Quantitative Forward Guidance Through Interest Rate Projections

This technical report assesses quantitative forward guidance provided through interest rate projections published by four major central banks: the Reserve Bank of New Zealand, the Norges Bank, the Swedish Riksbank, and the Federal Reserve. The report evaluates the effectiveness of these projections in managing market interest rate expectations, exploring dimensions such as path predictability, credibility, redundancy, and consistency. It finds that while interest rate projections are partially predictable and credible, significant deviations remain, particularly as the projection horizon increases. The analysis indicates that these projections are not redundant, as they significantly impact market rates even when controlling for macroeconomic projections. Furthermore, the interest rate and macroeconomic projections align with a meaningful monetary policy reaction function, suggesting a strong response to inflation. The findings highlight the complexities and limitations of central bank communication regarding interest rate forecasts.