MNI INTERVIEW: Trend Unemployment To Decline: Fed Economist

By Evan Ryser

     WASHINGTON (MNI) - The rate of U.S. unemployment consistent with stable

inflation is expected to continue to decline over the next decade, a Fed

economist told MNI.

     The so-called natural rate of unemployment, or u-star, will fall to 4.3%

over the next ten years, from about 4.6% now, Andreas Hornstein senior advisor

in the research department at the Federal Reserve Bank of Richmond, said in an

interview.

     All else being equal, the lower the rate of u-star, the lower the Fed can

set interest rates while still achieving its inflation objective.

     "People have talked about the aging of the population and that drives down

the participation rates," Hornstein said. "What we also find is this large role

played by education even more so than population over the last few years which

is working in the opposite direction driving up the participation rates."

     Hornstein's forecast was made after an examination of unemployment in

different working population subgroups, classed by factors such as sex, age and

education, and then factoring in demographic data from the Household Economic

Survey.

     It varied slightly from estimates made by the Congressional Budget Office,

of another, similar measure used by the Fed, the non-accelerating inflation rate

of unemployment, or NAIRU, which is currently at about 4.6% and is expected to

decline to roughly 4.4% by 2029.

     The Fed's own longer-run projection of the unemployment rate in its Summary

of Economic Projections is 3.6% to 4.5%, down from its March projection from

4.0% to 4.6%.

     -- PHILLIPS CURVE

     In mid-July, Fed Chair Jerome Powell said that the natural unemployment

rate is "substantially lower than we thought," although he added that it is not

something that can be identified directly.

     The negative correlation between unemployment and inflation, known as the

Phillips Curve, was very strong 50 years ago and has gotten weaker and weaker,

he said. It is a "faint heartbeat," Powell added, "but I think we really have

learned though that the economy can sustain much lower unemployment than we

thought without troubling levels of inflation."

     "I would look at today's level of unemployment as well within the range of

potential estimates, of plausible estimates, of what the natural rate of

unemployment is." Powell said.

     Hornstein's study does not involve any assumptions about how the

unemployment rate should feed into inflation.

     St. Louis Fed President James Bullard noted last week in a podcast that

determining a precise estimate for u-star mattered less than recognizing that

the number had now fallen very low.

     "Whether we should lower u-star or not is not really, whether you choose

4.5%, 4.0% or 4.2%," Bullard added. "The point is that whatever that gap is its

multiplied by a tiny number these days so the feedback to inflation is just much

lower than it used to be."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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