# Forward Guidance **Forward guidance** is central bank communication about the likely future path of policy, used as a policy tool in its own right. Because long-term interest rates embed the average expected short rate over a bond's life, credibly changing what markets expect the overnight rate to be in three years moves borrowing costs today without moving the current policy rate at all. It comes in three broad forms: **open-ended** ("for some time"), **calendar-based** (a date), and **state-contingent** (tied to an unemployment or inflation threshold, as in the 2012 Evans rule). The [[Federal Reserve]]'s main standing instrument is the quarterly Summary of Economic Projections and its "dot plot" of individual participants' rate expectations. Forward guidance became central at the zero lower bound, when the policy rate could not be cut further and expectations were the only remaining lever. Its weakness is that it is only as strong as the institution's credibility — guidance is a promise about behavior, not a transaction, and a central bank believed to be under political direction cannot make one that holds. See [[Central Bank Independence]]. ## See also - [[Monetary Policy Transmission Flow]] - [[Term Premium]] · [[Expectations Channel]] · [[Central Bank Independence]]