from banks at the same time banks confronted a reduced capacity to raise financing. as market participants have adjusted to what has been a very acute change in expectations about economic and credit risk, they have become more cautious in how they use their liquidity and capital. the symptoms of this are apparent in the high risk premia across a range of assets, as well as in the dramatic contraction in the volume of transactions for certain assets and the securities that reference those assets. elevated term premia in the interbank market has the effect of tightening overall financial conditions, offsetting some of the impact of reductions in the target federal funds rate. the danger this poses is the risk of an adverse, self - reinforcing dynamic in which concerns about overall liquidity magnify concerns about credit problems. as financial institutions prepare for a more challenging funding environment, in part by conserving capital, and as they anticipate the higher potential losses that would normally accompany an economic slowdown, their response, in aggregate, makes markets and the economy potentially more vulnerable to that adverse outcome. the risk is a greater contraction in the availability of credit beyond what might have otherwise occurred, with attendant risks to growth. monetary policy has an important role to play in addressing these dynamics in markets. by adjusting policy proactively as the risk to the outlook changes, central banks can help reduce the probability of the extreme adverse outcome. and this can positively affect the incentives that might otherwise lead market participants to protect themselves against the extreme outcome. central banks have been employing a range of different tools to help reduce the incentive for an excessive level of liquidity hoarding by banks that might impede an efficient flow of liquidity among banks. although the mix of tools and approaches has varied across the major economies, each has tried to provide a more effective form of liquidity insurance to its financial institutions by expanding the capacity of banks to borrow at longer maturities from the central banks against a broader range of collateral. the actions to address liquidity issues – those we announced this week and those that we have taken over the past five months – can help reinforce our monetary policy actions by providing greater assurance for market participants of access to funding. by allowing strong banks to borrow against collateral that they can no longer easily finance in the market, the central bank is providing an additional source of liquidity to banks as a complement to our open market operations. the term auction facility gives us a tool that lies somewhere between our open market operations and our primary credit program

of financial innovation and growth in derivative instruments, but the pace of change the growth in volume has brought a lot of challenges. substantial progress has been made to strengthen this infrastructure over the past two and a half years, and the resilience of the broader financial infrastructure has been a source of strength for the financial system during this crisis. however, the systems and practices that support the over - the - counter ( otc ) derivatives market significantly lags that of securities markets and other mature markets. we need to move quickly to put in place a more integrated operational infrastructure that supports all major otc derivatives products, is highly automated, has robust operational resilience and risk management, and is capable of handling very substantial growth in volumes. conclusion the u. s. economic and financial system is undergoing a very challenging period of adjustment, and we are likely to be living with a high degree of uncertainty for some period of time about the ultimate magnitude and duration of the slowdown underway. but it is important to recognize that we have already seen a lot of adjustment. prices and risk premia in many markets already reflect a much more sober and cautious view of the world than they did a year ago. and the degree of stress on markets that we have seen over the past six months is due in part to the sheer magnitude and speed of that adjustment to a more cautious view of the future. the united states, the world economy, and the financial system as a whole, are more resilient, than they were on the eve of previous downturns. the improvements in productivity growth in the united states of the past decade have been followed by significant improvements in potential growth and wealth accumulation in many other countries. the scale of investable assets around the globe is very substantial, and this will be an important source of demand for risk assets. the improvements in monetary policy credibility and in financial strength developed over the past few decades mean that policy around the world has more room to adjust to deal with the challenge in the present environment. nevertheless, the challenges that remain are substantial. the speed and agility with which public policy makers and private financial institutions respond to the continuing pressures in a rapidly evolving environment will determine how quickly and how smoothly market conditions return to normal – and how rapidly the risks to the economic outlook are mitigated.