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Economic Relationships

# Unemployment and Interest rates

I’m working on a project. Does anyone have a clue whether or not there is an inverse relationship between the monthly unemployment rate and the 10 year Treasury. Does anyone have data or a chart showing this relationship???

If so, could you post a chart, if it's handy and NOT a hassle, plotting the unemployment rate and the 10 Year Treasury rate?

The exact relationship between unemployment and interest rates is less than satisfying when viewed using both sets of data in real time.  Sometimes it appears to be an inverse relationship, and sometimes they appear to move together.  Thus, one can find himself able to support either side of the argument, depending on which data one looks at.  Indeed, for the period since 1980, the correlation coefficient is 0.59, and much of that can likely be explained as "autocorrelation", resulting from the general downtrend of both since 1980.

I believe that the key to understanding this better is to adjust the aligment of the data.  In the first chart, I have slid the 10-year yield forward by 2 years, thereby achieving a much better correlation of 0.69. This shows that unemployment truly is a lagging economic indicator, and that changes in interest rates take quite a while to show up in the jobs market.

The second chart helps to explain why this is so, and it is one that we have been watching for a long time.  It shows the growth rate in the CPI-U instead of T-Note yields (although bond yields and inflation rates are very closely related).  For this pair, with the 2-year offset, the correlation coefficient jumps all the way up to 0.76.

I hope that helps with your project.  Life is often much more complicated than simple comparisons can illustrate, so unlocking the key like this can really help toward a better understanding.  But don't look for this subject to be taught by Econ professors any time soon.

This is also worth thinking about in terms of awarding credit or blame for the unemployment rate to Congress or the White House.  If the inflation rate of two years before is the main determining factor for unemployment, then there is not much that the Federal government (outside the FOMC) can do to influence unemployment either positively or negatively, at least not in real time.  And since gold prices lead the unemployment rate by 14-15 months, there is not much that the government can do about that, other than try to manipulate gold prices via short term interest rate changes or monetary actions.