As the market awaits Congressional testimony Wednesday from Federal Reserve Chairman Ben Bernanke, it's been focusing closely on whether members of the rate-setting Federal Open Market Committee support tapering, or a reduction in Fed asset purchases.
Where there has been less focus is on the debate inside the Fed that will ultimately determine the answer to that question: do members believe there has been substantial improvement in the labor market, and improvement compared to what?
The answer divides hawks and doves and is a key reason they differ on the right course for policy.
Several hawks have argued that the committee should be comparing labor market conditions now with September when the new quantitative easing policy was first enacted, leading them to gauge that the time for tapering is now. Doves appear to judge policy less from where the economy has been and more on where it needs to go. Their take is that there is a long way to go.
Here are the two views of the world:
When the Fed met in mid-September, it had in hand the August employment report showing an 8.1 percent unemployment rate. Since then, the rate has come down 0.6 percent to 7.5 percent in what amounts to an historically big decline in unemployment for a seven month period.
Claims for unemployment insurance have also improved. The four-week average for weekly jobless claims has dropped from 374,000 in the week the Fed met in September, to 339,000 in the latest reading. The six month average of payroll growth has surged from 141,000 when the Fed met in September to 208,000 in the latest reading.
Not only do hawks see this as substantial improvement by their own standards, they say it meets the standards spelled out by the doves themselves. Indeed,the Fed's own outlook for unemployment has also improved. Back in September, the average forecast of committee members was for a 7.75 percent unemployment rate in 2013. In the committee's last forecast in March, the average dropped to 7.4 percent. It looks likely to fall further since the actual rate is just a tenth above the forecast for the entire year.
Richmond Fed President Jeffrey Lacker said: "I don't think there is any question...that we've seen substantial improvement in the labor market outlook over the last six months."
The doves look at the same data and come to different conclusions. First, several have said they are not convinced of the staying power of the improvement in jobs and want more time to judge whether government cutbacks reduce growth and payroll gains. Second, some are concerned that a better job market could mean an increase in the unemployment rate by attracting more people into the workforce.
They note that unemployment has come down, but a big part of the decline has come from people dropping out of the workforce. The participation rate—the percentage of the working age population that counts themselves as wanting work—has come down by 0.2 percent since September. Other measures of slack in the labor force have also stayed high: a broader measure of slack, which counts discouraged workers and those working part-time because they can't find full-time work, stands at 13.9 percent, down from 14.7 percent in September, but still almost four points above the highest level before this recession. The 4.3 million people currently unemployed for 27 weeks or longer is more than double the peak of the aftermath of the 2001 recession.
Most importantly, doves look less at where the economy has been and more to where it needs to go. FOMC projections show, on average, the committee sees the long-run unemployment rate between 5.2 percent and 6 percent, for a mid-point of 5.6 percent. That means the U.S. is about 2 percentage points away from where the committee believes the rate should be. That's significant for two reasons: first, it provides a reason to keep stimulating the economy. Second, together with low inflation, it offers policymakers a wide margin of error if they end up being wrong and the economy churns out stronger results than forecast.
_By CNBC's Steve Liesman. Follow him on Twitter at @steveliesman.