required us to lend to firms that issued commercial paper. at the same time, we have greatly expanded our dollar swaps with foreign central banks to help them meet the dollar funding needs of their domestic banks – needs that have been adding to pressures on our markets here at home. by opening and expanding these facilities, we are trying to assure banks, dealers, and commercial paper issuers that they can extend credit without worrying about whether they will be able to borrow to fund those loans. we are also trying to assure those who lend to these firms that the borrowers will have a source of funding to pay them back. clearly, the willingness of the federal reserve to lend substantial amounts to more counterparties over longer periods has not, by itself, been sufficient to unlock private credit flows ; but federal reserve credit has been a critical ingredient in the mix of policy tools. as i noted earlier, the troubles in the financial markets have spilled over to the economy. indeed, fear of economic weakness and the associated deterioration in credit quality contributed to the adverse dynamics in credit markets. to counter this dynamic and adjust its policy to the evolving economic outlook, the fomc reduced the target federal funds rate 50 basis points last week. to be sure, the effects of the easier stance of policy on the cost and availability of credit were overwhelmed last week by the further erosion in confidence. but, over time, lower rates will help to support asset prices and reduce the cost of capital to encourage spending, economic expansion, and job creation. importantly, this easing action was taken alongside similar actions by many other central banks. financial markets are connected around the world by the free flow of capital, and the freezing up of credit has occurred, to one degree or another, in many foreign economies as well as our own. in these circumstances, measures to address financial market problems within each country are likely to be more effective if other countries are also taking similar steps, as they are doing not only in monetary policy but also in their efforts to recapitalize banks, guarantee bank obligations, and shore up the confidence of lenders. i am optimistic that this multipronged approach is laying the groundwork for a return to more normal functioning in financial markets and a restoration of vigorous economic growth. the initial reaction has been positive, but it will take some time before we know to what extent the current stresses in the financial sector are being resolved. over time, financial firms will need to bolster profits to offset losses and attract capital, to

, as well as unexpected new shocks. in the past two years, spending cuts and tax increases totaling about $ 3. 5 trillion over the next 10 years have been enacted. assuming these measures are not rolled back – in particular, that the spending sequestration either takes effect or is replaced by equivalent deficit - reducing measures – a reasonable “ current policy ” projection is that the ratio of debt to gdp will be roughly stable at around 75 percent through about 2020. 6 after that, under current policy, health - care costs and, to a much lesser extent, pension costs will produce a sharp, sustained increase in the ratio of debt to gdp. fiscal sustainability and monetary policy the authors review empirical evidence of sovereign borrowing costs for 20 advanced economies. they join others in finding a statistically significant relationship between sovereign debt levels and borrowing costs. 7 they also find nonlinear increases in borrowing costs beginning at debt - to - gdp ratios of around 80 percent. but the nonlinearities they find are driven to a great extent by the experience of smaller euro - zone nations that, of course, figure 1 shows federal debt held by the public and primary budget surpluses – that is, the difference between federal revenues and federal noninterest outlays – as a percent of nominal gdp from fiscal year 1912 through fiscal 2012. see quote on p. 290 in henning bohn ( 2011 ), “ the economic consequences of rising u. s. government debt : privileges at risk, ” finanzarchiv / public finance analysis, vol. 67 ( september ), pp. 282 – 302. see carmen m. reinhart and kenneth s. rogoff ( 2009 ), “ the aftermath of financial crises, ” american economic review, vol. 99 ( may ), pp. 466 – 72. see loren adler, shai akabas, and brian collins ( 2013 ), “ key takeaways from the 2013 – 2023 cbo budget and economic outlook, ” bipartisan beat blog, bipartisan policy center, february 7. numbers are modified to assume that the spending sequestration either takes effect or is replaced by equivalent deficit reducing measures. for example, see eric engen and r. glenn hubbard ( 2005 ), “ federal government debt and interest rates, ” in mark gertler and kenneth rogoff, eds., nber macroeconomics annual 2004, vol. 19 ( cambridge, mass. : mit press ), pp. 83 – 138 ; thomas laubach (