15 If monetary policy persistently followed the prescriptions of a Taylor rule that assumed that R* was 2 percent when it was in fact 1 percent, then employment would run persistently below its maximum sustainable level and inflation would run persistently below 2 percent. Under such circumstances, inflation expectations might begin to fall, creating a risk of deflation.
In light of the earlier key influence that low US interest rates had exerted on boosting risk appetite and compressing term premiums in global financial markets, investors became concerned about a reversal of these earlier favourable market developments.