Thank you, Mr. Chairman. I will be referring to the set of charts that has been distributed. In the top panel on the first page, U.S. cash and forward deposit rates are shown in red. The forward rates—the dashed red lines—moved higher in a more pronounced manner after a string of stronger-than-expected economic data and Chairman Greenspan’s Senate appearance on March 7. The three-month forward rate is trading at 2½ percent, about ½ percentage point above the cash rate, and the nine- month forward rate rose nearly a full percentage point in the past five weeks or so to almost 4 percent. European rates, the green lines, showed the same general pattern though not to the same degree as U.S. rates. Traders apparently believe that European interest rates, which did not fall as much as U.S. rates did in 2001, will not rise as much in 2002. Japanese interest rates stayed low, and the Bank of Japan continued to provide significant liquidity to the yen money market. As we approach the end of the fiscal year, there is no hint of a Japanese premium in yen money markets and only a very slight premium that shows up periodically in dollar money markets—at least based on traditional indicators such as the British Bankers Association poll. However, market reports suggest that unsecured lending to Japanese banks has been scaled back significantly. Meanwhile, Japanese banks have resorted to raising dollars via foreign exchange swaps with non-Japanese banks wherein they are swapping in dollars in exchange for yen. The foreign banks doing these trades are able to raise the yen at negative interest rates, so even if invested at a zero interest rate they can earn a positive spread.
Turning to page 2, Treasury yields began to rise in late February in response to the same factors that moved short-term interest rates. From February 26 through yesterday, the two-year yield rose about 60 basis points. And the spread of the two- year note over the fed funds target was at 185 basis points yesterday, the highest spread in that relationship since January 1995. Similarly, the spread between the ten- year note and the fed funds target was 355 basis points, the widest since May 1994. Finally, the spread between the thirty-year bond—or I should say the twenty-nine year bond—and the target fed funds rate was just shy of 400 basis points, the widest since May 1993. In the private sector, accounting and disclosure issues hung over the corporate market during much of the period and securities of individual firms were periodically repriced. But spreads as a whole were steady or even narrowed slightly.