Interestingly, both measures – forward guidance and asset purchases – have been reinforced by the fact that the effective lower bound has proven to be slightly negative. When policy interest rates reach zero, even with credible forward guidance the term structure can steepen as markets anticipate that future short-term rates can only rise.
As you all know, during the first half of this year, the world economy was mired in the adjustment process that followed the IT boom of the 1990s, which came to an end in the fall of 2000. Furthermore, uncertainty about the economic outlook was amplified by the war in Iraq and severe acute respiratory syndrome (SARS) in East Asia.