a remarkable success, and the ecb has delivered what it is expected to deliver under its mandate, namely the maintenance of price stability in the euro area. i think there is broad consensus as regards this observation. first of all, with inflation averaging only slightly above 2 %, the euro area has witnessed a decade of relative price stability, despite a number of severe upside price shocks. in addition, medium and long - term inflation expectations have, judging by all available measures, remained firmly anchored at around 2 %. such anchoring reflects favourably on the smooth functioning of the ecb ’ s monetary policy and its high degree of credibility, which is based on the principles for sound central banking. analysing risks to price stability using our two - pillar approach served us well during these times. let me give you some specific examples of the impact of signals from our monetary analysis on our actions. as you are aware, in the aftermath of the bursting of the dot - com bubble and faced with receding inflationary pressures, the ecb lowered its policy rate to 2 %. it was because of signals from the monetary analysis that we stopped lowering rates still further. in the same vein, when the ecb decided in late 2005 to start increasing its policy rates again, it was mainly because our monetary analysis indicated upward risks to price stability. at the time, the signals from the economic analysis were rather mixed, and i remember that we were widely criticised for our decision. in retrospect, i would say this decision appears to have been well - timed, given the strength of the economic upturn that followed from 2006 onwards. finally, using signals from the monetary analysis, we continually reminded market participants during those times that risk premia in financial markets were extraordinarily low and that the strong growth in credit aggregates implied future risks to financial stability. on various occasions in 2006 and 2007, we voiced concerns and warned markets to prepare for the unavoidable correction. you all know what happened. the repricing of risks did indeed occur, although in a much more dramatic way than anticipated. there was virtually nobody who foresaw a financial crisis of such abruptness and swift progression, nor its severity. the complex interaction of the factors that i outlined earlier had created enormous risks for financial stability. monetary policy in times of financial crisis let me now give you a detailed account of what have been – and continue to be – very challenging times for the conduct of monetary policy. i will concentrate

been highly stimulative. however, despite some early promise, initially the upturn proved halting and erratic. policymakers and privatesector economists recognized early on that a balanced recovery would require willingness on the part of the business sector to begin investing and hiring again, but forecasts of improved business sentiment repeatedly proved wrong, or at least premature. in some sectors, such as nonresidential construction and communications, capital overhangs and capital misallocation, the result of the earlier boom, reduced both the need and the financial capacity to invest. importantly, the economy was also hit by a succession of shocks - notably the september 11, 2001, terrorist attacks, the corporate governance and accounting scandals of the summer of 2002, and the iraq war in the spring of 2003 each of which created new uncertainties and left its mark on business confidence. despite all this adversity, there could never have been any doubt that the diversified and resilient u. s. economy, assisted by ample monetary and fiscal stimulus, would eventually stage a comeback. after several false starts, it now appears that that comeback began in earnest in the summer of 2003. as you know, the third quarter of the year displayed near - record levels of real economic growth, in the vicinity of 8 percent at an annual rate, and growth appears to have continued strong in the fourth quarter of 2003. the most heartening aspect of this vigorous expansion is that, finally, the business sector appears to have emerged from its funk. corporate investment has been strong, particularly in equipment and software, and there are some recent signs that both inventory investment and hiring have begun to pick up. of course, downside risks to the economy remain : the recovery in capital investment may prove less durable than it now appears, the moderation of fiscal stimulus in the latter part of next year could thanks are due to sandy struckmeyer and members of the board staff for useful comments and assistance, but they are likewise not responsible for the views expressed here. adversely affect household spending, or new unfavorable shocks - geopolitical or otherwise - may yet appear. still, the incoming data have continued for the most part to surprise on the upside, and the odds accordingly have increased that 2003 will be remembered as the year when this recovery turned the corner. private - sector forecasters generally expect real growth to be approximately 4 percent in 2004, and they foresee modest improvements in the unemployment rate this year and continued reductions in unemployment in