noted that the downside risks to growth had increased appreciably. however, to allow time to gather and evaluate incoming information, possible policy action was deferred until the committee's next regularly scheduled meeting on september 18. a key issue at that meeting was the extent to which the market disturbances had affected the outlook for the housing sector. financial markets overall had improved somewhat, but tighter terms and standards in the mortgage market – particularly in the nonprime and jumbo segments - - appeared likely to intensify the correction in housing significantly, with adverse implications for construction activity and house prices. indeed, incoming housing data had continued to soften even before the advent of the stress in financial markets. a further sharp contraction in residential construction seemed likely to hold down overall economic growth in the fourth quarter and in early 2008. as they had at earlier meetings, the participants in the september meeting evaluated the potential effects of housing - market developments on other parts of the economy. they agreed that significant spillovers to household and business spending were not yet evident. for example, auto sales had picked up in august from the low levels of earlier in the summer ; and business investment did not appear to have been seriously affected by financial market developments, as highly rated firms continued to enjoy good access to credit. strong growth abroad was also viewed as supporting u. s. exports and domestic production. and as i have noted, the available evidence suggested that overall economic growth in the third quarter remained moderate. however, downside risks to both household and business spending had clearly increased over the period since the committee's previous meeting. notably, the weak housing market, somewhat downbeat consumer sentiment, and slower growth in private - sector employment increased the likelihood that consumption spending would slow in coming quarters. participants at the september meeting also reported somewhat greater caution in the outlooks of their business contacts. financial market conditions were expected to improve slowly at best ; and even if conditions began to normalize, credit would likely remain noticeably tighter for many borrowers than had been the case during the summer. furthermore, any weakening in the economy could itself have a negative effect on still - fragile credit markets, possibly leading credit conditions to tighten further. regarding the other half of its mandate, to promote price stability, the committee noted some improvement over the past year in measures of the trend component of inflation, such as core inflation. moreover, slower growth in aggregate demand would help to ease pressure on resources. but inflation risks remained, including still -

' capital or allow them to shed risk. in essence, these operations are short - term loans collateralized by government securities. the vigorous provision of funds through open market operations succeeded in damping pressures in overnight funding markets. yet markets for term funding, including commercial paper markets as well as the interbank markets, remained strained, and signs of broader financial stress persisted. on august 17, the fed took further action when the federal reserve board cut the discount rate – the rate at which it lends directly to banks – by 50 basis points, or 1 / 2 percentage point. the fed also adjusted its usual practices to facilitate the provision of financing for as long as thirty days, renewable at the request of the borrower. loans through the discount window differ from open market operations in that they can be made directly to specific banks with strong demands for liquidity. ( in contrast, open market operations are arranged with a limited set of dealers of government securities. ) in addition, whereas open market operations typically involve lending against government securities, loans through the discount window can be made against a much wider range of collateral, including mortgages and mortgage - backed securities. as with open market operations, however, fed lending through the discount window provides banks with liquidity, not risk capital. in particular, the strong collateralization accompanying discount window credit eliminates essentially all risk for the federal reserve system and the taxpayer. nonetheless, the availability of the discount window is potentially significant for banks, as it gives them greater confidence that they can obtain additional liquidity as necessary. access to a backstop source of liquidity in turn reduces the incentives of banks to limit the credit they provide to their customers and counterparties. the federal reserve also took some other steps in response to strains in financial markets, including reducing the fee that it charges for lending treasury securities from its portfolio, thus helping to meet the heavy demands in the market for those securities. the federal reserve's actions to ease the liquidity strains in financial markets were similar to actions that central banks have taken many times in the past. promoting financial stability and the orderly functioning of financial markets is a key function of central banks. indeed, a principal motivation for the founding of the federal reserve nearly a century ago was the expectation that it would reduce the incidence of financial crises by providing liquidity as needed. in its supervisory role, the federal reserve – like other bank regulators – attempts to ensure that individual banks maintain adequate liquidity on hand and make provision to raise additional funds quickly