THE RESPONSE OF INTEREST-RATES TO UNEMPLOYMENT RATE ANNOUNCEMENTS - IS THERE A NATURAL RATE OF UNEMPLOYMENT

This paper shows that there is a response of interest rates to announcements of unexpected changes in the unemployment rate. Overall, in response to an unexpectedly low unemployment rate announcement, interest rates rise and the dollar appreciates against three major currencies. This indicates that the real rate is responding to these announcements in general. This response differs depending on whether the current level of unemployment is above but near 5.9% or below that rate. Below 5.9%, there is a significant increase in the response of interest rates to unemployment surprises which is most likely a change in inflationary expectations. As such, 5.9% appears to be the financial markets' estimate of the natural rate of unemployment. There is an anomalous relationship between unemployment surprises and interest rates when the unemployment rate is above, but near 5.9%. In this region, longer term interest rates fall in response to an unexpected decrease in unemployment.