For example, where the markets correctly anticipate that a new piece of information will lead to a change in official interest rates they will do ‘much of the work’ themselves through a change in the term structure.
In such an environment, communication by the monetary authority is of the utmost importance and is directed towards informing the markets of its assessment of the outlook for price stability and preparing the markets for future policy moves, thereby avoiding unnecessary volatility and supporting the smooth conduct of policy. Another idea is that the financial markets lead and the monetary authority follows.