Guest contribution from Annaly Capital Management:

There are at least two central banks that have already raised interest rates in this cycle, Australia and Israel.  Australia raised its overnight cash rate from 3.25% to 3.5%, effective on November 4, citing global economic recovery and reduced concern over deflation. “With the risk of serious economic contraction in Australia now having passed,” the Reserve Bank of Australia press release explained, “the Board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.”

Israel raised its benchmark rate from 0.5% to 0.75% for September, citing a rise in inflation to the upper limit of its target range. “Interest rates of the leading central banks around the world are expected to remain unchanged till the end of the year, and possibly even to the middle of 2010,” the central bank’s press release said. “However, unlike in Israel, inflation in those countries is expected to remain low both this year and next.” (Apropos of nothing at all, the head of the Bank of Israel, Stanley Fischer, was Ben Bernanke’s thesis advisor at MIT.)

What will the Federal Open Market Committee say in the press release that accompanies the first move off its zero-rate policy? What sign posts will Bernanke & Co. have identified when it presents its rationale for beginning a tightening policy? We have no doubt in our mind that it will need to see a stronger jobs market , but the evidence, we believe, will be found in places other than the headline unemployment rate of 10.2%. There are probably more than thirteen ways of looking at this blackbird, but the graphs below are just three of them. The Fed will likely have to see significant change in the graphs below before it feels it is safe to move.

First, the unemployed are now unemployed for longer periods of time than ever before in the history of the time series….27 weeks and counting. It’s a measure of the intractability of unemployment.

Second, the broadest measure of unemployment, the so-called U6 measure, is at 17.5%, the highest since measurement began in 1994. It includes the 10.2% headline number of total unemployed, plus the additional cohort of all marginally attached workers (those who currently are neither working nor looking for work or have been discouraged from working but indicate that they want and are available for a job and have looked for work sometime in the recent past), plus total employed part time for economic reasons (those who want and are available for full-time work but have had to settle for a part-time schedule), as a percent of the civilian labor force. As the green line below shows, this additional cohort is also at an all-time high above the headline rate. In other words, in the US about 1 in 5 potential workers isn’t working.

Third, job leavers, or people who quit and immediately began looking for work, is at an all-time low as a percentage of all unemployed, implying that the number of people who leave their jobs involuntarily is at an all-time high.

Source: Annaly