For example, recognizing that the central bank will seek to counter adverse demand shocks, investors will anticipate an easing in monetary policy if they observe aggregate demand weakening; in turn, that anticipation would soon be reflected in lower long-term interest rates that would cushion the drop in demand even before a change in policy is made.
This market dynamic suggests that gauging the overall effect of monetary policy requires an assessment of broad financial conditions, including policy rates, long-term interest rates and foreign exchange rates.