to help markets return to more orderly functioning and to foster its economic objectives of maximum sustainable employment and price stability. broadly, the federal reserve's response has followed two tracks : efforts to improve market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy. to help address the significant strains in short - term money markets, the federal reserve has taken a range of steps. notably, on august 17, 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, and it has since maintained the spread between the federal funds rate and the discount rate at 50 basis points, rather than the customary 100 basis points. in addition, the federal reserve recently unveiled a term auction facility, or taf, through which prespecified amounts of discount window credit can be auctioned to eligible borrowers. the goal of the taf is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms. in december, the fed successfully auctioned $ 40 billion through this facility. and, as part of a coordinated operation, the european central bank and the swiss national bank lent an additional $ 24 billion to banks in their respective jurisdictions. this month, the federal reserve is auctioning $ 60 billion in twenty - eight - day credit through the taf, to be spread across two auctions. taf auctions will continue as long as necessary to address elevated pressures in short - term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives. although the taf and other liquidity - related actions appear to have had some positive effects, such measures alone cannot fully address fundamental concerns about credit quality and valuation, nor do these actions relax the balance sheet constraints on financial institutions. hence, they alone cannot eliminate the financial restraints affecting the broader economy. monetary policy ( that is, the management of the short - term interest rate ) is the fed's best tool for pursuing our macroeconomic objectives, namely to promote maximum sustainable employment and price stability. monetary policy has responded proactively to evolving conditions. as you know, the federal open market committee ( fomc ) cut its target for the federal funds rate by 50 basis points at its september meeting and by 25 basis points each at the october and december meetings. in total, therefore, we

a necessary first step to updating the economic outlook after the storms. finally, i would like to talk about the macroeconomic consequences of sharply higher energy prices that, if futures markets are an accurate guide, appear likely to persist long after rebuilding has been completed. the economy before the hurricanes before the hurricanes, economic activity appeared to have had considerable near - term momentum. payroll employment continued to increase through august, and other indicators suggested that further gains in production and sales were in train during july and august. consumer spending was growing briskly despite rapidly rising energy prices. sales of light motor vehicles were especially robust - - the result of the " employee pricing " plans offered by the major automakers. new residential construction remained at or near historically high levels through the summer, as did home sales. in contrast, business investment appeared to have lost a bit of steam. on net, real gross domestic product ( gdp ) looked likely to accelerate somewhat in the third and fourth quarters from the 3 - 1 / 2 percent annual rate registered in the first half of the year. on the price side of the ledger, consumer price inflation was moving up in response to the direct effects of higher energy prices. crude oil prices continued to rise before the storms hit as the growth in world demand for refined petroleum products further outstripped the growth of world supply. meanwhile, the readings on core consumer price inflation - - that is consumer price inflation excluding the direct effects of energy and food prices - - had been favorable, coming in well below the more - elevated pace seen earlier in 2005. of course, some of this slowdown in core price inflation was attributable to the temporary effects of the employee - pricing programs for light vehicles. and 1 / 5 higher energy costs were expected to place continued upward pressure on the prices of other goods and services. in this environment of somewhat faster growth in aggregate spending and greater upward pressure on prices, the federal open market committee ( fomc ) raised its target for the federal funds rate to 3 - 1 / 2 percent in early august. at the same time, the committee reiterated its belief that, with the appropriate monetary policy actions, the upside and downside risks to the outlook for sustainable economic growth and price stability were roughly equal and that the removal of monetary accommodation could proceed at a " measured pace. " thus, before the hurricanes, the outlook was relatively benign : continued moderate economic growth accompanied by little change in the underlying pace of core inflation. there were, of course, risks