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Forward Guidance

Forward guidance is a monetary policy tool used by central banks to influence interest rates and market expectations about future interest rate moves. It is a way for central banks to communicate their future plans for monetary policy to the public, and it can be used to manage market expectations and stabilize the economy.

There are several forms of forward guidance, but one of the most common is interest rate forward guidance, where a central bank announces its plans or intentions regarding future interest rate moves. This can be done by setting specific targets or thresholds for inflation or unemployment, or by providing a time horizon for when interest rates are expected to change. For example, the Federal Reserve's forward guidance announced in 2012-2014, under the name of "Evans rule" stated that it would keep interest rates near zero as long as unemployment remained above 6.5% and inflation was projected to be no higher than 2.5%.

The goal of forward guidance is to influence market expectations and stabilize the economy. By providing clear and transparent communication about future interest rate moves, central banks can reduce uncertainty and help to keep long-term interest rates low. This can encourage borrowing and spending, which can help to boost economic growth. Additionally, by providing a clear indication of the future path of interest rates, central banks can help to anchor inflation expectations and reduce volatility in financial markets.

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