Fed, higher “dots" more likely?

The hurdle for Fed moving NAIRU further down is quite high. Pushing it below 5% would require solid justification, based on more than guesswork about future shifts in the Beveridge curve.

What if the unemployment rate falls below 5% and wage growth remains stubbornly stuck at 2%? In this scenario, the NAIRU is estimated to inch lower, perhaps back to the pre-crisis mid-point of 4.9%. 

Ultimately, the Fed's ability to credibly lower its NAIRU estimate will depend on the evolution of wages. The evidence has been mixed, with the ECI numbers showing some upward pressure but average hourly earnings growth still stuck near 2%. One reason for the recent weakness may be rapid declines in long-term unemployment. 

With short-term unemployment already at extremely low levels, employers have two choices, hire workers currently employed elsewhere by bidding up their wages, or hire long-term unemployed who are cheaper but will need to be re-trained. Recent data suggests that employers have been opting for the latter, which may be temporarily holding back wage growth andproductivity. 

"However, this is a positive development which marks the last stage of labor market healing. Assuming no changes in the short-term unemployment rate, the forecast for total unemployment implies that the share of long-term unemployed in the total jobless rate will drop below 20% by the end of the year. At that point, employers looking to fill job vacancies will have to resort to bidding workers away from their competitors, which should produce a more pronounced upward pressure on compensation", forecasts Societe Generale.