What is forward guidance, and how do traders use it?

FTC Community TeamStaff17 Sept 202622 views

Central banks tell markets what they're likely to do next — "we expect to keep rates steady for some time" — so markets price the future in advance. By the time the decision lands, the surprise is usually small.

What is forward guidance, and how do traders use it? — central bank rate path diagram — A central bank's policy rate path across recent meetings

How do you use guidance?

which central banks' guidance you follow
how you track changes in the wording
a time guidance steered you wrong

What is forward guidance, and how do traders use it? — moving average crossover diagram — A fast moving average crossing a slower one

The dot plot guide is one famous form of forward guidance.

Background: The Fed's dot plot and economic projections explained

Four times a year Fed officials publish where they think interest rates are heading. How to read the dot plot, and why it can move the dollar more than the decision.

How often does the Fed publish the dot plot?

Four times a year, with the Summary of Economic Projections at the March, June, September and December FOMC meetings.

Is the dot plot a forecast of Fed policy?

It shows each official's view of appropriate policy at the time, not a commitment. The median dot is widely watched, but projections change as economic conditions change.

Read the full guide

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