How will the Fed's forward guidance evolve?

With the unemployment rate falling to 6.6% in January, putting it very close to the Fed's threshold level of 6.5%, new Chair Janet Yellen could use her congressional testimony this week to signal how the FOMC's forward guidance might evolve. Fed officials have showed little appetite for lowering that threshold level or adopting an alternative indicator of labour market conditions. Accordingly, we suspect that the FOMC will simply put less emphasis on any particular value of the unemployment rate and instead rely more on its interest rate projections to anchor market expectations.