them to reduce production to better align inventories with sales. excess inventories now appear to have been substantially eliminated and should not prove a further restraint on growth. the global economy continues to be strong. supported by solid economic growth abroad, u. s. exports should expand further in coming quarters. nonetheless, our trade deficit – which was about 5 - 1 / 4 percent of nominal gross domestic product ( gdp ) in the first quarter – is likely to remain high. for the most part, financial markets have remained supportive of economic growth. however, conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable - rate loans. in recent weeks, we have also seen increased concerns among investors about credit risk on some other types of financial instruments. credit spreads on lower - quality corporate debt have widened somewhat, and terms for some leveraged business loans have tightened. even after their recent rise, however, credit spreads remain near the low end of their historical ranges, and financing activity in the bond and business loan markets has remained fairly brisk. overall, the u. s. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy ’ s underlying trend. such an assessment was made around the time of the june meeting of the federal open market committee ( fomc ) by the members of the board of governors and the presidents of the reserve banks, all of whom participate in deliberations on monetary policy. the central tendency of the growth forecasts, which are conditioned on the assumption of appropriate monetary policy, is for real gdp to expand roughly 2 - 1 / 4 to 2 - 1 / 2 percent this year and 2 - 1 / 2 to 2 - 3 / 4 percent in 2008. the forecasted performance for this year is about 1 / 4 percentage point below that projected in february, the difference being largely the result of weaker - than - expected residential construction activity this year. the unemployment rate is anticipated to edge up to between 4 - 1 / 2 and 4 - 3 / 4 percent over the balance of this year and about 4 - 3 / 4 percent in 2008, a trajectory about the same as the one expected in february. i turn now to the inflation situation. sizable increases in food and energy prices have boosted overall inflation and eroded real incomes in recent months – both unwelcome developments. as measured by changes in the price index for personal consumption

public hearing on june 14 to discuss industry practices, including those pertaining to pre - payment penalties, the use of escrow accounts for taxes and insurance, stated - income and low - documentation lending, and the evaluation of a borrower ’ s ability to repay. the discussion and ideas we heard were extremely useful, and we look forward to receiving additional public comments in coming weeks. based on the information we are gathering, i expect that the board will propose additional rules under hoepa later this year. in coordination with the other federal supervisory agencies, last year we issued principlesbased guidance on nontraditional mortgages, and in june of this year we issued supervisory guidance on subprime lending. these statements emphasize the fundamental consumer protection principles of sound underwriting and effective disclosures. in addition, we reviewed our policies related to the examination of nonbank subsidiaries of bank and financial holding companies for compliance with consumer protection laws and guidance. as a result of that review and following discussions with the office of thrift supervision, the federal trade commission, and state regulators, as represented by the conference of state bank supervisors and the american association of residential mortgage regulators, we are launching a cooperative pilot project aimed at expanding consumer protection compliance reviews at selected nondepository lenders with significant subprime mortgage operations. the reviews will begin in the fourth quarter of this year and will include independent statelicensed mortgage lenders, nondepository mortgage lending subsidiaries of bank and thrift holding companies, and mortgage brokers doing business with or serving as agents of these entities. the agencies will collaborate in determining the lessons learned and in seeking ways to better cooperate in ensuring effective and consistent examinations of and improved enforcement for nondepository mortgage lenders. working together to address jurisdictional issues and to improve information - sharing among agencies, we will seek to prevent abusive and fraudulent lending while ensuring that consumers retain access to beneficial credit. i believe that the actions i have described today will help address the current problems. the federal reserve looks forward to working with the congress on these important issues.