Torsten Slok, chief economist at Apollo Global Management, zooms out a little further and notes that unemployment has been at or below 4.5% — the upper end of the Fed's long-run NAIRU estimate range — for 58 consecutive months. That's the longest stretch on record, showing that the labor market has been in "excess-demand territory" for an unusually long time, Slok says. Surprisingly low unemployment certainly helps explain why inflation has been above target for so long.
Lower NAIRU estimates mean unemployment would need to be even lower to exert upward pressure on inflation. A Kansas City Fed model estimate of the long-term natural unemployment rate — or U-star — was 4.3% in July, the lowest in nearly two years.
These are theoretical measures. Among the plethora of real-world U.S. labor market indicators, from "JOLTS" job openings to jobless claims, and from nonfarm payrolls to wage growth, the unemployment rate is the first among equals. Or as Slok puts it, "the best guidepost."
This view is generally shared across the Fed's interest rate-setting Federal Open Market Committee. Richmond Fed President Thomas Barkin said so after the July figures were released. Governor Christopher Waller said something similar last month, and Cleveland Fed President Beth Hammack said the same in June. Former Fed Chair Jerome Powell repeatedly nodded to the unemployment rate's weight over the years.
You can see why. It is well-known, easy to understand and updated regularly. Despite methodological and calculation differences, it is also generally comparable with other countries. This makes it a pretty decent measure of the U.S. labor market's relative strength globally.
As the unemployment rate is considered a good proxy for broad slack — or otherwise — in the economy, it is often a key input into economic models like the "Taylor Rule," which estimates the level of interest rates that gives the Fed the best chance of delivering on its dual inflation and employment goals.
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