With the unemployment rate falling to 6.6% in January, leaving it only trivially above the 6.5% threshold, the Fed will soon need to update its forward guidance on when it might begin to raise the fed funds rate from near-zero. We suspect that rather than lower the quantitative threshold for the unemployment rate, the Fed will revert to a more vague qualitative form of guidance. In particular, we expect it to stress that rates will remain at near-zero for some considerable time yet, particularly if the inflation rate remains below the 2% target. Since the Fed also publishes explicit interest rate projections, it still has a very powerful tool for anchoring market rate expectations.
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