##ing to hedge developing interest rate gaps rapidly shed receive - fixed swaps and treasuries, and these actions markedly aggravated last summer ’ s long - term interest rate upturn. in recent months, mortgage rates have risen further, suppressing much of what is left of incentives to refinance, thereby increasing mortgage duration to its current elevated level. this suggests that the vast secondary market for home mortgages has largely adjusted to the recent increases in mortgage rates. moreover, the expectation of federal reserve tightening has apparently already induced other significant balance sheet adjustments as well. an unwinding of carry trades is notably under way at least judging from the shift in the trading portfolios of primary dealers. in addition, a swing toward a net short position on ten - year treasury note futures among investors has been the largest since the inception of the contract in the 1980s. * * * economic developments going forward will determine the level and term structure of interest rates. federal funds futures prices already reflect expectations of a substantial firming of policy by the federal open market committee ( fomc ). unlike 1994, there has been an appreciable increase of market rates in anticipation of policy tightening, though history cautions that investors ’ anticipations of the cumulative magnitude of policy actions and their timing under such circumstances are far from perfect. lastly, let me emphasize that recent financial indicators, including rapid growth of the money supply, underscore that the fomc has provided ample liquidity to the financial system that will become increasingly unnecessary over time. the committee is of the view, as you know, that monetary policy accommodation can be removed at a pace that is likely to be measured. that conclusion is based on our current best judgment of how economic and financial forces will evolve in the months and quarters ahead. should that judgment prove misplaced, however, the fomc is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability so as to ensure maximum sustainable economic growth.

alan greenspan : central bank panel discussion - economic developments remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, at the international monetary conference, london ( via satellite ), 8 june 2004. * * * one of the defining characteristics of the recent business expansion in the united states has been the evident reluctance of corporate managers to expand spending and hiring aggressively in response to and in anticipation of continued cyclical growth. a substantial rebound in business spending had been a hallmark of most past economic expansions. judging by the pickup in capital spending in recent quarters, businesses are becoming more confident in the strength and durability of the cyclical upturn. still, over the four quarters ending in march, corporate investment in capital and inventories likely fell short of rapidly rising cash flow for the first time, over a comparable period, since the mid - 1970s. corporate debt expansion has accordingly been tepid. indeed, corporate net bond issuance was negative in may. the exceptional reluctance to expand payrolls also appears to have waned this year, and businesses are once again hiring with some vigor. but for nearly three years prior, managers sought every avenue to forestall new hiring despite rising business sales. their ability to boost output without adding appreciably to their workforces, appears to have reflected a backlog of unexploited capabilities to enhance productivity with minimal capital investment, a delayed effect of the capital goods boom of the 1990s. even now, the proportion of increases in temporary workers relative to total employment gains has been unusually large, suggesting that business caution remains a feature of the economic landscape. this hesitancy on the part of businesses to expand risk - taking, as i have noted in the past, is an apparent consequence of scandals surrounding corporate accounting and governance, an aftermath of the stock market surge. although there is no compelling evidence that corporate governance risk has fully subsided, with time, it should. an increased willingness to borrow, and ample liquid assets, should provide a further lift to capital investment and, with it, economic activity. * * * with concerns of deflation now presumably safely behind us, developments ahead are likely to be dominated by the paths of productivity growth and profit margins - assuming, of course, the always latent danger of terrorism in the united states remains in check. profits of nonfinancial corporations as a share of sector output, after falling to 7 percent in the third quarter of 2001, rebounded to 12 percent