these incentives. in addition, the evolution of the financial system has altered the role and importance of liquidity provision by banks and how that provision of liquidity responds to different types of stress to the financial system. the second issue relates to the tools that central banks have at their disposal for providing liquidity in ways that do support our monetary policy objectives. do we need additional instruments that would better enable us to mitigate marketwide liquidity problems? and how can we mitigate the moral hazard risk inherent in such instruments? efforts are underway to address these issues both within the fed and among our central banking colleagues around the world. we will be looking both to financial market participants and to the academic community for advice. for now, though, our principal task is to address the challenges of the present. the federal reserve act gives us broad authority to act in response to these types of conditions. we will continue to examine ways to adapt our instruments as market conditions evolve. we will do so in close cooperation with other central banks, as indeed we have since august. and we will do so in the tradition of pragmatism and flexibility that has been one of the defining features of the central bank of the united states. thank you.

from banks at the same time banks confronted a reduced capacity to raise financing. as market participants have adjusted to what has been a very acute change in expectations about economic and credit risk, they have become more cautious in how they use their liquidity and capital. the symptoms of this are apparent in the high risk premia across a range of assets, as well as in the dramatic contraction in the volume of transactions for certain assets and the securities that reference those assets. elevated term premia in the interbank market has the effect of tightening overall financial conditions, offsetting some of the impact of reductions in the target federal funds rate. the danger this poses is the risk of an adverse, self - reinforcing dynamic in which concerns about overall liquidity magnify concerns about credit problems. as financial institutions prepare for a more challenging funding environment, in part by conserving capital, and as they anticipate the higher potential losses that would normally accompany an economic slowdown, their response, in aggregate, makes markets and the economy potentially more vulnerable to that adverse outcome. the risk is a greater contraction in the availability of credit beyond what might have otherwise occurred, with attendant risks to growth. monetary policy has an important role to play in addressing these dynamics in markets. by adjusting policy proactively as the risk to the outlook changes, central banks can help reduce the probability of the extreme adverse outcome. and this can positively affect the incentives that might otherwise lead market participants to protect themselves against the extreme outcome. central banks have been employing a range of different tools to help reduce the incentive for an excessive level of liquidity hoarding by banks that might impede an efficient flow of liquidity among banks. although the mix of tools and approaches has varied across the major economies, each has tried to provide a more effective form of liquidity insurance to its financial institutions by expanding the capacity of banks to borrow at longer maturities from the central banks against a broader range of collateral. the actions to address liquidity issues – those we announced this week and those that we have taken over the past five months – can help reinforce our monetary policy actions by providing greater assurance for market participants of access to funding. by allowing strong banks to borrow against collateral that they can no longer easily finance in the market, the central bank is providing an additional source of liquidity to banks as a complement to our open market operations. the term auction facility gives us a tool that lies somewhere between our open market operations and our primary credit program