Speaking at the New York Public Library, U.S. Treasury Secretary Henry Paulson said Fannie Mae and Freddie Mac are vital to the U.S. financial system, and that he remains confident Congress will pass GSE legislation sometime this week.

"Because of their size and scope, Fannie and Freddie stability is critical to financial market stability," said Paulson. "Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in out financial markets and financial institutions."

The Treasury Secretary once again reminded attendees that he did not expect Fannie and Freddie to access the unlimited line of credit Paulson wants to extend to the institutions, which is intended to be a strong signal to the markets.

While Paulson continues to see strong economic fundamentals in the United States, he admitted that there would be bumps in the road and that the turbulences would only truly end once the housing market stabilized. He also urged financial institutions to continue raising capital to brace against the turbulences.

Looking ahead, new legislation would have to address the systemic risk associated with GSEs and the new regulator, which is expected to be established with the upcoming legislation, will have to pay extra attention to Fannie Mae and Freddie Mac.

In the Q&A that followed, Paulson reiterated the need for powers over the GSEs to be flexible, and that any loans made to Fannie or Freddie would be under terms decided by the U.S. government and the institutions. Paulson also repeated that any loans would be fully collateralized.

Paulson also said that while headline inflation in the United States is moving higher, core inflation, which is a better long-term indicator, was manageable. He also said that higher food and energy prices would prolong the recovery of the U.S. economy, adding that the value of the USD would eventually reflect the strong underlying fundamentals of the economy.

A strong dollar is "very important", Paulson said, adding that he had been advocating support for the greenback for some time.

By Erik Kevin Franco and edited by Nancy Girgis