banks and other outreach to market participants to understand the factors that influence the demand for reserves. 4 to smooth the transition to a level of reserves consistent with the framework, the fomc announced a slowing of the pace of the reduction in securities holdings at its march meeting this year and stopped it outright at the july meeting. 5 based on a variety of metrics and information, the supply of reserves appeared ample during the summer and into early september. the funds rate traded well within the target range and money markets functioned well. recent developments in money markets with the stage set, i ’ ll turn to market conditions over the past month and the fed ’ s actions. conditions in money markets became highly volatile about a month ago. secured and unsecured rates moved higher and became more disparate on monday, september 16, and this intensified the following day. we had expected a number of factors — including corporate tax payments and the settlement of newly issued treasury securities — to put some upward pressure on short - term rates. however, the size of the reaction in repo rates, the spillover to the federal funds market, and the emergence of strains in market functioning were outside of recent experience. in response to the simultaneous increase and widening dispersion in repo rates and the federal funds rate, on the morning of tuesday, september 17, the fed conducted the first non - test repo operations in many years, followed by daily operations. these actions had the desired effect of reducing strains in markets, narrowing the dispersion of rates, and fostering conditions in money markets to keep the federal funds rate within the target range. to ensure that the federal funds rate remained within the target range going forward, we announced daily overnight and regular term repo operations, which continue to this day. 6 the path forward our open market operations have succeeded at keeping the federal funds rate within the target range and have stabilized conditions in short - term funding markets. at the same time, recent experience has provided important lessons for the successful operation of the ample reserves framework. a confluence of events contributed to the volatility in money markets a month ago. but one telling observation is that when increases in the fed ’ s non - reserve liabilities caused the level of reserves to fall well below those prevailing during summer and early september, strains in money markets emerged. and when the prior level of reserves was quickly restored through temporary open market operations, normal interest rates and market functioning returned. in light of these events, we have

of empirical research. in short, the economic impact of the euro in international trade transactions is likely to be limited. the same cannot be said of the euro ’ s potential role in international financial transactions. partly because of their sheer magnitude - - some estimates place the volume of international capital transactions at more than 40 times the volume of international trade transactions - - growth in the use of the euro as the currency of choice in global capital markets will have much more significant repercussions for the united states than will increasing use of the euro in global product markets. to a large extent, these repercussions reflect the well - known gains that stem from increasing returns in the use of a currency as a store of value. as the market for a currency becomes more liquid, the costs of carrying wealth denominated in that currency fall, raising investors ’ preferences for denominating their portfolios in that currency. these increased preferences in turn lead to a further deepening and broadening of the market for that currency, costs of holdings are reduced further, and the process continues. as in trade transactions, the dollar is the predominant means of exchange in international financial transactions. its predominance is especially apparent with respect to large issues of international bonds - - a clear reflection of the low cost of covering exchange rate and interest rate risk for long - term dollar instruments. i would suggest, however, that the current role of the dollar should not be taken for granted. once the euro comes into existence, the simple conversion of the emu countries ’ outstanding securities into euros will contribute to the immediate creation of a major securities market. this development alone will create a critical mass for a market in euro - denominated securities. it will give the market depth and liquidity, and, in so doing, bring down the costs of conducting transactions, issuing loans, and trading securities below those currently seen for european national currencies - - possibly to levels comparable to those for dollars. the development of such a virtuous cycle could well feed upon itself and lead to the continuous growth of the market for euros. in this context, i would like to suggest that the experience the united states has had with a large, unified capital market may point to ways in which a unified european capital market may evolve after the advent of emu. if the u. s. experience is of any relevance, we may expect to see a decreasing use of bank loans in favor of a growing use of securities in europe after