economy, and we are confident in our ability to do so. to be sure, decisions about when and how quickly to proceed will require a careful balancing of the risk of withdrawing support before the recovery is firmly established versus the risk of allowing inflation to rise above its preferred level in the medium term. however, this delicate balancing of risks is a challenge that central banks face in the early stages of every economic recovery. i believe that we are well equipped to make those judgments appropriately. in addition, when the time comes, our ability to clearly communicate our policy goals and our assessment of the outlook will be crucial to minimizing public uncertainty about our policy decisions. why did the fed and the treasury act to prevent the bankruptcy of some major financial firms? the final question is as difficult as it is important : why did the fed and the treasury act to prevent the bankruptcy of some major financial firms, such as the investment bank bear stearns and the insurance company american international group, or aig? we must answer that question not only because the decisions have been controversial, but also because it bears on the steps we need to take as a country if we are to avert a repetition of the crisis. as a general rule, my strong preference is that any firm that cannot meet its obligations should bear the consequences of the marketplace. but recent circumstances have been truly extraordinary. consider the situation on september 16 of last year, when the insurance conglomerate aig faced pressures that threatened to force it imminently into bankruptcy. at that time, the strains in the global financial system were unprecedented and extreme, and the confidence of financial market participants in the system was rapidly eroding. the investment bank lehman brothers had filed for bankruptcy the day before, and the mortgage giants fannie mae and freddie mac, after suffering losses that threatened their solvency, had effectively been taken over by the government just two weeks earlier. as waves of panic and fear washed over the markets, the fed and the treasury became very concerned about the stability of a number of other major financial firms. large, complex financial institutions tend to be highly interconnected with other firms and markets, and aig was more interconnected than most. for example, aig had insured many billions of dollars of loans and securities held by banks around the world, and its failure would have rendered those insurance contracts worthless, imposing large losses on the global banking system. in addition, banks had extended more than $ 50 billion in credit to the company, much of which would

is the fed doing to address the situation? those challenges bring me to my second question : what has the federal reserve been doing to address the economic and financial crisis? the fed's mandate from the congress is to promote maximum sustainable employment and stable prices. in addition, the fed is expected to contribute to financial stability by acting to contain financial disruptions and prevent their spread outside of the financial sector. thus, we have been serving as a first responder to the crisis. the fed's basic policy tool for influencing economic activity and inflation is its ability to control very short - term interest rates – specifically, the federal funds rate, which is the rate that banks pay each other for overnight loans. lower interest rates can be used to stimulate private - sector borrowing and spending at times like the present when the economy is suffering from a lack of demand. in september 2007, shortly after the turbulence in financial markets began and signs of economic weakness started to appear, the federal open market committee ( fomc ), the body that determines the federal reserve's monetary policy, began to aggressively reduce the federal funds rate. by the spring of 2008, we had cut that interest rate from 5 - 1 / 4 percent to 2 percent, a highly proactive policy that helped to cushion the economy from some of the effects of the financial turmoil. but, as i mentioned a moment ago, the intensification of the financial crisis in the fall of 2008 led to a further significant deterioration in the economic outlook. the fomc responded with additional interest rate cuts, and since december, our policy interest rate has been essentially zero. in addition, the fomc has made clear that it expects economic conditions to warrant holding the federal funds rate low for an extended period. however, given the ongoing problems in credit markets, conventional monetary policy alone is not adequate to provide all the support that the economy needs. the fed has therefore taken a number of steps to help the economy by unclogging the flow of credit to households and businesses. in doing so, we have demonstrated that the fed's toolkit remains potent, even though the federal funds rate is close to zero and thus cannot be reduced further. we have taken a wide range of actions to help restore the flow of credit, of which i will only mention a few of the most important. one set of actions involves making short - term loans to banks and other financial institutions. banks and other financial intermediaries normally make longer - term commitments –