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Is the Fed Too Bearish on Unemployment?

The Federal Reserve may have too bearish an outlook on unemployment.

As the pseudonymous blogger DutchBook points out at the Stone Street Advisors blog, the Fed shifted its predictions for unemployment to a far more bearish stance in the beginning of 2011. Now, however, it looks like this was just a temporary uptick in unemployment.

Here are the charts that show that the Fed has been consistently overestimating unemployment for a few months now.

In the first, you can see how the Fed's economic projections underestimated unemployment in 2011.

Then the Fed revised its views, and almost immediately began overestimating unemployment.

Jobs numbers are coming in hotter than expected. Consumer creditkeeps blowing away expectations.

“With a breakeven rate of unemployment around 400k on claims, as I have been advocating on Twitter, this disconnect looks to be further exacerbated in coming months,” Dutchbook writes.

The Fed getting unemployment expectations wrong can have serious consequences. It could result in the Fed easing too much for too long, for example.

On the other hand, the Fed sees this kind of data even before the markets. So perhaps it is already revising its expectations. This might be another nail in the coffin of QE3.

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