are evidencing increased concerns about the potential for supply disruptions in various oil - producing regions. to be sure, the capacity to tap and utilize the world's supply of oil continues to expand. major advances in recovery rates from existing reservoirs have enhanced proved reserves despite ever fewer discoveries of major oil fields. but, going forward, because of the geographic location of proved reserves, the great majority of the investment required to convert reserves into new crude oil productive capacity will need to be made in countries where foreign investment is currently prohibited or restricted or faces considerable political risk. moreover, the preponderance of oil and gas revenues of the dominant national oil companies is perceived as necessary to meet the domestic needs of growing populations. these factors have the potential to constrain the ability of producers to expand capacity to keep up with the projected growth of world demand, which has been propelled to an unexpected extent by burgeoning demand in emerging asia. more favorably, the current and prospective expansion of u. s. capability to import liquefied natural gas will help ease longer - term natural gas stringencies and perhaps bring natural gas prices in the united states down to world levels. the third major uncertainty in the economic outlook relates to the behavior of long - term interest rates. the yield on ten - year treasury notes, currently near 4 - 1 / 4 percent, is about 50 basis points below its level of late spring 2004. moreover, even after the recent widening of credit risk spreads, yields for both investment - grade and less - than - investment - grade corporate bonds have declined even more than those on treasury notes over the same period. 2 / 5 this decline in long - term rates has occurred against the backdrop of generally firm u. s. economic growth, a continued boost to inflation from higher energy prices, and fiscal pressures associated with the fast approaching retirement of the baby - boom generation. 1 the drop in long - term rates is especially surprising given the increase in the federal funds rate over the same period. such a pattern is clearly without precedent in our recent experience. the unusual behavior of long - term interest rates first became apparent last year. in may and june of 2004, with a tightening of monetary policy by the federal reserve widely expected, market participants built large short positions in long - term debt instruments in anticipation of the increase in bond yields that has been historically associated with an initial rise in the federal funds rate. accordingly, yields on ten - year treasury notes rose during the spring of last year

trading partners, also have extended the ongoing softness in the demand for u. s. goods and services. when the federal open market committee ( fomc ) met last month, with the economy not yet showing convincing signs of a sustained pickup in growth, and against the backdrop of our concerns about the implications of a possible substantial decline in inflation, we elected to ease policy another quarter - point. the fomc stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance. in the judgment of the committee, policy accommodation aimed at raising the growth of output, boosting the utilization of resources, and warding off unwelcome disinflation can be maintained for a considerable period without ultimately stoking inflationary pressures. * * * the prospects for a resumption of strong economic growth have been enhanced by steps taken in the private sector over the past couple of years to restructure and strengthen balance sheets. these changes, assisted by improved prices in asset markets, have left households and businesses better positioned than they were earlier to boost outlays as their wariness about the economic environment abates. nowhere has this process of balance sheet adjustment been more evident than in the household sector. on the asset side of the balance sheet, the decline in longer - term interest rates and diminished perceptions of credit risk in recent months have provided a substantial lift to the market value of nearly all major categories of household assets. most notably, historically low mortgage interest rates have helped to propel a solid advance in the value of the owner - occupied housing stock. and the lowered rate at which investors discount future business earnings has contributed to the substantial appreciation in broad equity price indexes this year, reversing a portion of their previous declines. in addition, reflecting growing confidence, households have been shifting the composition of their portfolios in favor of riskier assets. in recent months, equity mutual funds attracted sizable inflows following the redemptions recorded over much of the last year. moreover, strong inflows to corporate bond funds, particularly those specializing in speculative - grade securities, have provided further evidence of a renewed appetite for risk - taking among retail investors. on the liability side of the balance sheet, despite the significant increase in debt encouraged by higher asset values, lower interest rates have facilitated a restructuring of existing debt. households have taken advantage of new lows in mortgage interest rates to refinance debt on more favorable terms, to