the housing sector. private payrolls have continued to contract, and the declines in employment, together with earlier increases in food and energy prices, have eroded the purchasing power of households. this sluggishness of real incomes, together with tighter credit and declining household wealth, is now showing through more clearly to consumer spending. indeed, since may, real consumer outlays have contracted significantly. meanwhile, in the business sector, worsening sales prospects and a heightened sense of uncertainty have begun to weigh more heavily on investment spending as well. the intensification of financial turmoil and the further impairment of the functioning of credit markets seem likely to increase the restraint on economic activity in the period ahead. even households with good credit histories are now facing difficulties obtaining mortgage loans or home equity lines of credit. banks are also reducing credit card limits, and denial rates on automobile loan applications reportedly are rising. businesses, too, are confronting diminished access to credit. for example, disruptions in the commercial paper market and tightening of bank lending standards have made it more difficult for businesses to obtain the working capital they need to meet everyday operating expenses such as payrolls and inventories. all told, economic activity is likely to be subdued during the remainder of this year and into next year. the heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth. to support growth and reduce the downside risks, continued efforts to stabilize the financial markets are essential. the federal reserve will continue to use the tools at its disposal to improve market functioning and liquidity. inflation has been elevated, reflecting the steep increases in the prices of oil, other commodities, and imports that occurred earlier this year, as well as some pass - through by firms to consumers of their higher costs of production. however, more recently, the prices of oil and other commodities, while remaining quite volatile, have fallen from their peaks, and prices of imports show signs of decelerating. in addition, expected inflation, as measured by consumer surveys and inflation - indexed treasury securities, has held steady or eased. these recent developments, together with economic activity that is likely to fall short of potential for a time, should lead to rates of inflation more consistent with price stability. still, the inflation outlook remains highly uncertain, in part because of the extraordinary volatility of commodity prices. we will need to continue to monitor price developments closely. overall, the combination of the incoming data and recent financial developments

, including putting in place a temporary lending facility that provides financing for banks to purchase high - quality asset - backed commercial paper from money market funds. the fed has also significantly increased the quantity of funds it auctions to banks and has accommodated heightened demands for funding from banks and primary dealers ; as of last wednesday, our various lending facilities, including our securities lending program, were providing more than $ 800 billion of liquidity to the financial system. to address dollar funding pressures worldwide, we have significantly expanded reciprocal currency arrangements ( so - called swap agreements ) with foreign central banks. these agreements enable the foreign central banks to provide dollar funding to financial institutions in their jurisdictions, which helps to improve the functioning of dollar funding markets globally. in addition, this morning the federal reserve announced a new facility that will help provide liquidity to term funding markets by purchasing three - month commercial paper and asset - backed commercial paper directly from eligible issuers. the expansion of federal reserve lending is helping financial firms cope with reduced access to their usual sources of funding. recently, however, our liquidity provision had begun to run ahead of our ability to absorb excess reserves held by the banking system, leading the effective funds rate, on many days, to fall below the target set by the federal open market committee. this problem has largely been addressed by a provision of the legislation the congress passed last week, which gives the federal reserve the authority to pay interest on balances that depository institutions hold in their accounts at the federal reserve banks. the federal reserve announced yesterday that it will pay interest on required reserve balances at 10 basis points below the target federal funds rate, and pay interest on excess reserves, initially at 75 basis points below the target. paying interest on reserves should allow us to better control the federal funds rate, as banks are unlikely to lend overnight balances at a rate lower than they can receive from the fed ; thus, the payment of interest on reserves should set a floor for the funds rate over the day. with this step, our lending facilities may be more easily expanded as necessary. so long as financial conditions warrant, we will continue to look for ways to reduce funding pressures in key markets. economic activity had shown signs of decelerating even before the recent upsurge in financial - market tensions. as has been the case for some time, the housing market continues to be a primary source of weakness in the real economy as well as in the financial markets. however, the slowdown in economic activity has spread outside