market operations and the discount window, strains in term funding markets persisted and became particularly elevated in early december in response to year - end pressures. the magnitude of these strains can be gauged using the spread between libor – that is, the london interbank offered rate – and the overnight indexed swap ( ois ) rate at the same maturity, because the ois rate reflects the average overnight interbank rate expected over that maturity but is not subject to pressures associated with credit and liquidity risks to the same degree as libor. as shown in chart 2, the one - month and three - month libor - ois spreads were at low levels through the month of july but increased markedly in august and early september at the onset of the financial market turmoil. 6 the one - month spread declined during the fall but rose sharply again toward the end of the year. in association with these wider spreads, liquidity in term bank funding markets deteriorated substantially. to address these pressures, the federal reserve introduced a new policy tool called the term auction facility ( taf ). 7 with this tool, the federal reserve auctions a pre - announced quantity of credit to eligible borrowers for a term substantially longer than overnight ; thus far, each auction has involved a term of one month. as with primary credit, a depository institution is eligible to participate in a taf auction if the bank is judged to be in generally similar patterns are evident in the spread between the term federal funds rate and the ois rate at these maturities. the taf was introduced as a temporary measure, but the federal reserve has left open the possibility that this facility could become permanent ( bernanke, 2008 ). sound financial condition, and a wide variety of collateral can be used to secure the loan. the minimum bid rate for each auction is established at the ois rate corresponding to the maturity of the credit being auctioned. the introduction of the taf was announced on december 12 in conjunction with related announcements by the bank of canada, the bank of england, the european central bank, and the swiss national bank ( board of governors, 2007c ). 8 the first two auctions were held on december 17 and 20, for amounts of $ 20 billion each, and were very well subscribed : a large number of banks participated in each auction, and the total value of bids was about three times as large as the amount of credit auctioned. the resulting interest rate in both cases was about 50 basis points above

exports and investment toward greater dependence on household demand. ultimately, lower interest rates abroad should boost domestic demand in the euro area and japan, which could eventually be a net positive for u. s. net exports. but the most immediate effect appears to be a shift in asset demand toward countries with relatively higher expected interest rates, such as the united states. inflation, employment, and the implications for monetary policy foreign headwinds also appear to be affecting u. s. inflation. weak foreign demand appears to be the dominant factor driving recent reductions in the prices of some non - oil commodities and also likely played some role in last year ’ s decline in oil prices, although changes in supply are likely the more important driver. the stronger dollar is also weighing on u. s. inflation through lower import prices. non - oil import prices are reported to have declined at an annual rate of 4 – 1 / 2 percent last quarter, and data on trade prices through april suggest a decrease of a similar magnitude this quarter. based on the share of imports in consumption, econometric models imply that falling import prices might subtract about 0. 3 percentage point from consumer price inflation this year. in addition, an increase over time in import and export shares will increase the effect of exchange rate changes on real gdp even if the export and import elasticities have not changed. bis central bankers ’ speeches starting this month, with the end of calendar - based forward guidance, the decisions of the federal open market committee ( fomc ) regarding the level of the federal funds rate will depend on the evolution of incoming economic data. while the date of liftoff will not be predetermined, the conditions governing the decision to lift off have been clearly stated. first, to have reasonable confidence that inflation will be on track to reach its target of 2 percent over the medium term, i will be looking closely at a variety of indicators – in particular, signs that core inflation is firming, deflationary pressures from abroad are abating, and both survey - and market - based measures of inflation expectations are stable. despite the deflationary pressures from abroad, the recent data have provided some reassurance that inflation in the united states is starting to firm. oil prices have now retraced part of their decline from the middle of last year through january, and monthly changes in core personal consumption expenditures ( pce ) prices have increased from the very low levels reached around the turn of the year. in the face of