Never seen that setup before, but it is a Hose bung
Usually, around that year, ECT sensor was on the Thermostat housing by-pass fitting
Seen here in View A:
https://www.2carpros.com/questions/ford-ranger-1996-ford-ranger-thermostat
This is the SENSOR only used by the computer
The dash board temp gauge uses a SENDER, located drivers side rear of engine just below Oil Pressure sender/switch
In line bung could be used, seen here:
http://static.summitracing.com/global/images/prod/large/atm-2280_w.jpg
By-pass hose always has coolant circulating, it can be part of the heater setup but not controlled by heat setting.
Inline bungs are also used for electric cooling fan control on radiators, although usually on upper rad hose so fan won't activate until thermostat opens and coolant is flowing thru rad.