In policy-making regimes that feature a primary, sharplydefined objective – reinforced by a precise numerical definition of the central bank’s notion of price stability – the likely evolution of the economy vis-à-vis that objective gives clear indications as to the most likely future stance of policy. This is supposed to diminish the odds that expectations might start diverging in the first place.
And, if expectation instability should develop nonetheless, being able to refer in communication unambiguously to that objective can – at times and under certain circumstances – provide an effective substitute for tangible action, provided “credible alertness” of the central bank is undisputed by market participants.