Forward Guidance
The central-bank practice of communicating future policy intent to shape market expectations — a tool that became central post-2008 ZLB.
Definition
Forward guidance comes in three forms: open-ended (qualitative descriptions), time-based ('rates low through 2024'), or state-based ('until inflation reaches 2%'). Effective guidance moves the entire yield curve, not just the policy rate.
Its power depends on credibility — guidance is only as effective as the central bank's willingness to follow through.
Why it matters
Forward guidance has become as important as the policy rate itself for shaping financial conditions. Misreading it is a frequent source of duration losses.
Worked example
2021 Fed guidance: 'transitory' inflation framing kept 2Y yields anchored near zero through mid-2021. When guidance flipped hawkish in late 2021, 2Y yields rose 150bp in 3 months.
Frequently asked
Which is more effective: time- or state-based?⌄
Can guidance be reversed?⌄
Do other central banks use it?⌄
How does the market measure guidance shifts?⌄
Track it on Market Ontology
Related terms
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