The Fed Wants Higher Unemployment – NAIRU: On the Road to the Weimar Republic

The US Federal Reserve appears to be targeting a recession, posits the ever-observant Tim Duy, University of Washington prof, blogger and Bloomberg commentator.

Why? NAIRU, or the great bogeyman, aka the “non-accelerating inflation rate of unemployment.”

Readers might have thought NAIRU had been tossed out of the macroeconomic analytic tool-kit along with the Phillips Curve, and long ago, but no. After all, the 1990s did not result in runaway inflation, with relatively low unemployment and lots of prosperity.

So what?  The US central bank still shudders at the thought of NAIRU, which it places now at about 4.6% or 4.7%. BTW, that works out to about 1.5 US residents actively seeking a job for every job opening.

The Fed says when less than 1.5 people are hunting for every job opening, the nations gets accelerating inflation.

“To counter these [inflationary] pressures, the Fed anticipates tighter policy to guide the unemployment rate back to 4.6%….Central bankers now project a benchmark federal funds rate of 3.1% by the end of 2020, compared with a neutral (or longer-run) rate of 2.8%. Monetary policy thus will turn from accommodative to slightly restrictive in the next couple of years,” contends Duy.


In Q3 2017, unit labor costs were lower than in Q4 2015.

Far from obsessing about wages, the Fed might rightly ponder whether a slew of flat unit labor cost years are ahead, due to global gluts of everything and US businesses investing in plant and equipment, finally validated by a somewhat healthy economy. The same rising productivity that defined much of the 1990s, evidently a forgotten decade.

What role would NAIRU play in the next couple of years if the economy keeps growing? The same role the Cleveland Browns will play in the Super Bowl.

Duy Again

Nevertheless, the Fed must engineer a recession to manage its NAIRU fears, and raise the unemployment rate, observes Duy.

“[U]nless they [the Fed] can explain how they intend to manage the unprecedented task of raising the unemployment rate 0.7 percentage points without toppling the economy, that recession is most definitely in these forecasts,” he writes.


Of all the totems genuflected to by the tight-money crowd, perhaps the most potent is NAIRU. Low unemployment does not merely lead to a higher but steady level of inflation, but always accelerating inflation. The genie will get out of the bottle, bring on a deep recession or the even the hob-nailed boots.

Oddly, a possible salvation ahead could lie in grubby politics. The new Fed chairman, Jerome Powell, may be a genteel sort but he is a financial industry denizen appointed by the GOP, and a Washingtonian.

Powell wants the GOP and the GOP tax cuts to succeed. For that matter, in many regards any sensible person does. I prefer prosperity no matter who is President. Powell may put fighting inflation on hold through 2020, until the GOP is safely ensconced for another major election cycle.

As many an administration has said, “The Fed should be independent (except before elections).”


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