27 March 2015 US Fixed Income Weekly We then project our model to assess the prospects for wage acceleration in the near future. If the unemployment rate remains stagnant at its present level, 5.5%, the NAIRU will not get breached and our model implies that wage inflation will not increase. By contrast, suppose that the unemployment rate continues its rapid decline. In particular, we consider the case in which payrolls grow at a steady pace of 225k per month through the end of 01 2016, and simulate the path of the unemployment rate using the Atlanta Fed's "Jobs Calculator", under the assumption of an unchanged labor force participation rate.1 Then our model suggests that wage inflation will pick up because the NAIRU will be breached. The timing of this event, however, depends crucially on the estimate of the NAIRU. In our projection, the unemployment rate will fall below the CBO's estimate of the NAIRU, which is slightly below 5.4%, in Q2 2015. But it will only fall below the FOMC's most recent estimate, 5.0%- 5.2%, in 03 or Q4 2015.2 This highlights the importance of the FOMC's reduction of its NAIRU estimate at the March meeting from a range that was consistent with the CBO's estimate to the above-discussed range. All else being equal, the lower NAIRU estimate implies that the FOMC expects wage acceleration to be delayed by three-to-six months. The likely corollary is that the committee now expects to raise rates a quarter or two later. 'Actual, fitted, and projected wage acceleration --•Actual MeE accoleaton —.-•FRted at We/Awn PlafeciedniE acceleration, no dnemplonenren dechne - ProjectedAi( acceleration...90 unemployment (WU*. CB011iciftU NotatedMC accelerator', rapclunemploymenT decline. FOMC NAJRU 20 1,14 191i 144 1200 1921 1993 $04 29% 199? IYN 14:91 2002 2001 200, XOS 2004 2)03 2011 2011 2014 204 01 91 CO QS 92 CIS 02 02 92 QS cli CO CO CU n1 0I Qi 02 02 cri co co San ifol 'Mat Mee Sawa env Dwane Cant Jap