The Fed's full-employment definition has evolved over the last decade or so, and that's instructive in considering when the Fed may feel a need to raise interest rates. Economists once considered estimates of NAIRU—a measure of the lowest the unemployment rate could go without triggering inflation—to generally be around 5%, and the Fed put significant emphasis on that number.4 Over the last 25 years, however, unemployment has periodically fallen below NAIRU without triggering worrisome inflation, meaning the relationship between unemployment and inflation has likely changed.
When now-U.S. Treasury Secretary Janet Yellen chaired the Fed from 2014 to 2018, she maintained a dashboard that considered, among other measures, job openings, layoffs, underemployment, and long-term joblessness to help determine how much slack remained in the labor market. Current Fed Chair Jerome Powell has made clear he is also seeking improvement in areas that are typically late to recover after a recession, such as labor force participation among workers without college degrees, wage growth for the lowest-paid workers, and Black unemployment. Mr. Powell's Fed wants full employment to reflect the full labor market, and rate hikes may not come until it clearly does, or will, reflect that.5