swanson ( 2004 ) find that if analysts ignore risk premiums in federal funds and eurodollar futures, they will estimate longer - horizon policy expectations that “ lag behind ” actual market expectations, remaining too high when the fed is easing and too low when the fed is tightening. 15 fortunately, this research also shows how to correct the futures data to account for the time variation in risk premiums. once again, we see that some subtlety is required to extract the information available in asset prices. a great advantage of market - based measures of policy expectations, relative to periodic surveys that ask market participants about their expectations, is that market measures are available essentially continuously. 16 these measures thus lend themselves to “ event studies ” of two types, both of which are employed at the board of governors. the first type analyzes how various events, such as federal reserve statements ; the release of minutes, testimony, or speeches by members of the federal open market committee ( fomc ) ; and macroeconomic news affect market expectations of monetary policy. one simply compares the implied policy expectations before and after the event being studied. we have already considered an example, the effects of the most recent payroll report, in figure 3. analyses of this type provide insights for policymakers into the question of what economic factors the “ market, ” viewed collectively, is focusing on at a given time. the second type of event study uses market - based measures of policy expectations to analyze the effects of policy changes on the economy. in particular, when the fomc chooses to set the target for the federal funds rate at a value different from that expected by the market, asset prices tend to react strongly. for example, in a recent paper, kenneth kuttner and i ( 2004 ) studied the effects on stock prices of unanticipated changes in monetary policy, as measured by settings of the federal funds rate target that differ from those implied by federal funds futures market. we found that a surprise increase of 25 basis points in the funds rate target typically results in a decline in broad equity indexes of about 1 percent, whereas a change in the funds rate that is expected by the market has essentially no effect on stock prices. 17 our work is just one example of a number of event - study analyses that may well shed light on the effects of monetary policy and the channels of monetary policy transmission. policymakers are concerned not only about market expectations of output, inflation, interest rates, and other key variables, but

reports suggest that well over half of these foreclosure starts could result in property sales. not want borrowers who have avoided problems through responsible financial management to feel that they are being unfairly penalized. let me turn now to some recent efforts to help distressed borrowers refinance. the fhasecure plan, which the federal housing administration ( fha ) announced late last summer, offers qualified borrowers who are delinquent because of an interest rate reset the opportunity to refinance into an fha - insured mortgage. recently, the congress and administration temporarily increased the maximum loan value eligible for fha insurance, which should allow more borrowers, particularly those in communities with higher - priced homes, to qualify for this program and to be eligible for refinancing into fha - insured loans more generally. these efforts represent a step in the right direction. not all borrowers are eligible for this program, of course ; in particular, some equity is needed to qualify. in addition, second - lien holders must settle or be willing to re - subordinate their claims for an fha loan, which has sometimes proved difficult to negotiate. separately, some states have created funds to offer refinancing options, but eligibility criteria tend to be tight and the take - up rates appear to be low thus far. in cases where refinancing is not possible, the next - best solution may often be some type of loss - mitigation arrangement between the lender and the distressed borrower. indeed, the federal reserve and other regulators have issued guidance urging lenders and servicers to pursue such arrangements as an alternative to foreclosure when feasible and prudent. 5 for the lender or servicer, working out a loan makes economic sense if the net present value ( npv ) of the payments under a loss - mitigation strategy exceeds the npv of payments that would be received in foreclosure. 6 loss mitigation is made more attractive by the fact that foreclosure costs are often substantial. historically, the foreclosure process has usually taken from a few months up to a year and a half, depending on state law and whether the borrower files for bankruptcy. the losses to the lender include the missed mortgage payments during that period, taxes, legal and administrative fees, real estate owned ( reo ) sales commissions, and maintenance expenses. additional losses arise from the reduction in value associated with rep