term funding markets. the federal reserve was created in large part to supply liquidity and calm markets in such situations, importantly by assuring banks of a backup source of funding through the discount window. to enhance the utility of the discount window and encourage its use, the federal reserve reduced the spread between the discount rate and the federal funds rate last august, and we made lending available explicitly on a term basis, rather than only overnight. however, banks were reluctant to use even this more attractive discount facility because they feared that their counterparties would see it as a sign of weakness, and pressures in term funding markets increased. in december we introduced a new method for banks to borrow from the federal reserve against a broad range of collateral – the term auction facility ( taf ). the taf is an auction through which a fixed amount of lending is offered to the banking system, and it seems to have been successful in avoiding the " stigma " problem and in helping funding markets return to more normal functioning. markets were also aided by coordinated efforts to supply liquidity by several other central banks at the same time. as the deterioration in financial markets increasingly has threatened to hold down spending and employment, the fomc has eased monetary policy, reducing the federal funds rate target by 2 - 1 / 4 percentage points since the turmoil erupted in august. those actions have been intended to counteract the effects on the overall economy of tighter terms and conditions in credit markets, the drop in equity and housing wealth, and the steep decline in housing activity. our objective has been to promote sustainable growth and maximum employment over time. but easier monetary policy will not forestall a period of economic weakness in the near term. experience teaches us that some time is likely to pass between a decline in interest rates and its positive effect on demand. once financial conditions change, time is required for individuals to recalibrate, and then execute, their spending decisions. lower interest rates will not stop, only cushion, the correction in housing markets. easier monetary policy will not – and should not – " bail out " lenders and other investors who made poor choices or failed to protect themselves against the remote, but potentially severe, contingency that house prices would decline or against the much more predictable repricing of credit and liquidity risk. the adjustment in financial markets is part of the process that ultimately will restore credit allocation and market functioning to a sounder, more sustainable basis. what policy can do is attempt to limit the fallout on the economy

to this most likely scenario abound : uncertainty could trigger an even greater withdrawal from risk - taking by households, businesses, and investors, resulting in more pronounced and prolonged economic weakness ; events beyond our borders could continue to put upward pressure on inflation rates. but we should not lose sight of some fundamental strengths of our economy. our markets have proven to be flexible and resilient, able to absorb shocks, and quick to adapt to changing circumstances. those markets reward entrepreneurship and risk - taking, and many people are looking for opportunities to buy distressed assets and restructure and strengthen businesses to take advantage of the economic rebound that will occur. monetary policy has proven itself, under a wide variety of circumstances, very effective in recent decades in damping inflation when needed and in stimulating demand and activity when that has been appropriate. our job at the federal reserve is to put in place those policies that will promote both price stability and growth over time. we have the tools. as chairman bernanke often emphasizes : we will do what is needed.