Definition
Forward Guidance
Forward guidance is a central bank's communication about the likely future path of policy, used to shape market expectations and influence current financial conditions.
Central banks like the Fed, ECB and RBI use forward guidance to tell markets where rates are likely headed, so that today's bond yields and currency rates adjust in advance. Clear guidance can ease policy without an actual rate change.
Guidance can be qualitative ('rates will stay accommodative') or tied to data thresholds. Markets punish guidance that proves unreliable, so central banks balance flexibility with credibility. The RBI's monetary policy stance is a form of forward guidance.
Related terms
- Monetary Policy StanceThe monetary policy stance is the RBI's signalled direction for future policy, described as accommodative, neutral, or withdrawal of accommodation, telling markets which way rates are likely to lean.
- Federal Open Market Committee (FOMC)The FOMC is the Federal Reserve's policy-setting committee that meets eight times a year to decide US interest rates and the path of monetary policy.
- Dot PlotThe dot plot is a chart in which each FOMC member anonymously marks their forecast for future US interest rates, signalling the committee's expected policy path.
- European Central Bank (ECB)The ECB is the central bank for the eurozone, setting interest rates and monetary policy for the countries that share the euro.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.