Forecast, Reaction Function, or Promise?
A future rate path can perform three different communicative jobs: it can promise a policy action, forecast an outcome under stated assumptions, or explain how a central bank would respond as conditions change. The FOMC dot plot sits closest to the second and third jobs, even though a precise chart can be heard as the first. Distinguishing those forms of forward guidance matters because the same words can ease financial conditions in one economic state and constrain price stability in another.
Three ways to communicate a future rate
An explicit rate-path commitment says that the central bank intends to constrain its future policy choices. The commitment may be tied to a calendar date, a threshold such as an inflation or employment condition, or a broader state-contingent promise. Its defining feature is not simply that it mentions a future rate. It is that the institution presents the future path as something it will honor even if doing so differs from what the public would otherwise expect.
A forecast does something more conditional. It describes what policymakers currently expect to be appropriate or likely under a stated set of assumptions about the economy and policy. If those assumptions change, the forecast can change as well. An economic forecast is not weakened by acknowledging that possibility; its meaning depends on making the assumptions and risks clear enough that readers can understand why the path might move.
Reaction-function communication is related but distinct again. It explains which variables and judgments matter to the central bank and how they affect the balance of risks. Inflation expectations, underlying inflation, credit conditions, real activity, and the strength of policy transmission can all matter. A reaction function need not be a mechanical equation. It can be a qualitative framework that gives the public a disciplined way to interpret decisions without promising a predetermined rate at every future date.
The IMF note on forward guidance uses this three-part distinction to narrow the term “forward guidance” to communication about the future policy-rate path while treating forecasts, scenarios, and reaction-function explanations as parts of the broader monetary policy framework. The categories can blur in practice. A rate forecast may reveal how policymakers map their outlook into policy. A state-contingent commitment may contain a conditional trigger. The point is not to force every statement into a perfect box, but to identify how much future flexibility the communication claims to remove.
The dot plot is best understood through that continuum of commitment specificity. Each participant reports a projection for a future federal funds rate under appropriate monetary policy. The median summarizes the middle of those projections. That gives markets information about the policy assessment and, indirectly, about how participants connect their economic outlook to a policy stance. It does not state that the FOMC has already voted to deliver the median at each horizon. The New York Fed evidence is consistent with this reading: markets respond to unexpected changes in the projection, but initially pass through only about one-fifth of the surprise.