CFA Level I · CFA Level I Exam · Monetary Policy
A central bank announces that it expects to keep its policy rate unchanged until unemployment falls below a stated level. The main way this announcement is intended to ease financial conditions is by:
Forward guidance eases conditions by anchoring market expectations of future short-term rates at low levels, which pulls down longer-term borrowing costs. It does not change reserve requirements or involve buying corporate bonds, which are separate tools.
- Alowering the required reserve ratio for banks
- Banchoring expectations of future short-term rates at low levelsCorrect
- Cdirectly purchasing corporate bonds in the secondary market
Explanation
Forward guidance works by shaping expectations of the future policy rate path, which lowers longer-term rates. It involves no change in reserve requirements and no asset purchases, so the other two options describe different tools.
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