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<s>[INST] Lacker and Lockhart, and Ms. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Mr. Reinhart, Secretary and Economist [/INST] Ms. Danker, Deputy Secretary Ms. Smith, Assistant Secretary Mr. Skidmore, Assistant Secretary Mr. Alvarez, General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Messrs. Connors, Evans, Fuhrer, Kamin, Madigan, Rasche, Slifman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Messrs. Clouse and English,¹ Associate Directors, Division of Monetary Affairs, Board of Governors Mr. Struckmeyer, Associate Director , Division of Research and Stat istics, Board of Governors ______________ ¹ Attended Wednesday’s session only. </s>

<s>[INST] Plosser and Stern, Alternate Members of the Federal Open Market Committee Messrs. Lacker and Lockhart, and Ms. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Mr. Reinhart, Secretary and Economist [/INST] Ms. Danker, Deputy Secretary Ms. Smith, Assistant Secretary Mr. Skidmore, Assistant Secretary Mr. Alvarez, General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Messrs. Connors, Evans, Fuhrer, Kamin, Madigan, Rasche, Slifman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Messrs. </s>

<s>[INST] Connors, Evans, Fuhrer, Kamin, Madigan, Rasche, Slifman, and Wilcox, Associate [/INST] Economists Mr. Dudley, Manager, System Open Market Account Messrs. Clouse and English,¹ Associate Directors, Division of Monetary Affairs, Board of Governors Mr. Struckmeyer, Associate Director , Division of Research and Stat istics, Board of Governors ______________ ¹ Attended Wednesday’s session only. March 20-21, 20071 of 196 Mr. Reifschneider, Deputy Associate Director, Division Research and Statistics, Board of Governors Messrs. </s>

<s>[INST] Lacker and Lockhart, and Ms. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Mr. Reinhart, Secretary and Economist Ms. Danker, Deputy Secretary Ms. Smith, Assistant Secretary Mr. Skidmore, Assistant Secretary Mr. Alvarez, General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Messrs. Connors, Evans, Fuhrer, Kamin, Madigan, Rasche, Slifman, and Wilcox, Associate [/INST] Economists Mr. Dudley, Manager, System Open Market Account Messrs. Clouse and English,¹ Associate Directors, Division of Monetary Affairs, Board of Governors Mr. Struckmeyer, Associate Director , Division of Research and Stat istics, Board of Governors ______________ ¹ Attended Wednesday’s session only. </s>

<s>[INST] Clouse and English,¹ Associate Directors, Division of Monetary Affairs, Board of Governors Mr. Struckmeyer, Associate Director , [/INST] Division of Research and Stat istics, Board of Governors ______________ ¹ Attended Wednesday’s session only. March 20-21, 20071 of 196 Mr. Reifschneider, Deputy Associate Director, Division Research and Statistics, Board of Governors Messrs. Dale ² and Oliner, Senior Advisers, Divisions of Monetary Affairs an d Res earch and Statistics, respectively, Board of Governors Mr. Hambley,² Assistant to the Board, Office of Board Members, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, ¹ Project Manager, Division of Monetary Affairs, Board of Governors Mr. Kiley ² and Ms. Kole,² Section Ch iefs, Divisions of Research and Statistics and International Finance, respectively, Board of Governors Mr. Doyle, ² Ms. Mauskopf,² and Mr. Wood,² Senior Economi sts, Divisions of International Finance, Research and Statistics, and International Finance, respectively, Board of Governors Ms. Roush, Economist, Division of Monetary Affairs, Board of Governors Mr. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Rosenblum, Executive Vice President, F ederal Reserve Bank of Dallas Mr. Hakkio, Ms. Mester, Messrs. </s>

<s>[INST] Connors, Evans, Fuhrer, Kamin, Madigan, Rasche, Slifman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Messrs. Clouse and English,¹ Associate Directors, Division of Monetary Affairs, Board of Governors Mr. Struckmeyer, Associate Director , [/INST] Division of Research and Stat istics, Board of Governors ______________ ¹ Attended Wednesday’s session only. March 20-21, 20071 of 196 Mr. Reifschneider, Deputy Associate Director, Division Research and Statistics, Board of Governors Messrs. </s>

<s>[INST] March 20-21, 20071 of 196 Mr. Reifschneider, Deputy Associate Director, [/INST] Division Research and Statistics, Board of Governors Messrs. Dale ² and Oliner, Senior Advisers, Divisions of Monetary Affairs an d Res earch and Statistics, respectively, Board of Governors Mr. Hambley,² Assistant to the Board, Office of Board Members, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, ¹ Project Manager, Division of Monetary Affairs, Board of Governors Mr. Kiley ² and Ms. Kole,² Section Ch iefs, Divisions of Research and Statistics and International Finance, respectively, Board of Governors Mr. Doyle, ² Ms. Mauskopf,² and Mr. Wood,² Senior Economi sts, Divisions of International Finance, Research and Statistics, and International Finance, respectively, Board of Governors Ms. Roush, Economist, Division of Monetary Affairs, Board of Governors Mr. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Rosenblum, Executive Vice President, F ederal Reserve Bank of Dallas Mr. Hakkio, Ms. Mester, Messrs. Rolnick, Rudebusch, and Sniderman, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Minneapolis, San Francisco, and Cleveland, respectively Messrs. </s>

<s>[INST] Clouse and English,¹ Associate Directors, Division of Monetary Affairs, Board of Governors Mr. Struckmeyer, Associate Director , Division of Research and Stat istics, Board of Governors ______________ ¹ Attended Wednesday’s session only. March 20-21, 20071 of 196 Mr. Reifschneider, Deputy Associate Director, [/INST] Division Research and Statistics, Board of Governors Messrs. Dale ² and Oliner, Senior Advisers, Divisions of Monetary Affairs an d Res earch and Statistics, respectively, Board of Governors Mr. Hambley,² Assistant to the Board, Office of Board Members, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, ¹ Project Manager, Division of Monetary Affairs, Board of Governors Mr. Kiley ² and Ms. Kole,² Section Ch iefs, Divisions of Research and Statistics and International Finance, respectively, Board of Governors Mr. Doyle, ² Ms. Mauskopf,² and Mr. Wood,² Senior Economi sts, Divisions of International Finance, Research and Statistics, and International Finance, respectively, Board of Governors Ms. Roush, Economist, Division of Monetary Affairs, Board of Governors Mr. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Rosenblum, Executive Vice President, F ederal Reserve Bank of Dallas Mr. Hakkio, Ms. Mester, Messrs. </s>

<s>[INST] Dale ² and Oliner, Senior Advisers, Divisions of Monetary Affairs an d Res earch and Statistics, respectively, Board of Governors Mr. Hambley,² Assistant to the Board, Office of Board Members, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, ¹ Project Manager, Division of Monetary Affairs, Board of Governors Mr. Kiley ² and Ms. Kole,² Section Ch iefs, Divisions of Research and Statistics and International Finance, respectively, Board of Governors Mr. Doyle, ² Ms. Mauskopf,² and [/INST] Mr. Wood,² Senior Economi sts, Divisions of International Finance, Research and Statistics, and International Finance, respectively, Board of Governors Ms. Roush, Economist, Division of Monetary Affairs, Board of Governors Mr. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Rosenblum, Executive Vice President, F ederal Reserve Bank of Dallas Mr. Hakkio, Ms. Mester, Messrs. Rolnick, Rudebusch, and Sniderman, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Minneapolis, San Francisco, and Cleveland, respectively Messrs. Cunningham and Hilton, Vice Presidents, Federal Reserve Banks of Atlanta and New York, respectively Ms. Sbordone, Research Officer, Federal Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond _______________ ¹ Attended Wednesday’s session only. </s>

<s>[INST] March 20-21, 20071 of 196 Mr. Reifschneider, Deputy Associate Director, Division Research and Statistics, Board of Governors Messrs. Dale ² and Oliner, Senior Advisers, Divisions of Monetary Affairs an d Res earch and Statistics, respectively, Board of Governors Mr. Hambley,² Assistant to the Board, Office of Board Members, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, ¹ Project Manager, Division of Monetary Affairs, Board of Governors Mr. Kiley ² and Ms. Kole,² Section Ch iefs, Divisions of Research and Statistics and International Finance, respectively, Board of Governors Mr. Doyle, ² Ms. Mauskopf,² and [/INST] Mr. Wood,² Senior Economi sts, Divisions of International Finance, Research and Statistics, and International Finance, respectively, Board of Governors Ms. Roush, Economist, Division of Monetary Affairs, Board of Governors Mr. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Rosenblum, Executive Vice President, F ederal Reserve Bank of Dallas Mr. Hakkio, Ms. Mester, Messrs. Rolnick, Rudebusch, and Sniderman, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Minneapolis, San Francisco, and Cleveland, respectively Messrs. </s>

<s>[INST] Rolnick, Rudebusch, and Sniderman, Senior Vice Presidents, Federal Reserve Banks of [/INST] Kansas City, Philadelphia, Minneapolis, San Francisco, and Cleveland, respectively Messrs. Cunningham and Hilton, Vice Presidents, Federal Reserve Banks of Atlanta and New York, respectively Ms. Sbordone, Research Officer, Federal Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond _______________ ¹ Attended Wednesday’s session only. ² Attended portion of the meeting relating to the discussion of communications issues. </s>

<s>[INST] Dale ² and Oliner, Senior Advisers, Divisions of Monetary Affairs an d Res earch and Statistics, respectively, Board of Governors Mr. Hambley,² Assistant to the Board, Office of Board Members, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, ¹ Project Manager, Division of Monetary Affairs, Board of Governors Mr. Kiley ² and Ms. Kole,² Section Ch iefs, Divisions of Research and Statistics and International Finance, respectively, Board of Governors Mr. Doyle, ² Ms. Mauskopf,² and Mr. Wood,² Senior Economi sts, Divisions of International Finance, Research and Statistics, and International Finance, respectively, Board of Governors Ms. Roush, Economist, Division of Monetary Affairs, Board of Governors Mr. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Rosenblum, Executive Vice President, F ederal Reserve Bank of Dallas Mr. Hakkio, Ms. Mester, Messrs. Rolnick, Rudebusch, and Sniderman, Senior Vice Presidents, Federal Reserve Banks of [/INST] Kansas City, Philadelphia, Minneapolis, San Francisco, and Cleveland, respectively Messrs. Cunningham and Hilton, Vice Presidents, Federal Reserve Banks of Atlanta and New York, respectively Ms. Sbordone, Research Officer, Federal Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond _______________ ¹ Attended Wednesday’s session only. </s>

<s>[INST] Cunningham and Hilton, Vice Presidents, Federal Reserve Banks of Atlanta and New York, respectively Ms. Sbordone, Research Officer, Federal Reserve [/INST] Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond _______________ ¹ Attended Wednesday’s session only. ² Attended portion of the meeting relating to the discussion of communications issues. March 20-21, 20072 of 196 Transcript of the Federal Open Market Committee Meeting of March 20 -21, 2007 March 20, 2007— Afternoon Session CHAIRMAN BERNANKE. </s>

<s>[INST] Rolnick, Rudebusch, and Sniderman, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Minneapolis, San Francisco, and Cleveland, respectively Messrs. Cunningham and Hilton, Vice Presidents, Federal Reserve Banks of Atlanta and New York, respectively Ms. Sbordone, Research Officer, Federal Reserve [/INST] Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond _______________ ¹ Attended Wednesday’s session only. ² Attended portion of the meeting relating to the discussion of communications issues. </s>

<s>[INST] ² Attended portion of the meeting relating [/INST] to the discussion of communications issues. March 20-21, 20072 of 196 Transcript of the Federal Open Market Committee Meeting of March 20 -21, 2007 March 20, 2007— Afternoon Session CHAIRMAN BERNANKE. Good afternoon , everybod y. Let me be the first to welcome Dennis Lockhart sitting in for the Federal Reserve Bank of Atlanta. </s>

<s>[INST] Cunningham and Hilton, Vice Presidents, Federal Reserve Banks of Atlanta and New York, respectively Ms. Sbordone, Research Officer, Federal Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond _______________ ¹ Attended Wednesday’s session only. ² Attended portion of the meeting relating [/INST] to the discussion of communications issues. March 20-21, 20072 of 196 Transcript of the Federal Open Market Committee Meeting of March 20 -21, 2007 March 20, 2007— Afternoon Session CHAIRMAN BERNANKE. </s>

<s>[INST] March 20-21, 20072 of 196 Transcript of the Federal Open Market Committee Meeting [/INST] of March 20 -21, 2007 March 20, 2007— Afternoon Session CHAIRMAN BERNANKE. Good afternoon , everybod y. Let me be the first to welcome Dennis Lockhart sitting in for the Federal Reserve Bank of Atlanta. We’ll start with Bill Dudley. </s>

<s>[INST] ² Attended portion of the meeting relating to the discussion of communications issues. March 20-21, 20072 of 196 Transcript of the Federal Open Market Committee Meeting [/INST] of March 20 -21, 2007 March 20, 2007— Afternoon Session CHAIRMAN BERNANKE. Good afternoon , everybod y. Let me be the first to welcome Dennis Lockhart sitting in for the Federal Reserve Bank of Atlanta. </s>

<s>[INST] Good afternoon , everybod y. Let me be the first to welcome [/INST] Dennis Lockhart sitting in for the Federal Reserve Bank of Atlanta. We’ll start with Bill Dudley. MR. </s>

<s>[INST] March 20-21, 20072 of 196 Transcript of the Federal Open Market Committee Meeting of March 20 -21, 2007 March 20, 2007— Afternoon Session CHAIRMAN BERNANKE. Good afternoon , everybod y. Let me be the first to welcome [/INST] Dennis Lockhart sitting in for the Federal Reserve Bank of Atlanta. We’ll start with Bill Dudley. </s>

<s>[INST] Financial markets have become much more turbulent since the last meeting —especiall y in subprime [/INST] mortgages and associated securities, in U.S. and global equities, and in foreign exchange markets. The good news is that markets have generally remained liquid and well functioning, with a minor exception on the New York Stock Exchange on February 27. Moreover, there are few signs of significant contagion from the subprime mortgage market into the rest of the mortgage market or from subprime mortgage credit spreads to corporate credit spreads more generally. </s>

<s>[INST] 1 Thank you, Mr. Chairman. Financial markets have become much more turbulent since the last meeting —especiall y in subprime [/INST] mortgages and associated securities, in U.S. and global equities, and in foreign exchange markets. The good news is that markets have generally remained liquid and well functioning, with a minor exception on the New York Stock Exchange on February 27. </s>

<s>[INST] The good news is that markets have generally remained liquid and well functioning, with [/INST] a minor exception on the New York Stock Exchange on February 27. Moreover, there are few signs of significant contagion from the subprime mortgage market into the rest of the mortgage market or from subprime mortgage credit spreads to corporate credit spreads more generally. In general, the debt markets hav e been mostly unruffled by recent developments. </s>

<s>[INST] Financial markets have become much more turbulent since the last meeting —especiall y in subprime mortgages and associated securities, in U.S. and global equities, and in foreign exchange markets. The good news is that markets have generally remained liquid and well functioning, with [/INST] a minor exception on the New York Stock Exchange on February 27. Moreover, there are few signs of significant contagion from the subprime mortgage market into the rest of the mortgage market or from subprime mortgage credit spreads to corporate credit spreads more generally. </s>

<s>[INST] Moreover, there are few signs of significant contagion from the subprime mortgage market into the rest of [/INST] the mortgage market or from subprime mortgage credit spreads to corporate credit spreads more generally. In general, the debt markets hav e been mostly unruffled by recent developments. I plan to focus my attention on four major market developments. </s>

<s>[INST] The good news is that markets have generally remained liquid and well functioning, with a minor exception on the New York Stock Exchange on February 27. Moreover, there are few signs of significant contagion from the subprime mortgage market into the rest of [/INST] the mortgage market or from subprime mortgage credit spreads to corporate credit spreads more generally. In general, the debt markets hav e been mostly unruffled by recent developments. </s>

<s>[INST] In general, the debt markets hav e [/INST] been mostly unruffled by recent developments. I plan to focus my attention on four major market developments. First, t he substantial turmoil in the subprime mortgage market— I talked about the risk that this market might unravel at the January FOMC meet ing; that certainly occurred more quickly and more forcefully than I anticipated. </s>

<s>[INST] Moreover, there are few signs of significant contagion from the subprime mortgage market into the rest of the mortgage market or from subprime mortgage credit spreads to corporate credit spreads more generally. In general, the debt markets hav e [/INST] been mostly unruffled by recent developments. I plan to focus my attention on four major market developments. </s>

<s>[INST] I plan to focus my attention [/INST] on four major market developments. First, t he substantial turmoil in the subprime mortgage market— I talked about the risk that this market might unravel at the January FOMC meet ing; that certainly occurred more quickly and more forcefully than I anticipated. Second, I want to talk a little about the decline in U.S. equity prices and the accompanying rise in actual and implied price volatility. </s>

<s>[INST] In general, the debt markets hav e been mostly unruffled by recent developments. I plan to focus my attention [/INST] on four major market developments. First, t he substantial turmoil in the subprime mortgage market— I talked about the risk that this market might unravel at the January FOMC meet ing; that certainly occurred more quickly and more forcefully than I anticipated. </s>

<s>[INST] First, t he substantial turmoil in the subprime mortgage market— I talked about the risk that this market might [/INST] unravel at the January FOMC meet ing; that certainly occurred more quickly and more forcefully than I anticipated. Second, I want to talk a little about the decline in U.S. equity prices and the accompanying rise in actual and implied price volatility. Third is the sharp correction in t he so -called “carry trade” in foreign exchange markets. </s>

<s>[INST] I plan to focus my attention on four major market developments. First, t he substantial turmoil in the subprime mortgage market— I talked about the risk that this market might [/INST] unravel at the January FOMC meet ing; that certainly occurred more quickly and more forcefully than I anticipated. Second, I want to talk a little about the decline in U.S. equity prices and the accompanying rise in actual and implied price volatility. </s>

<s>[INST] Second, I want to talk a little about the decline in U.S. equity [/INST] prices and the accompanying rise in actual and implied price volatility. Third is the sharp correction in t he so -called “carry trade” in foreign exchange markets. The low interest rate currencies such as the yen and the Swiss franc have appreciated, with the greatest moves coming against their higher-yielding counterparts. </s>

<s>[INST] First, t he substantial turmoil in the subprime mortgage market— I talked about the risk that this market might unravel at the January FOMC meet ing; that certainly occurred more quickly and more forcefully than I anticipated. Second, I want to talk a little about the decline in U.S. equity [/INST] prices and the accompanying rise in actual and implied price volatility. Third is the sharp correction in t he so -called “carry trade” in foreign exchange markets. </s>

<s>[INST] Third is the sharp correction in t he so [/INST] -called “carry trade” in foreign exchange markets. The low interest rate currencies such as the yen and the Swiss franc have appreciated, with the greatest moves coming against their higher-yielding counterparts. Finally, I’ll talk a bit about the s harp downward shift in market expectations about the path of the federal funds rate target over the next year and a half. </s>

<s>[INST] Second, I want to talk a little about the decline in U.S. equity prices and the accompanying rise in actual and implied price volatility. Third is the sharp correction in t he so [/INST] -called “carry trade” in foreign exchange markets. The low interest rate currencies such as the yen and the Swiss franc have appreciated, with the greatest moves coming against their higher-yielding counterparts. </s>

<s>[INST] The low interest rate currencies such as the yen and the Swiss franc [/INST] have appreciated, with the greatest moves coming against their higher-yielding counterparts. Finally, I’ll talk a bit about the s harp downward shift in market expectations about the path of the federal funds rate target over the next year and a half. Two key questions motivate my comments. </s>

<s>[INST] Third is the sharp correction in t he so -called “carry trade” in foreign exchange markets. The low interest rate currencies such as the yen and the Swiss franc [/INST] have appreciated, with the greatest moves coming against their higher-yielding counterparts. Finally, I’ll talk a bit about the s harp downward shift in market expectations about the path of the federal funds rate target over the next year and a half. </s>

<s>[INST] Finally, I’ll talk a bit about the s harp downward shift in market expectations about the [/INST] path of the federal funds rate target over the next year and a half. Two key questions motivate my comments. First, is th e market turbulence driven mainly by fundamental developments, or does it reflect mainly a shift in the risk appetite of investors? </s>

<s>[INST] The low interest rate currencies such as the yen and the Swiss franc have appreciated, with the greatest moves coming against their higher-yielding counterparts. Finally, I’ll talk a bit about the s harp downward shift in market expectations about the [/INST] path of the federal funds rate target over the next year and a half. Two key questions motivate my comments. </s>

<s>[INST] First, is th e market turbulence driven mainly by fundamental developments, or does [/INST] it reflect mainly a shift in the risk appetite of investors? Second, what is the ongoing risk of contagion from the market area that has experienced the most stress —the subprime mortgage market—to other markets? Regarding the subprime mortgage market, the deterioration appears driven mostly by fundamental developments. </s>

<s>[INST] Two key questions motivate my comments. First, is th e market turbulence driven mainly by fundamental developments, or does [/INST] it reflect mainly a shift in the risk appetite of investors? Second, what is the ongoing risk of contagion from the market area that has experienced the most stress —the subprime mortgage market—to other markets? </s>

<s>[INST] Second, what is the ongoing risk of contagion from the market area that [/INST] has experienced the most stress —the subprime mortgage market—to other markets? Regarding the subprime mortgage market, the deterioration appears driven mostly by fundamental developments. As you know, the delinquency rates for subprime adjustable- rate mortgages have risen sharply. </s>

<s>[INST] First, is th e market turbulence driven mainly by fundamental developments, or does it reflect mainly a shift in the risk appetite of investors? Second, what is the ongoing risk of contagion from the market area that [/INST] has experienced the most stress —the subprime mortgage market—to other markets? Regarding the subprime mortgage market, the deterioration appears driven mostly by fundamental developments. </s>

<s>[INST] Regarding the subprime mortgage market, the deterioration [/INST] appears driven mostly by fundamental developments. As you know, the delinquency rates for subprime adjustable- rate mortgages have risen sharply. In contrast, as shown in e xhibit 1 of the handout , there has been little change in delinquency rates f or fixed -rate mortgages. </s>

<s>[INST] Second, what is the ongoing risk of contagion from the market area that has experienced the most stress —the subprime mortgage market—to other markets? Regarding the subprime mortgage market, the deterioration [/INST] appears driven mostly by fundamental developments. As you know, the delinquency rates for subprime adjustable- rate mortgages have risen sharply. </s>

<s>[INST] As you know, the delinquency rates for subprime [/INST] adjustable- rate mortgages have risen sharply. In contrast, as shown in e xhibit 1 of the handout , there has been little change in delinquency rates f or fixed -rate mortgages. Most significantly, delinquency rates for the 2006 vintage of subprime adjustable- rate mortgages have climbed unusually quickly. </s>

<s>[INST] Regarding the subprime mortgage market, the deterioration appears driven mostly by fundamental developments. As you know, the delinquency rates for subprime [/INST] adjustable- rate mortgages have risen sharply. In contrast, as shown in e xhibit 1 of the handout , there has been little change in delinquency rates f or fixed -rate mortgages. </s>

<s>[INST] In contrast, as shown in e xhibit 1 of the handout , there [/INST] has been little change in delinquency rates f or fixed -rate mortgages. Most significantly, delinquency rates for the 2006 vintage of subprime adjustable- rate mortgages have climbed unusually quickly. As shown in e xhibit 2, the last vintage that went this bad so fast was the 2001 vintage, and t hat had a much different economic environment—one c haracterized by a mild recession and a rising unemployment rate. </s>

<s>[INST] As you know, the delinquency rates for subprime adjustable- rate mortgages have risen sharply. In contrast, as shown in e xhibit 1 of the handout , there [/INST] has been little change in delinquency rates f or fixed -rate mortgages. Most significantly, delinquency rates for the 2006 vintage of subprime adjustable- rate mortgages have climbed unusually quickly. </s>

<s>[INST] Most significantly, delinquency rates for the 2006 vintage of [/INST] subprime adjustable- rate mortgages have climbed unusually quickly. As shown in e xhibit 2, the last vintage that went this bad so fast was the 2001 vintage, and t hat had a much different economic environment—one c haracterized by a mild recession and a rising unemployment rate. The deterioration in the quality of subprime mortgage credit has led to a sharp widening in credit spreads for the ABX indexes . </s>

<s>[INST] In contrast, as shown in e xhibit 1 of the handout , there has been little change in delinquency rates f or fixed -rate mortgages. Most significantly, delinquency rates for the 2006 vintage of [/INST] subprime adjustable- rate mortgages have climbed unusually quickly. As shown in e xhibit 2, the last vintage that went this bad so fast was the 2001 vintage, and t hat had a much different economic environment—one c haracterized by a mild recession and a rising unemployment rate. </s>

<s>[INST] As shown in e xhibit 2, the last vintage that went this bad so fast was the 2001 vintage, and [/INST] t hat had a much different economic environment—one c haracterized by a mild recession and a rising unemployment rate. The deterioration in the quality of subprime mortgage credit has led to a sharp widening in credit spreads for the ABX indexes . The ABX indexes 1 Material used by Mr. Du dley is appended to this transcript (appendix 1). </s>

<s>[INST] Most significantly, delinquency rates for the 2006 vintage of subprime adjustable- rate mortgages have climbed unusually quickly. As shown in e xhibit 2, the last vintage that went this bad so fast was the 2001 vintage, and [/INST] t hat had a much different economic environment—one c haracterized by a mild recession and a rising unemployment rate. The deterioration in the quality of subprime mortgage credit has led to a sharp widening in credit spreads for the ABX indexes . </s>

<s>[INST] The deterioration in the quality of subprime mortgage credit has led to [/INST] a sharp widening in credit spreads for the ABX indexes . The ABX indexes 1 Material used by Mr. Du dley is appended to this transcript (appendix 1). March 20-21, 20073 of 196 represent the cost of default protection on a basket of collateralized debt obligations that are backstopped mainly by subprime mortgages. </s>

<s>[INST] As shown in e xhibit 2, the last vintage that went this bad so fast was the 2001 vintage, and t hat had a much different economic environment—one c haracterized by a mild recession and a rising unemployment rate. The deterioration in the quality of subprime mortgage credit has led to [/INST] a sharp widening in credit spreads for the ABX indexes . The ABX indexes 1 Material used by Mr. Du dley is appended to this transcript (appendix 1). </s>

<s>[INST] The ABX indexes 1 Material used by Mr. Du [/INST] dley is appended to this transcript (appendix 1). March 20-21, 20073 of 196 represent the cost of default protection on a basket of collateralized debt obligations that are backstopped mainly by subprime mortgages. As shown in e xhibit 3, although this widening has been most pronounced at the bottom end of the credit quality spect rum (BBB-minus and BBB), it has rippled upward to the higher- rated tranches that are better protected. </s>

<s>[INST] The deterioration in the quality of subprime mortgage credit has led to a sharp widening in credit spreads for the ABX indexes . The ABX indexes 1 Material used by Mr. Du [/INST] dley is appended to this transcript (appendix 1). March 20-21, 20073 of 196 represent the cost of default protection on a basket of collateralized debt obligations that are backstopped mainly by subprime mortgages. </s>

<s>[INST] March 20-21, 20073 of 196 represent the cost of default protection on a [/INST] basket of collateralized debt obligations that are backstopped mainly by subprime mortgages. As shown in e xhibit 3, although this widening has been most pronounced at the bottom end of the credit quality spect rum (BBB-minus and BBB), it has rippled upward to the higher- rated tranches that are better protected. Exhibit 4 shows how the credit deterioration initially registered in the ABX index es as market participants sought to buy protection. </s>

<s>[INST] The ABX indexes 1 Material used by Mr. Du dley is appended to this transcript (appendix 1). March 20-21, 20073 of 196 represent the cost of default protection on a [/INST] basket of collateralized debt obligations that are backstopped mainly by subprime mortgages. As shown in e xhibit 3, although this widening has been most pronounced at the bottom end of the credit quality spect rum (BBB-minus and BBB), it has rippled upward to the higher- rated tranches that are better protected. </s>

<s>[INST] As shown in e xhibit 3, although this widening has been most pronounced at the bottom end of the credit [/INST] quality spect rum (BBB-minus and BBB), it has rippled upward to the higher- rated tranches that are better protected. Exhibit 4 shows how the credit deterioration initially registered in the ABX index es as market participants sought to buy protection. In milder form, this deterioration also registered in the underlying collateralized debt obligations and asset- backed securities. </s>

<s>[INST] March 20-21, 20073 of 196 represent the cost of default protection on a basket of collateralized debt obligations that are backstopped mainly by subprime mortgages. As shown in e xhibit 3, although this widening has been most pronounced at the bottom end of the credit [/INST] quality spect rum (BBB-minus and BBB), it has rippled upward to the higher- rated tranches that are better protected. Exhibit 4 shows how the credit deterioration initially registered in the ABX index es as market participants sought to buy protection. </s>

<s>[INST] Exhibit 4 shows how the credit deterioration initially registered in the [/INST] ABX index es as market participants sought to buy protection. In milder form, this deterioration also registered in the underlying collateralized debt obligations and asset- backed securities. The widening of the credit spread in the ABX indexes was probably exaggerated by the fact that there was an asymmetry between the many that were seeking loss protection and the few that were willing to write protection. </s>

<s>[INST] As shown in e xhibit 3, although this widening has been most pronounced at the bottom end of the credit quality spect rum (BBB-minus and BBB), it has rippled upward to the higher- rated tranches that are better protected. Exhibit 4 shows how the credit deterioration initially registered in the [/INST] ABX index es as market participants sought to buy protection. In milder form, this deterioration also registered in the underlying collateralized debt obligations and asset- backed securities. </s>

<s>[INST] In milder form, this deterioration also registered in the [/INST] underlying collateralized debt obligations and asset- backed securities. The widening of the credit spread in the ABX indexes was probably exaggerated by the fact that there was an asymmetry between the many that were seeking loss protection and the few that were willing to write protection. This can be seen in two ways. </s>

<s>[INST] Exhibit 4 shows how the credit deterioration initially registered in the ABX index es as market participants sought to buy protection. In milder form, this deterioration also registered in the [/INST] underlying collateralized debt obligations and asset- backed securities. The widening of the credit spread in the ABX indexes was probably exaggerated by the fact that there was an asymmetry between the many that were seeking loss protection and the few that were willing to write protection. </s>

<s>[INST] The widening of the credit spread in the ABX indexes was probably exaggerated by the fact that there was an [/INST] asymmetry between the many that were seeking loss protection and the few that were willing to write protection. This can be seen in two ways. First, as shown in e xhibit 4, the spread widening was more pronounced in the ABX index than in either underlying collateralized debt obligations or asset -backed securities. </s>

<s>[INST] In milder form, this deterioration also registered in the underlying collateralized debt obligations and asset- backed securities. The widening of the credit spread in the ABX indexes was probably exaggerated by the fact that there was an [/INST] asymmetry between the many that were seeking loss protection and the few that were willing to write protection. This can be seen in two ways. </s>

<s>[INST] First, as shown in e xhibit 4, the spread widening was more pronounced in the [/INST] ABX index than in either underlying collateralized debt obligations or asset -backed securities. Second, as shown in e xhibit 3, the ABX spreads have come down a bit from their peaks even as the underlying market for subprime mortgages, as reflected in the ongoing viability of many mortgage originators, has continued to dete riorate. The deterioration in the subprime market has undermined the economics of subprime mortgage origination and securitization. </s>

<s>[INST] This can be seen in two ways. First, as shown in e xhibit 4, the spread widening was more pronounced in the [/INST] ABX index than in either underlying collateralized debt obligations or asset -backed securities. Second, as shown in e xhibit 3, the ABX spreads have come down a bit from their peaks even as the underlying market for subprime mortgages, as reflected in the ongoing viability of many mortgage originators, has continued to dete riorate. </s>

<s>[INST] Second, as shown in e xhibit 3, the ABX spreads have come down a bit from their peaks even as the [/INST] underlying market for subprime mortgages, as reflected in the ongoing viability of many mortgage originators, has continued to dete riorate. The deterioration in the subprime market has undermined the economics of subprime mortgage origination and securitization. This is especially true for those mortgage originators with poorer underwriting track records. </s>

<s>[INST] First, as shown in e xhibit 4, the spread widening was more pronounced in the ABX index than in either underlying collateralized debt obligations or asset -backed securities. Second, as shown in e xhibit 3, the ABX spreads have come down a bit from their peaks even as the [/INST] underlying market for subprime mortgages, as reflected in the ongoing viability of many mortgage originators, has continued to dete riorate. The deterioration in the subprime market has undermined the economics of subprime mortgage origination and securitization. </s>

<s>[INST] The deterioration in the subprime market has undermined the [/INST] economics of subprime mortgage origination and securitization. This is especially true for those mortgage originators with poorer underwriting track records. Their loans can no longer be sold at a sufficient premium to par value to cover their origination costs. </s>

<s>[INST] Second, as shown in e xhibit 3, the ABX spreads have come down a bit from their peaks even as the underlying market for subprime mortgages, as reflected in the ongoing viability of many mortgage originators, has continued to dete riorate. The deterioration in the subprime market has undermined the [/INST] economics of subprime mortgage origination and securitization. This is especially true for those mortgage originators with poorer underwriting track records. </s>

<s>[INST] This is especially true for those mortgage [/INST] originators with poorer underwriting track records. Their loans can no longer be sold at a sufficient premium to par value to cover their origination costs. In addition, the costs that they must incur to replace loans that have defaulted early have increased sharply. </s>

<s>[INST] The deterioration in the subprime market has undermined the economics of subprime mortgage origination and securitization. This is especially true for those mortgage [/INST] originators with poorer underwriting track records. Their loans can no longer be sold at a sufficient premium to par value to cover their origination costs. </s>

<s>[INST] Their loans can no longer be sold at a sufficient [/INST] premium to par value to cover their origination costs. In addition, the costs that they must incur to replace loans that have defaulted early have increased sharply. In several cases, these difficulties have caused banks to pu ll their warehouse lines of credit. </s>

<s>[INST] This is especially true for those mortgage originators with poorer underwriting track records. Their loans can no longer be sold at a sufficient [/INST] premium to par value to cover their origination costs. In addition, the costs that they must incur to replace loans that have defaulted early have increased sharply. </s>

<s>[INST] In addition, the costs that they must incur to replace [/INST] loans that have defaulted early have increased sharply. In several cases, these difficulties have caused banks to pu ll their warehouse lines of credit. Several of the large monoline originators are bankrupt, distressed, or up for sale—they are highlighted in red in exhibit 5 . </s>

<s>[INST] Their loans can no longer be sold at a sufficient premium to par value to cover their origination costs. In addition, the costs that they must incur to replace [/INST] loans that have defaulted early have increased sharply. In several cases, these difficulties have caused banks to pu ll their warehouse lines of credit. </s>

<s>[INST] In several cases, these difficulties have caused banks to [/INST] pu ll their warehouse lines of credit. Several of the large monoline originators are bankrupt, distressed, or up for sale—they are highlighted in red in exhibit 5 . Moreover, several of the diversified lenders, such as HSBC, have indicated that they are tightening credit standards and pulling back from this sector. </s>

<s>[INST] In addition, the costs that they must incur to replace loans that have defaulted early have increased sharply. In several cases, these difficulties have caused banks to [/INST] pu ll their warehouse lines of credit. Several of the large monoline originators are bankrupt, distressed, or up for sale—they are highlighted in red in exhibit 5 . </s>

<s>[INST] Several of the large monoline originators are bankrupt, distressed, or up [/INST] for sale—they are highlighted in red in exhibit 5 . Moreover, several of the diversified lenders, such as HSBC, have indicated that they are tightening credit standards and pulling back from this sector. The result is that the volume of subprime mortgage originations is likely to fall sharply this year —perhaps dropping one-third or more from the 2006 rate of slightly more than $600 billion. </s>

<s>[INST] In several cases, these difficulties have caused banks to pu ll their warehouse lines of credit. Several of the large monoline originators are bankrupt, distressed, or up [/INST] for sale—they are highlighted in red in exhibit 5 . Moreover, several of the diversified lenders, such as HSBC, have indicated that they are tightening credit standards and pulling back from this sector. </s>

<s>[INST] Moreover, several of the diversified lenders, such as HSBC, have indicated that [/INST] they are tightening credit standards and pulling back from this sector. The result is that the volume of subprime mortgage originations is likely to fall sharply this year —perhaps dropping one-third or more from the 2006 rate of slightly more than $600 billion. This tightening of credit availability to subprime borrowers is likely to manifest itself through a number of channels . </s>

<s>[INST] Several of the large monoline originators are bankrupt, distressed, or up for sale—they are highlighted in red in exhibit 5 . Moreover, several of the diversified lenders, such as HSBC, have indicated that [/INST] they are tightening credit standards and pulling back from this sector. The result is that the volume of subprime mortgage originations is likely to fall sharply this year —perhaps dropping one-third or more from the 2006 rate of slightly more than $600 billion. </s>

<s>[INST] The result is that the volume of subprime mortgage originations is likely to fall sharply this year [/INST] —perhaps dropping one-third or more from the 2006 rate of slightly more than $600 billion. This tightening of credit availability to subprime borrowers is likely to manifest itself through a number of channels . These channels includ e (1) a drop in housing demand, as borrowers who would have been able to get credit in 2006 no longer qualify under now toughened underwriting standards; (2) a n increase in housing supply, as the rate of housing foreclosures increases (n otably, the Mortgage Bankers Association reported last week that the rate of loans entering the foreclosure process in the fourth quarter of 2006 reached a record level of 0.54 percent, the highest level in the history of the thirty- seven -year-old survey ); and (3) a dditional downward pressure on home prices, which in turn threatens to increase the magnitude of credit problems, delinquencies, and foreclosures. </s>

<s>[INST] Moreover, several of the diversified lenders, such as HSBC, have indicated that they are tightening credit standards and pulling back from this sector. The result is that the volume of subprime mortgage originations is likely to fall sharply this year [/INST] —perhaps dropping one-third or more from the 2006 rate of slightly more than $600 billion. This tightening of credit availability to subprime borrowers is likely to manifest itself through a number of channels . </s>

<s>[INST] This tightening of credit availability to subprime borrowers is likely [/INST] to manifest itself through a number of channels . These channels includ e (1) a drop in housing demand, as borrowers who would have been able to get credit in 2006 no longer qualify under now toughened underwriting standards; (2) a n increase in housing supply, as the rate of housing foreclosures increases (n otably, the Mortgage Bankers Association reported last week that the rate of loans entering the foreclosure process in the fourth quarter of 2006 reached a record level of 0.54 percent, the highest level in the history of the thirty- seven -year-old survey ); and (3) a dditional downward pressure on home prices, which in turn threatens to increase the magnitude of credit problems, delinquencies, and foreclosures. In considering these channels, it is important to emphasize that the credit strains in the subprime sector are unlikely to have peaked yet. </s>

<s>[INST] The result is that the volume of subprime mortgage originations is likely to fall sharply this year —perhaps dropping one-third or more from the 2006 rate of slightly more than $600 billion. This tightening of credit availability to subprime borrowers is likely [/INST] to manifest itself through a number of channels . These channels includ e (1) a drop in housing demand, as borrowers who would have been able to get credit in 2006 no longer qualify under now toughened underwriting standards; (2) a n increase in housing supply, as the rate of housing foreclosures increases (n otably, the Mortgage Bankers Association reported last week that the rate of loans entering the foreclosure process in the fourth quarter of 2006 reached a record level of 0.54 percent, the highest level in the history of the thirty- seven -year-old survey ); and (3) a dditional downward pressure on home prices, which in turn threatens to increase the magnitude of credit problems, delinquencies, and foreclosures. </s>

<s>[INST] These channels includ e (1) a drop in housing demand, as borrowers who would have been able to get credit in 2006 no longer qualify under now toughened underwriting standards; (2) a n increase in housing supply, as the rate of housing foreclosures increases (n otably, the Mortgage Bankers Association reported last week that the rate [/INST] of loans entering the foreclosure process in the fourth quarter of 2006 reached a record level of 0.54 percent, the highest level in the history of the thirty- seven -year-old survey ); and (3) a dditional downward pressure on home prices, which in turn threatens to increase the magnitude of credit problems, delinquencies, and foreclosures. In considering these channels, it is important to emphasize that the credit strains in the subprime sector are unlikely to have peaked yet. The reset risk on the adjustable- rate portion of the subprime loans originated in 2005 and 2006 will be felt mainly over the remainder of 2007 and 2008. </s>

<s>[INST] This tightening of credit availability to subprime borrowers is likely to manifest itself through a number of channels . These channels includ e (1) a drop in housing demand, as borrowers who would have been able to get credit in 2006 no longer qualify under now toughened underwriting standards; (2) a n increase in housing supply, as the rate of housing foreclosures increases (n otably, the Mortgage Bankers Association reported last week that the rate [/INST] of loans entering the foreclosure process in the fourth quarter of 2006 reached a record level of 0.54 percent, the highest level in the history of the thirty- seven -year-old survey ); and (3) a dditional downward pressure on home prices, which in turn threatens to increase the magnitude of credit problems, delinquencies, and foreclosures. In considering these channels, it is important to emphasize that the credit strains in the subprime sector are unlikely to have peaked yet. </s>

<s>[INST] In considering these channels, it is important to emphasize that the credit [/INST] strains in the subprime sector are unlikely to have peaked yet. The reset risk on the adjustable- rate portion of the subprime loans originated in 2005 and 2006 will be felt mainly over the remainder of 2007 and 2008. Most of the adjustable- rate loans are fixed for two years at low “teaser” rates. </s>

<s>[INST] These channels includ e (1) a drop in housing demand, as borrowers who would have been able to get credit in 2006 no longer qualify under now toughened underwriting standards; (2) a n increase in housing supply, as the rate of housing foreclosures increases (n otably, the Mortgage Bankers Association reported last week that the rate of loans entering the foreclosure process in the fourth quarter of 2006 reached a record level of 0.54 percent, the highest level in the history of the thirty- seven -year-old survey ); and (3) a dditional downward pressure on home prices, which in turn threatens to increase the magnitude of credit problems, delinquencies, and foreclosures. In considering these channels, it is important to emphasize that the credit [/INST] strains in the subprime sector are unlikely to have peaked yet. The reset risk on the adjustable- rate portion of the subprime loans originated in 2005 and 2006 will be felt mainly over the remainder of 2007 and 2008. </s>

<s>[INST] The reset risk on the adjustable- rate portion of the subprime loans originated in 2005 [/INST] and 2006 will be felt mainly over the remainder of 2007 and 2008. Most of the adjustable- rate loans are fixed for two years at low “teaser” rates. When yields adjust upward once the teaser rate period is over, some borrowers may have in sufficient resources to service these March 20-21, 20074 of 196 debts. </s>

<s>[INST] In considering these channels, it is important to emphasize that the credit strains in the subprime sector are unlikely to have peaked yet. The reset risk on the adjustable- rate portion of the subprime loans originated in 2005 [/INST] and 2006 will be felt mainly over the remainder of 2007 and 2008. Most of the adjustable- rate loans are fixed for two years at low “teaser” rates. </s>

<s>[INST] Most of the adjustable- rate loans are fixed [/INST] for two years at low “teaser” rates. When yields adjust upward once the teaser rate period is over, some borrowers may have in sufficient resources to service these March 20-21, 20074 of 196 debts. The good news— at least to date —is that spillover into the a lt-A mortgage and conforming mortgage areas is very mild , both in terms of credit spreads and in terms of loan performance. </s>

<s>[INST] The reset risk on the adjustable- rate portion of the subprime loans originated in 2005 and 2006 will be felt mainly over the remainder of 2007 and 2008. Most of the adjustable- rate loans are fixed [/INST] for two years at low “teaser” rates. When yields adjust upward once the teaser rate period is over, some borrowers may have in sufficient resources to service these March 20-21, 20074 of 196 debts. </s>

<s>[INST] When yields adjust upward once the teaser rate period is over, some borrowers may [/INST] have in sufficient resources to service these March 20-21, 20074 of 196 debts. The good news— at least to date —is that spillover into the a lt-A mortgage and conforming mortgage areas is very mild , both in terms of credit spreads and in terms of loan performance. Although there has been some rise in delinquency and foreclosure rates for higher -quality residential mortgages, these rates are still low both qualitatively and historically . </s>

<s>[INST] Most of the adjustable- rate loans are fixed for two years at low “teaser” rates. When yields adjust upward once the teaser rate period is over, some borrowers may [/INST] have in sufficient resources to service these March 20-21, 20074 of 196 debts. The good news— at least to date —is that spillover into the a lt-A mortgage and conforming mortgage areas is very mild , both in terms of credit spreads and in terms of loan performance. </s>