A useful benchmark for assessing the degree of spare capacity in the labour market and inflationary pressures is the NAIRU, or non-accelerating inflation rate of unemployment. When the actual unemployment rate is above the NAIRU, there is spare capacity in the labour market, which would typically exert downward pressure on wage growth and inflation. The NAIRU is not observable, but it can be estimated.
These contractual recourse exposures, as you well know, are addressed in the agencies’ risk-based capital standards, including an interagency rule implemented in January of this year that establishes a concentration limit and imposes a dollar-for-dollar capital charge on certain residual interests.