limit the build - up of current exposures. in addition, ccps must also calculate and collect initial margin sufficient to cover potential changes in the value of each participant ’ s position between the last collection of variation margin and the final closeout of a participant ’ s position should it default to the ccp. this process involves modeling potential price movements with an appropriate confidence threshold, determining the closeout period in the event the participant defaults, and numerous other factors. given the complexity of this modeling, it is important that ccps rigorously back - test and stress - test the adequacy of their margin models under a wide range of extreme yet plausible scenarios. more broadly, a ccp should test the sufficiency of its total financial resources – initial margin, default funds and capital – to cover potential credit losses, taking into account evolving market volatility and liquidity conditions. an important lesson from the financial crisis is that liquidity is extremely important in ensuring on - going viability and resilience during a period of financial stress. no amount of resources can guarantee that a ccp will be able to meet its payment and settlement obligations, unless those resources can be converted to cash with certainty and within a very short time frame. ccp liquidity is especially important, since a failure to meet required payment obligations could undermine market confidence at precisely the moment when it is most fragile and trigger run - like behavior as financial institutions seek to reduce their exposure to the ccp and its members. to measure and manage its liquidity risks, the pfmis require a ccp to have effective methodologies to estimate its funding exposures under a variety of stressed conditions, to identify available cash resources, and to establish mechanisms for converting its noncash collateral to cash. the need to assure adequate liquidity presents a number of challenges. ccps will need to mobilize cash within a matter of hours on the day of a large clearing member ’ s default. cash balances on deposit at a bank can be quickly accessed, but ccps often put their cash resources in overnight investments to earn a return. the nature and mechanics of such investments, as well as prevailing market conditions, can critically affect the ability of a ccp to unwind those investments quickly enough to meet its cash needs. a similar challenge will arise with the need to convert noncash collateral, such as initial margin collateral, to cash. the pfmis require ccps to have in place prearranged

##y 1 - 1 / 2 percentage points from u. s. real gdp growth. my sense is that the optimistic growth forecasts for the united states for the next year do not rely on anything more than a modest increase in growth in the rest of the world. of course, to the extent that unanticipated strength abroad materializes and raises demand for u. s. exports, the outlook here will improve further. finally, a word on long - term interest rates, which as you know have been rising. at current levels, bond yields do not pose a major risk to continuing strength in housing or the recovery in corporate investment, in my view, though they may well end the boom in mortgage refinancing activity. since those consumers who had the most to gain from refinancing have mostly already done so, a slowdown in refinancing is unlikely to have a significant effect on household spending. the forecast through 2004 : inflation i turn now from the forecast for real activity to the outlook for inflation. as before, i will both compare the various published projections and talk about some risks to the forecast. inflation has been quite low, of course, and the private - sector forecasters expect inflation to remain low for the rest of this year and next. as table 1 shows, forecasts for cpi inflation for the second half of 2003 ( the average of third - and fourth - quarter inflation forecasts, at an annual rate ) by global insight, blue chip, macroeconomic advisers, and the survey of professional forecasters are tightly clustered in a range of approximately 1 - 1 / 4 percent to 1 - 1 / 2 percent. ( i will not comment here on forecasts for inflation as measured by the gdp price index, also shown in table 1, other than to say, as you can see for yourselves, that they are also quite low. ) the same four sources report cpi inflation forecasts for 2004, fourth quarter over fourth quarter, of between 1 - 1 / 4 and 2 percent. for monetary policy purposes, one is often interested in measures of underlying inflation. one such measure is so - called core cpi inflation, defined as the rate of change of the consumer price index excluding food and energy prices, which tend to be relatively volatile. i was able to find a core cpi inflation forecast only for macroeconomic advisers. macroeconomic advisers expects core cpi inflation for 2004 to be 1. 5 percent, compared with an expectation of 1. 3 percent for overall