What is forward guidance in monetary policy?

• A. Central bank communications about future policy paths
• B. A plan to surprise markets with policy changes
• C. The immediate publication of all policy decisions
• D. The mandatory disclosure of all forecasts

Answer: (A)

Forward guidance is the central bank’s communication about its expected future policy path to influence market expectations and thus current financial conditions. It helps anchor longer-term interest rates by signaling how policy is likely to evolve, rather than just reacting to today’s data. This can be qualitative, describing the intended direction and conditions (for example, keeping rates low until unemployment falls to a certain level or inflation reaches target), or conditional on economic outcomes.

It’s not about plans to surprise markets, immediate publication of all policy decisions, or mandatory disclosure of all forecasts. Those relate more to other aspects of transparency or packaging of information, whereas forward guidance specifically focuses on signaling the anticipated future policy trajectory.