bond markets so far this year is an encouraging development. to be sure, spreads remain high by historical standards, but the constraint imposed by last fall's huge run - up in risk premiums now appears to have been put largely behind us. in addition, businesses should see some relief from the pressure on profit margins that had developed in recent months as energy prices rose sharply, and improvement on this front could be a positive development for capital spending. a modestly encouraging sign is provided by the backlog of orders for nondefense capital goods excluding aircraft, which has been moving up in recent months. households, too, are likely to welcome lower energy bills and a continuation of favorable conditions in mortgage and credit markets. as you know, core prices by many measures have increased very slowly over the last six months. with price inflation already at a low level, substantial further disinflation would be an unwelcome development, especially to the extent it put pressure on profit margins and impeded the revival of business spending. the balance of influences on inflation and economic activity will be among the subjects of discussion by the federal open market committee when it meets in six days.

vehicles in which they retained contractual and reputational liquidity exposures. these vehicles, like banks themselves, were funding longer - term assets with short - term liabilities, and, like banks, they were subject to a run when their lenders became concerned about the quality of the assets. some banks wound up using their own liquidity to support financing vehicles that were no longer able to fund themselves on anything like the same terms and conditions as before the market turmoil began. and as banks made good on the implicit or explicit liquidity insurance they sold, they found themselves with larger balance sheets and less - robust capital cushions than they anticipated. as the banks'capital and liquidity cushions unexpectedly eroded, they became quite cautious about extending credit, a dramatic change from the more complacent attitudes of previous years. concentration risk is another familiar risk that is appearing in a new form. banks have always had to worry about lending too much to one borrower, one industry, or one geographic region. but as smaller banks hold more of their balance sheet in types of loans that are difficult to securitize, concentration risks can develop. concentrations of commercial real estate exposures are currently quite high at some smaller banks. this has the potential to make the banking sector much more sensitive to a downturn in the commercial real estate market. the private sector needs to respond to protect their capital and liquidity, banks and other financial market participants are addressing the weaknesses revealed by market developments by becoming much more careful about the risks they are taking. this is a necessary process, but it has been a difficult one as well ; it is reducing the values of some assets and tightening credit cost and availability across a wide range of instruments and counterparties, despite considerable easing in the stance of monetary policy. it is this tightening that is accentuating the downside risks for the economy as a whole. and in some sectors, as lenders seek protection against perceived downside risks, it is probably going further than is necessary to foster financial stability in the long run. but we will end up with a safer, more robust financial system. for banks, a safer and more robust financial system will be characterized by improved risk management that incorporates the lessons from the recent turmoil. successful risk management looks comprehensively across business lines and is fully integrated into the decisionmaking of senior management. it identifies stresses and scenarios that might seem remote, but that could threaten safety and soundness. banks'own self - interest clearly provides a strong incentive to