concentrations within those portfolios or as banks failed or merged. established banking relationships are particularly important to small businesses, who generally do not have access to broader capital markets and for whom credit extension is often based on private information acquired through repeated interactions over time. when existing lending relationships are broken, time may be required for other banks to establish and build such relationships, allowing lending to resume. the reduction in the availability of credit, however, is not the whole story. there is also less demand for credit. as businesses reduced inventory levels and capital spending, they tended to pay down debt and build cash positions. moreover, large firms replaced bank debt by accessing the bond market in considerable volume last year. even small businesses, in a survey by the national federation of independent business, report that while loans remain difficult to get, their most important business problem is lack of customer demand, a factor that has likely restrained their demand for funds. furthermore, some consumers, perhaps in particular those who are highly leveraged, may be trying to pay down debt and rebuild their balance sheets. while some potential borrowers seek less credit, others are ineligible to borrow. weakened balance sheets, reduced income, falling real estate collateral values, and in some cases, a recent history of payment problems, presumably have made it difficult for some businesses and consumers to qualify for loans, especially under current stricter standards. my conversations with bankers in recent weeks, however, lead me to be somewhat optimistic that we may begin to see an increase in bank loans later this year. nearly all the bankers with whom i have talked report that their business plans for 2010 are based on achieving increases in loan volumes. most are expecting that loan losses will peak later this year, as the bottoming of the housing market becomes clearer and the economic recovery takes firmer hold. and a few bankers are beginning to report renewed competition for new loans. the federal reserve has been working with banks to foster improved access to credit and prudent underwriting of new loans, and we will continue to do so. i believe that the considerable support that we have given to bank lending through accommodative monetary policy and our borrowing facilities has been critically important. in addition, on the regulatory side, in november 2008, the federal reserve along with the other banking agencies issued supervisory guidance that emphasized the importance of continuing to meet the credit needs of creditworthy borrowers, while maintaining appropriate prudence in lending decisions. 1 more recently, the banking agencies jointly issued guidance encouraging banks

transmission to the real economy remain more uncertain. i would draw from this three policy conclusions : a. in the usual alleged time lag of one to two years for monetary transmission, our economic situation makes it likely that we are presently closer to the upper range. and hence the commitment i reaffirm today to bring inflation back towards 2 % by 2025, is consistent with the full transmission of the monetary tightening that will have been put in place by summer 2023. page 13 sur 14 b. against this backdrop of significant transmission “ in the pipe “ and still to come, a deceleration in the size of the policy steps ( from 50bp to 25 bp ) was wise and cautious. we obviously keep our hands free, but we add the capacity of observing and monitoring the pass - through of our substantial and exceptionally rapid past hikes. persistence is now more important than speed ; the duration for which we will maintain rates is now more important than the precise terminal level we will reach. or in other words, for interest rates as with ballistics, “ longer ” is becoming more significant than “ higher ”. c. hence, our next rate decisions should not monopolise attention ; we already have completed most of our rate - hiking journey, and we are clearly in restrictive territory. that said, as i said already last january, i expect today that we will be at the terminal rate not later than by summer. summer is a long and beautiful season, which starts in june and ends in september. in the meantime, we have three possible governing councils either for hiking or pausing ; but don ’ t deduce a guidance from this or a preference for a given terminal rate. we will remain data driven, looking meeting by meeting at the outlook for headline inflation as well as for the dynamics of underlying inflation and the strength of monetary policy transmission. * * * monetary policy is at work and rest assured, we ’ ll do the job : we ’ ll bring inflation back towards 2 %. we ’ ll do it with the necessary patience – looking at the 2025 horizon for full transmission, with persistence – maintaining restrictive interest rates for long enough, and pragmatism – monitoring actual economic data. but once more, monetary policy cannot be the only game in town. fiscal policies should gradually adjust and consolidate, reducing first and foremost energy subsidies ; wage negotiations and mark - up decisions by firms should incorporate the expected decrease in inflation ; and still more, structural reforms are needed more than