But it would be an irony if an effort to get people to think more about how monetary policy might respond to events, by communicating something akin to a “reaction function”, had actually had the opposite effect. At any rate, having already gone through at some length the point I want to make, the rest just fills in some gaps. I’ll start with a more formal description of “Odyssean” guidance, explaining why, when the interest rate is up against the lower bound, there could be very significant  gains to credible commitments to keep rates low in future – but also why, in practice, such credibility is hard to secure. There’s then a brief discussion at various forms of guidance in the real world. As we’ll see, the distinction between “Odyssean” and “Delphic” guidance is less clear in practice than in theory. In the real world the dividing line between them is sometimes a bit fuzzy. This may have contributed to the conflation of the two – more exactly the (mis)interpretation of conditional as unconditional statements – in the outside world. But I think it’s clear enough that central banks have rarely if ever committed themselves unconditionally to future policy. It’s clear too that, on several occasions, the outside world has nonetheless viewed these statements as promises. I’ll give some examples before a short concluding section.
This was the first, and I daresay the last, time that MPC members were likened to an elite sportsman. )[2]  Chart 2: Forward interest rates and economic activity also co-moved closely before the financial crisis, less so afterwards  Six-month rolling averages. Combined IHS Markit/CIPS and CBI distributive trades lagged one month. Six-month change in one-year forward one-year LIBOR rate, spliced onto one-year, one-year OIS rate in 2022. Sources: ONS, IHS Markit/CIPS, CBI, Bloomberg Finance L.P. and Bank calculations. So if financial markets are able to react this way, without any explicit hints from the policy maker, why has there since been more communication from central banks about future policy – and more expectation of it in financial markets? What is the rationale for “forward guidance”? At least in theory there are two distinct types of guidance. The reasons for both, I think, are connected with changes in the economy in recent years. But they are quite distinct and it’s important to understand how. The first – sometimes described in the economics literature (somewhat grandiosely) as “Delphic” guidance – seeks in general to convey what is sometimes referred to as “private information” held by the central bank. This makes it sound more exciting than it really is. More often than not it means making clear to the outside world the policy maker’s view of how the economy might evolve over the future – its forecasts – and to clarify the so-called “reaction function” (how monetary policy might respond to possible future events).