##s yields over the yields on comparable treasury securities to rise sharply. together with the increased fees imposed by the gses, the rise in this spread resulted in higher interest rates on conforming mortgages. more recently, agency mbs spreads and conforming mortgage rates have retraced part of this increase, and conforming mortgages continue to be readily available to households. however, for the most part, the nonconforming segment of the mortgage market continues to function poorly. in corporate debt markets, yields and spreads on both investment - grade and speculativegrade corporate bonds rose through mid - march before falling more recently. issuance of investment - grade bonds by both financial and nonfinancial corporations has been quite robust so far this year, but issuance of new high - yield debt has stalled. strains continue to be evident in the commercial paper market as well, where risk spreads remain elevated and the quantity of commercial paper outstanding, particularly asset - backed paper, has decreased. commercial and industrial loans at banks grew in january and february, but at a considerably slower pace than in previous months. these developments in financial markets – which themselves reflect, in part, greater concerns about housing and the economic outlook more generally – have weighed on real economic activity. notably, in the housing market, sales of both new and existing homes have generally continued weak, partly as a result of the reduced availability of mortgage credit, and home prices have continued to fall. 1 starts of new single - family homes declined an additional 7 percent in february, bringing the cumulative decline since the early 2006 peak in single - family starts to more than 60 percent. residential construction is likely to contract somewhat further in coming quarters as builders try to reduce their high inventories of unsold new homes. private payroll employment fell 101, 000 in february, after two months of smaller job losses, with job cuts in construction and closely related industries accounting for a significant share of the decline. but the demand for labor has also moderated recently in other industries, such as business services and retail trade, and manufacturing employment has continued on its downward trend. meanwhile, claims for unemployment insurance have risen somewhat on balance, and surveys indicate that employers have scaled back hiring plans and that jobseekers are experiencing greater difficulties finding work. the unemployment rate edged down in february and remains at a relatively low level ; however, in light of the sluggishness of economic activity and other indicators of a softer labor market, i expect it to move somewhat higher in coming

about one point the growth in our working age population. the remainder was drawn from the ever decreasing pool of available job seekers without work. that last development represents an unsustainable trend that has been produced by an inclination of households and firms to increase their spending on goods and services beyond the gains in their income from production. that propensity to spend, in turn, has been spurred by the rise in equity and home prices, which our analysis suggests can account for at least one percentage point of gdp growth over the past three years. even if this period of rapid expansion of capital gains comes to an end shortly, there remains a substantial amount in the pipeline to support outsized increases in consumption for many months into the future. of course, a dramatic contraction in equity market prices would greatly reduce this backlog of extra spending. to be sure, labor market tightness has not, as yet, put the current expansion at risk. despite the ever shrinking pool of available labor, recent readings on year - over - year increases in labor compensation have held steady or, by some measures, even eased. this seems to have resulted in part from falling inflation, which has implied that relatively modest nominal wage gains have provided healthy increases in purchasing power. also, a residual fear of job skill obsolescence, which has induced a preference for job security over wage gains, probably is still holding down wage levels. but should labor markets continue to tighten, significant increases in wages, in excess of productivity growth, will inevitably emerge, absent the unlikely repeal of the law of supply and demand. because monetary policy operates with a significant lag, we have to make judgments, not only about the current degree of balance in the economy, but about how the economy is likely to fare a year or more in the future under the current policy stance. the return of financial markets to greater stability and our growing concerns about emerging imbalances led the federal open market committee to adopt a policy position at our may meeting that contemplated a possible need for an upward adjustment of the federal funds rate in the months ahead. the issue is what policy setting has the capacity to sustain our remarkable economic expansion, now in its ninth year. this is the question the fomc will be addressing at its meeting at the end of the month. one of the important issues for the fomc as it has made such judgments in recent years has been the weight to place on asset prices. as i have already noted, history suggests that owing to the