outside of motor vehicles, which had benefited from the earlier decline in the dollar and strong foreign growth ; it fell for a third consecutive month in august, and indications for september suggest a further decline last month, even after excluding the effects of the recent hurricanes and the strike at boeing. meanwhile, inflation remained uncomfortably high through much of the summer. the sharp increases in the prices of oil and many agricultural commodities showed through to consumer food and energy prices, and producers passed through some of their higher input costs into retail prices for " core " goods and services. more recently, however, the prices of oil and other commodities have posted substantial declines, non - oil import prices have edged down, and the prospect of greater slack in resource markets and weak demand seems likely to restrain labor cost pressures and pricing power. reflecting these developments, inflation expectations appear to have eased a bit. the weakening u. s. economy and ongoing declines in house prices, with their implications for credit performance, put further pressure on exposed financial institutions over the summer. investors lost confidence in some of these institutions, which then saw their access to liquidity dry up, causing some to fail and others to require government assistance or to consolidate via their acquisition by healthier institutions. the speed with which these developments occurred, along with worries about losses throughout the financial system, led banks and other lenders to pull back from extending credit except at the very shortest maturities. as a result, conditions in funding markets deteriorated substantially further in september and early october, with interbank lending rates moving up sharply from already - high levels and spreads over comparable - maturity overnight index swaps widening to unprecedented levels. in addition, the commercial paper market became severely disrupted as money market mutual funds, the largest investors in that market, substantially reduced their demand in response to outflows and the difficulty of liquidating commercial paper in secondary markets. as a result, yields on commercial paper skyrocketed for most issuers, and funding became increasingly concentrated in paper with overnight maturities. similarly, interest rates on longer - term corporate bonds rose sharply even for investment - grade firms, and bond markets were closed off to many issuers. these developments quickly led to sharp declines in equity prices more generally, as well as to widespread disruptions in other markets, including the markets for municipal bonds. market distress fed on itself, as efforts by lenders to protect themselves triggered calls for increased margins, sales of assets that accentuated price declines, large increases in volatility in an

in lending institutions and freeing the flow of credit to households and businesses ; and governments in the united states and elsewhere have shown themselves able to work across political parties and across international boundaries to craft new approaches to problems. as chairman bernanke has often remarked, at the federal reserve we will utilize all the tools at our disposal to meet our responsibilities for fostering high employment and stable prices. i also know that the u. s. economy has proven itself over the years to be flexible and resilient as well as innovative and productive, qualities which enable it to rebound from serious economic shocks. i am confident that we will emerge from this episode with a stronger and more robust financial system and with a restoration of solid and sustainable economic growth.