By contrast, a decline in energy costs or a further weakening of demand would lower price pressures. Financial and monetary conditions As we tighten monetary policy, borrowing is becoming more expensive for firms and households. Bank lending to firms remains robust, as firms replace bonds with bank loans and use credit to finance the higher costs of production and investment.
To be quite clear, the Federal Reserve believes that strong capital is critical to the health of our banking system and we believe that Basel II will help us continue to ensure that U.S. banks maintain capital levels that serve as an appropriate cushion against risk-taking. As we have mentioned before, we will continue to use existing prudential measures to complement Basel II.