This file photo taken on August 9, 2011, shows the US Federal Reserve building in Washington (AFP)
Washington: The latest US jobs report provided Federal Reserve officials with a surprise. Unemployment in March had already declined to the level they’d expected it to hit by the end of 2017.
That combined with what some economists viewed as another head-scratcher. Even as unemployment fell to 4.5 percent, its lowest level in almost 10 years, wages remained on just a gentle upward path. Average hourly earnings rose 2.7 percent year-on-year, essentially the same as the average over the previous 12 months.
How policy makers react depends on how they unravel that riddle. If they conclude that it’s only a matter of time before falling joblessness triggers a stronger response in wages and prices, the Fed may be inclined pick up the pace of rate increases. Their current set of projections points them toward three total hikes this year, including a March move already in the books. But there’s another option. They could decide to lower their estimate for the level at which unemployment becomes inflationary -- the so-called non-accelerating inflation rate of unemployment, or Nairu. That would justify sticking to their current outlook for rates.
“There’s a good chance we’ll see them revising the Nairu downward” when Fed officials submit new projections in June, said Thomas Costerg, senior US economist at Standard Chartered Bank. “The Fed is flying a bit in the dark on Nairu. The canary in the coal mine is wage growth, and the fact is wage growth remains tepid.”
It wouldn’t be the first time central bankers shifted that estimate. Nairu is the term now in fashion for what Nobel Prize-winning economist Milton Friedman first described in 1968 as the “natural rate of unemployment.” First thought of as a fixed level, Nairu is what economists now see as a trigger point that can move substantially over time.
