lowered the target federal funds rate in a timely, decisive, and flexible manner to help mitigate macroeconomic risk. although financial disruptions present one of the most difficult challenges that central banks can face, i believe that these measures have been appropriate for achieving our macroeconomic objectives of promoting price stability and maximum sustainable employment. references bernanke, ben s. ( 2008 ). " financial markets, the economic outlook, and monetary policy ", speech delivered at the women in housing and finance and exchequer club joint luncheon, washington, january 10. board of governors of the federal reserve system ( 2005 ). " the implementation of monetary policy ", in the federal reserve system : purposes & functions. washington : board of governors of the federal reserve system, pp. 27 - 50. board of governors of the federal reserve system ( 2007a ). " the federal reserve is providing liquidity to facilitate the orderly functioning of financial markets ", press release, august 10. board of governors of the federal reserve system ( 2007b ). " federal reserve board discount rate action ", press release, august 17. board of governors of the federal reserve system ( 2007c ). " federal reserve and other central banks announce measures designed to address elevated pressures in short - term funding markets ", press release, december 12. mishkin, frederic s. ( 1991 ). " asymmetric information and financial crises : a historical perspective, " in r. glenn hubbard, ed., financial markets and financial crises. chicago : university of chicago press, pp. 69 - 108. mishkin, frederic s. ( 2007a ). " financial instability and the federal reserve as a liquidity provider ", speech delivered at the museum of american finance commemoration of the panic of 1907, new york, october 26. mishkin, frederic s. ( 2007b ). the economics of money, banking, and financial markets, 8th ed. boston : addison - wesley. mishkin, frederic s. ( 2007c ). " financial instability and monetary policy ", speech delivered at the risk usa 2007 conference, new york, november 5. mishkin, frederic s. ( 2008 ). " monetary policy flexibility, risk management, and financial disruptions ", speech delivered at the federal reserve bank of new york, new york, january 11.

frederic s mishkin : the federal reserve's tools for responding to financial disruptions speech by mr frederic s mishkin, member of the board of governors of the us federal reserve system, at the tuck global capital markets conference, tuck school of business, dartmouth college, hanover, new hampshire, 15 february 2008. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * since the onset of financial market strains late last summer, the federal reserve has been acting in a decisive, timely, and flexible manner in fostering the objectives of price stability and maximum employment. in particular, the federal reserve's actions have been aimed at supporting market liquidity, mitigating the downside risks to economic activity, and promoting moderate growth over time. in my remarks here, i would like to explain how the federal reserve has used four different tools to accomplish these objectives. 1 i will first examine three tools for supporting market liquidity – namely, open market operations, the discount window, and the newly developed term auction facility. then i will discuss some important principles for adjusting the target federal funds rate, which is the primary tool for addressing the macroeconomic implications of a financial market disruption. as usual, my remarks reflect only my own views and are not intended to reflect those of the federal open market committee ( fomc ) or of anyone else associated with the federal reserve system. 2 supporting market liquidity as i pointed out in a speech last october, one of the fundamental reasons that the federal reserve was established in 1913 was to ensure the provision of ample liquidity during financial market disruptions ( mishkin, 2007a ). in fact, my own academic research has examined the recurring financial crises that occurred prior to the founding of the fed ( mishkin, 1991 ). these crises exhibited a consistent pattern of very sharp upward spikes in interest rates, reflecting a surge in demand for liquidity without any corresponding change in supply, and these interest rate fluctuations were associated with significant adverse consequences on the broader economy. in contrast, during more recent episodes of financial market turmoil, as in october 1987 and the fall of 1998, the federal reserve has contributed to the stability of short - term funding markets by boosting the supply of liquidity in line with changes in demand. in each case, the federal reserve's actions were successful in preventing sharp upward spikes in short - term interest rates and in insulating the