Inflation and Joblessness: The Tipping Point

Another day, another clue in the quest to understand why the Fed isn’t trying harder to reduce the rate of unemployment:

John Williams, president of the Federal Reserve Bank of San Francisco, said Thursday that the nonaccelerating inflation rate of unemployment – the lowest level of joblessness that can be reached without leading to inflation – may have climbed as high as 6.5 percent, compared to 5 percent before the recession.

First time hearing about the nonaccelerating inflation rate of unemployment, or Nairu? No worries. It’s an important concept, but also pretty obscure. Basically, the idea is that some unemployment is good, or at least unavoidable. People change jobs. Industries disappear and workers need to be retrained. And a pool of unemployed workers limits the competitive pressure to raise wages.

In technical terms, many economists – including the ones who run the Fed – believe that pushing unemployment below a certain level will cause wages and prices to rise. They call that level the natural rate of unemployment. And Mr. Williams thinks recent disruptions, which have left some workers ill equipped to find new jobs, have raised that rate as much as 1.5 percentage points.

(In a February research note, Mr. Williams and a co-author calculated that the rate might have climbed as high as 6.7 percent.)

First time hearing about John Williams? Well he, too, is important, if a bit obscure. Mr. Williams is one of the 10 people with votes on the Federal Open Market Committee, which sets Fed policy. He generally is in the activist faction that supports efforts to bolster growth. Indeed, just a few months ago, Mr. Williams seemed to be in favor of doing more.

But Mr. Williams has sounded a lot less enthusiastic in recent speeches. So has the rest of the activist wing. And that is a little easier to understand if the Fed has concluded that it shouldn’t try to push the rate of unemployment below 6.5 percent.