rate over the next five years is 2.1 percent, and some other estimates are even higher. "If real GDP growth were to fall below potential growth for a sustained period, then the unemployment rate would be expected to rise," they conclude.

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