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When a central bank communicates a likely path for policy rates, it is not merely forecasting. The announcement itself can move longer-term yields if investors treat the path as a commitment rather than a conditional projection. That distinction matters. A path presented as a commitment can compress term premia and ease financial conditions immediately, which is useful when the policy rate is already near a lower bound. It is costly if incoming data later require a reversal, because the bank must then spend credibility to undo an expectation it helped to form. A path presented as data-dependent preserves flexibility but may fail to ease conditions if markets discount it as cheap talk. Central banks therefore choose not only a rate but a communication regime, trading the present value of easier conditions against the future cost of rewriting the script.

According to the passage, presenting a rate path as a commitment can be useful when

  1. the policy rate is near a lower bound.
  2. inflation can never be measured accurately.
  3. banks have no depositors at all.
  4. term premia can never move.
  5. incoming data never change.

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