Forward Guidance.
In plain English
Forward guidance is when a central bank communicates its likely future path for interest rates, rather than only announcing what it is doing today. By signaling intentions, the Fed can influence borrowing costs and markets now, because rates on things like mortgages move on expectations, not just the current setting. Guidance can be a specific plan or vaguer language, and markets parse every word. When the Fed's actual moves match its guidance it keeps credibility; surprises can jolt markets.
01Why it matters
Markets and loan rates move on what the Fed signals it will do next, so forward guidance can shift borrowing costs before any rate actually changes.
02The math, step by step
The Fed holds rates steady but signals it expects two cuts later in the year. Mortgage rates ease right away, even though the Fed has not moved its benchmark yet.
03What this is NOT
Forward guidance is NOT a rate change itself. It is the Fed signaling what it expects to do later, which moves markets through expectations before any real change.