The U.S. central bank has no official target for full employment—generally expressed as the unemployment rate that is consistent with stable prices. But accurately estimating it is critical for the Fed, given its mandate is to safeguard economic conditions that allow maximum employment consistent with stable prices that the bank defines as 2 percent inflation.
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Since the 1960s estimates of that "natural rate of unemployment" have averaged 6.3 percent, according to data published quarterly as part of the Fed's main economic model.
Beginning in 2013, however, its staff has been marking that rate down, from 5.6 percent to 5 percent by late last year. That may lead regional Fed presidents and board members to cut their quarterly estimates due next month.
Research at several Fed banks, both published and unpublished, puts the estimate as low as 4.7 percent.
The possible reasons, according to Fed policy makers and staff, range from a structural downshift in growth, an aging workforce less likely to job-hop, and the sense that there are many people willing to rejoin the labor force and work for less.
Another explanation is the rise in the number of workers who choose to work part time, which helps lower both labor costs and the unemployment rate.
Many economists now also believe that low inflation expectations are so deeply rooted they act as a cap on wages and prices.
Those policymakers and Fed researchers who estimate a lower "non-accelerating inflation rate of unemployment" believe those and other scars of the 2007-2009 financial crisis have allowed the unemployment rate to slide from 10 percent without much evidence of a run-up in wages or prices.
Despite an addition of a million jobs between October and December, wages in the 12 months to December rose just 2.2 percent, a historically slow pace.
"Wage inflation has been well below the level that would be consistent with 2 percent price inflation," Powell said. Wage growth, he said, would need to accelerate to perhaps 3.5 percent—the target inflation rate plus the expected increase in productivity—before it nudges up inflation.
Shift is not yet sealed
Not all Fed policymakers have changed their minds, however. Cleveland Fed President Loretta Mester, for example, said last week she was sticking with her current estimate of 5.5 percent.