Forward guidance One way to think about the policy reaction function is as a form of forward guidance. Indeed, it is perhaps the best and most useful form of forward guidance. In normal times, forward guidance provides the public with information about the expected path of policy.
As I’ve discussed, forward guidance is a form of transparency that reduces volatility by reducing policy uncertainty relative to discretionary decision-making. However, with the policy rate at or near zero, forward guidance can play a role in increasing the degree of accommodation.