We’ve seen it popularized by the Bank of Canada and Bank of England, and it figured prominently in the statement recently released by the Federal Open Market Committee (FOMC) of the Federal Reserve after our meeting of March 18–19 and again during the post-meeting press conference of the Fed Chair, Janet Yellen. It is front and center on the agenda of the FOMC. To understand forward guidance and its prominence in current discussions within monetary policy circles, it helps to retrace recent history. Adieu quantitative easing To encourage economic recovery from the debacle of the financial crisis of 2007–09, the FOMC cut interest rates to near zero. The Fed introduced an array of special lending facilities during the most panicked stage of the crisis. These credit and liquidity programs were largely self-liquidating as market functioning improved. But still being “zero bound,” we embarked upon a program of massively expanding the Fed’s balance sheet, referred to internally as “large-scale asset purchases” and popularly known as quantitative easing (QE). By buying copious quantities of longer-term U.S. Treasury bonds and mortgage-backed securities (MBS), our balance sheet has grown from slightly under $ billion prior to the crisis to $ trillion at present. When the Fed buys a Treasury note or bond or an MBS, we pay for it, putting money out into the economy with the expectation that the money will be used by banks and other creditors and investors to finance job-creating investment, the purchase of homes and other expansive economic activity.
Spiegel online on 26th September 2007 described a research led by the Nobel-price winning chemist Paul Crutzen which had found that biofuels emit even 70 percent more greenhouse gases than fossil fuels. In effect, global warming may accelerate and lead to further increase in frequency of disasters such as floods, droughts, and unexpected weather changes that may have negative  1  Views presented today are my own and do not necessarily represent the official position of the National Bank of Poland and the Polish Financial Supervision Authority. 2  Rybinski K. (2007) “The Role of the EURO for the Future of Poland”, speech by Krzysztof Rybinski, Deputy Governor of the National Bank of Poland, 15 June 2007, http://www.nbp.pl/publikacje/wyklady/rybinskiadesti.pdf  BIS Review 138/2007  1  effects on crops. Secondly, food prices will be lifted up by an increasing demand for agriculture products in the emerging markets, especially in Asia, as the catching-up process progresses. It is worth keeping in mind that the share of food in the CPI basket is some 10 pp. higher in Poland than in the eurozone, so agflation, if it materializes, will lead to inflation divergence. 2. One cannot exclude a possibility that other commodities prices may continue to rise as well. Demand for commodities has already substantially risen in recent years. The “problem” lies again in the emerging markets. Fast growing economies create still growing demand for all sorts of commodities, especially metals and fuels (for example: oil consumption in China has doubled within last 10 years).