US Economic conditions to improve during second half of 2008

At the international Monetary Conference, Barcelona, Spain, the
chairman, US Federal Reserve, Ben S. Bernanke, made the following
remarks on economic outlook, on June 3, 2007.

Highlighting, the plight of financial markets in the United States and
in a number of other industrialized countries, he said they have been
under considerable strain since late last summer. This has adversely
affected economic prospects, most notably by affecting the cost and
availability of new credit.

Analyzing the origin of the financial turmoil, on a long term
perspective, he remarked the severity of the financial stresses became
apparent only in August, several longer-term developments served as
prologue for the recent turmoil and helped bring us to the current
situation.

Looking back, he said the turmoil began with the U.S. housing boom, in
the mid-1990s and picked up steam around 2000. Between 1996 and 2005,
house prices nationwide increased about 90 %.

During the years from 2000 to 2005 alone, house prices increased by
roughly 60 %, far outstripping the increases in incomes and general
prices, and single-family home construction increased by about 40 %.
Starting in 2006, the boom turned to bust. Over the past two years,
building activity has fallen by more than half and now is well below
where it was in 2000. House prices have shown significant declines in
many areas of the country.

Bernake said, a second critical development was an even broader credit
boom, in which lenders and investors aggressively sought out new
opportunities to take credit risk even as market risk premiums
contracted. Aspects of the credit boom included rapid growth in the
volumes of private equity deals and leveraged lending and the
increased use of complex and often opaque investment vehicles,
including structured credit products.

The explosive growth of subprime mortgage lending in recent years was
yet another facet of the broader credit boom. Expanding access to
homeownership is an important social goal, and responsible subprime
lending is beneficial for both borrowers and lenders. But, clearly,
much of the subprime lending that took place during latter stages of
the credit boom in 2005 and 2006 was done very poorly.

A third longer-term factor contributing is the unprecedented growth in
developing and emerging market economies. From the U.S. perspective,
this growth has been a double-edged sword. On the one hand, low-cost
imports from emerging markets for many years increased U.S. living
standards and made the Fed`s job of managing inflation easier, he
added.

Briefly speaking, both global and domestic factors have played
important roles in recent developments in the United States. The
housing and credit booms were driven to some extent by global savings
flows, but they also reflected domestic factors, such as weaknesses in
risk measurement and management and lax standards in subprime lending.
Higher commodity prices are for the most part a global phenomenon, but
U.S. dependence on oil imports makes this country quite vulnerable on
that score.

Broadly speaking, the functioning of financial markets have improved
of late, but conditions remain strained and some key funding and
securitization markets have shown only tentative signs of recovery.
Some borrowers, such as highly-rated corporations, retain good access
to credit, but credit conditions generally remain restrictive in areas
related to residential or commercial real estate, he said.

He further said, residential construction continues to contract, and
the overhang of unsold new homes remain large, although it declined
some in absolute terms. Consumer spending has thus far held up a bit
better than expected, but households continue to face significant
headwinds, including falling house prices, a softer job market,
tighter credit, and higher energy prices, and consumer sentiment
declined sharply since the fall. Businesses are also facing
challenges, including rapidly escalating costs of raw materials and
weaker domestic demand. However, the strength of foreign demand for
U.S. goods and services has offset, to some extent, the slowing of
domestic sales.

Overall economic growth was quite slow but apparently positive in both
the fourth quarter of 2007 and the first quarter of this year.
Activity during the current quarter is also likely to be relatively
weak.

Talking about the present scenario, he said, we may see somewhat
better economic conditions during the second half of 2008, reflecting
the effects of monetary and fiscal stimulus, reduced drag from
residential construction, further progress in the repair of financial
and credit markets, and still solid demand from abroad.

He said, this baseline forecast is consistent with our recently
released projections, which also see growth picking up further in
2009. However, until the housing market, and particularly house
prices, shows clearer signs of stabilization, growth risks will remain
to the downside. Recent increases in oil prices pose additional
downside risks to growth.

Referring to inflation he commented inflation has remained high,
largely reflecting continued sharp increases in the prices of globally
traded commodities. So far, the pass-through of high raw materials
costs to domestic labor costs and the prices of most other products
has been limited, in part because of softening domestic demand.
However, the continuation of this pattern is not guaranteed and will
bear close attention.

Futures markets continue to predict, albeit with a great range of
uncertainty, that commodity prices will level out, a forecast
consistent with our expectation of some overall slowing in the global
economy and thus in the demand for raw materials. A rough
stabilization of commodity prices, even at high levels, would result
in a relatively rapid moderation of inflation, consistent with the
projections of Federal Reserve governors and Reserve Bank presidents
for 2009 and 2010, he added.

Unfortunately, the prices of a number of commodities, most notably
oil, have continued upward recently, even as expectations of future
policy rates and the foreign exchange value of the dollar have
remained generally stable in the past few months. The possibility that
commodity prices will continue to rise is an important risk to the
inflation forecast. Another significant upside risk to inflation is
that high headline inflation, if sustained, might lead the public to
expect higher long-term inflation rates, an expectation that could
ultimately become self-confirming.

Above all, he concluded saying, we are taking action in our role as
regulators. We have worked with lenders and servicers to encourage
appropriate modifications of distressed mortgage loans, and we have
proposed new rules to improve disclosure and to ban unfair or
deceptive acts and practices in mortgage lending. We are also
collaborating with other regulators, both domestically and abroad, to
put in place changes that will help make the financial system less
vulnerable in the future. Among the changes we expect to see are
strengthening of capital and liquidity rules, greater disclosure
requirements, an increased emphasis on the measurement and management
of firm wide risks, and further steps to increase the transparency and
resilience of the financial infrastructure.

He declared, our goal is to emerge from this difficult period with a
financial system that will be more stable without being less
innovative, with a more effective balance between market discipline
and regulation.