Link Between Stocks and Unemployment Shows Why Fed Isn't Worried

(Bloomberg) -- U.S. Federal Reserve officials have downplayed concerns about the stock market in recent days, even as the S&P 500 Index plummeted nearly 10 percent from last month’s record high.

The reason, according to New York Fed President William Dudley: Equities are still up a good amount from where they were a year ago, which means financial conditions should still be supportive of continued economic growth.

And Fed officials who are concerned the labor market will overheat may actually welcome a slowdown in stock gains. At 4.1 percent, joblessness is already below the rate at which Fed officials say it will fan inflation.

The historical link between equity prices and unemployment shows what Dudley has in mind. In the past, a pickup in stock market gains tended to precede an acceleration in the pace at which the unemployment rate dropped.

The stock market selloff in recent days has brought the year-over-year rate of increase in equity prices down to about 10 percent from roughly 25 percent at the end of January. This implies less risk that unemployment will plunge rapidly over the next year, and suggests it will instead continue to decline at a more gradual pace.

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