greater investor receptivity, corporate bond issuance has been strong. many markets are functioning more normally, with increased liquidity and lower bidasked spreads. equity prices, which hit a low point in march, have recovered to roughly their levels at the end of last year, and banks have raised significant amounts of new capital. many of the improvements in financial conditions can be traced, in part, to policy actions taken by the federal reserve to encourage the flow of credit. for example, the decline in interbank lending rates and spreads was facilitated by the actions of the federal reserve and other central banks to ensure that financial institutions have adequate access to shortterm liquidity, which in turn has increased the stability of the banking system and the ability of banks to lend. interest rates and spreads on commercial paper dropped significantly as a result of the backstop liquidity facilities that the federal reserve introduced last fall for that market. our purchases of agency mortgage - backed securities and other longer - term assets have helped lower conforming fixed mortgage rates. and the term asset - backed securities loan facility ( talf ), which was implemented this year, has helped restart the securitization markets for various classes of consumer and small business credit. earlier this year, the federal reserve and other federal banking regulatory agencies undertook the supervisory capital assessment program ( scap ), popularly known as the stress test, to determine the capital needs of the largest financial institutions. the results of the scap were reported in may, and they appeared to increase investor confidence in the u. s. banking system. subsequently, the great majority of institutions that underwent the assessment have raised equity in public markets. and, on june 17, 10 of the largest u. s. bank holding companies – all but one of which participated in the scap – repaid a total of nearly $ 70 billion to the treasury. better conditions in financial markets have been accompanied by some improvement in economic prospects. consumer spending has been relatively stable so far this year, and the decline in housing activity appears to have moderated. businesses have continued to cut capital spending and liquidate inventories, but the likely slowdown in the pace of inventory liquidation in coming quarters represents another factor that may support a turnaround in activity. although the recession in the rest of the world led to a steep drop in the demand for u. s. exports, this drag on our economy also appears to be waning, as many of our trading partners are also seeing signs of stabilization

spectrum of plausible outcomes for the millennium rollover as i see them. as you will shortly hear, i believe the y2k alarmists have not fully recognized the attention that is being given to this challenge and to the significant progress that is being made towards meeting it. given what we know today, i am cautiously but increasingly optimistic that the millennium bug will not cause major economic disruptions when it bites. and i am quite confident that the financial system will be well prepared. why was it so difficult for so long for people to come to terms with the year 2000 problem? at the most basic level of any organization – be it public or private, large or small – the y2k problem was all too easy to ignore. it is a hidden threat, cloaked in the arcane language of computer programs and in embedded microchips. as such, it was difficult at first for senior management in both the private and public sectors to recognize the serious nature of the problem. this was compounded by the fact that the costs and benefits of the solution for an individual operation were neither very easily quantified nor very attractive. but after an initial period of denial, organization leaders in the united states have now recognized the problem and are taking aggressive action to correct it. nonetheless, given the pervasiveness of the problems involved, i suspect that even the most thoroughly prepared organizations are concerned that something significant might be missed. consequently, responsible and careful organizations are developing extensive contingency plans to work around any emerging problems as insurance against y2k disruptions. thus, insecurity about the comprehensiveness of y2k remediation efforts is affecting corporate investment and production plans now and will do so into next year. the second feature of the millennium bug that makes it so difficult to analyze is the interrelated character of many computer systems. an individual company may be satisfied that it has done all it can to fix its own systems, but it may still feel vulnerable to the actions taken by its suppliers and customers. for example, what good would it do you to be perfectly ready if your electricity is off? or if the train bringing in tomorrow ’ s production materials is delayed? in an environment where ‘ just - intime ’ inventory systems and electronic data interchanges have linked economic activities very closely together, one firm ’ s failure has the potential to ripple through significant segments of the chain of production, services, and distribution. thus, coordination of y2k remediation activities would