time could have had disastrous results. in between those two meetings were some of the darkest hours of the financial crisis. on september 7, the treasury department placed fannie mae and freddie mac into conservatorship, essentially putting the government in charge of the mortgage giants. on september 15, lehman brothers filed for bankruptcy protection. a day later, a prominent money market mutual fund “ broke the buck ” – that is, its share price went below $ 1 – sparking fears that no investments were safe as the financial crisis rapidly spread around the globe. that was the same day we made the loan to aig – not exactly a lot of time to ease into a new job. we realized that if we didn ’ t act rapidly, the panic that we saw in financial markets – the worst in 80 years – could quickly trigger a global depression. in fighting the crisis, the fed acted as a first responder of sorts using a wide range of tools, including lowering interest rates ; maintaining a steady flow of dollars to meet demand abroad ; providing liquidity to sound institutions to support faltering financial markets ; and providing emergency loans to specific, troubled institutions whose failures would have had disastrous consequences for the financial system and the economy. later, the fed created additional programs to unlock lending, the lifeblood of the u. s. economy. while the economy today is by no means nearly as strong as we ’ d like it to be and some parts of the financial system are still not functioning smoothly, the forceful actions by the federal reserve in the fall of 2008 helped prevent the apocalyptic scenario that we all feared. i ’ d like to explain how we acted swiftly, responsibly, and effectively in response to the financial crisis. lowering interest rates during more normal times, the federal reserve ’ s policymaking is focused on short - term interest rates, our main tool for steering the economy. the fed influences the costs of borrowing to buy everything from cars to condos to computers by controlling short - term interest rates. interest rates can be lowered to stimulate borrowing and spending when demand is otherwise weak or raised to damp demand and curb inflation. before i arrived, the fed had already responded to the weakening in the economy by aggressively lowering its federal funds rate target from 5 - 1 / 4 percent in september 2007 to 2 percent. two percent is extremely low for interest rates, but as the financial crisis intensified and the economic outlook grew more dire in the fall of 2008, the fed continued to cut rates.

their financial positions. some progress is being made on this front. saving rates are up noticeably from pre - crisis levels, and household assets have risen, on net, over recent quarters, while debt and debt service payments have declined markedly relative to income. 1 together with expected further easing in credit terms and conditions offered by lenders, stronger balance sheets should eventually provide households the confidence and the wherewithal to increase their pace of spending. that said, progress has been and is likely to be uneven, as the process of balance sheet repair remains impeded to some extent by elevated unemployment, lower home values, and limited ability to refinance existing mortgages. household finances and attitudes also have an important influence on the housing market, which has remained depressed, notwithstanding reduced house prices and record - low mortgage rates. the overhang of foreclosed properties and vacant homes remains a significant drag on house prices and residential investment. in the business sector, indicators such as new orders and business sentiment suggest that growth in spending on equipment and software has slowed relative to its rapid pace earlier this year. investment in nonresidential structures continues to contract, reflecting stringent financing conditions and high vacancy rates for commercial real estate. the availability of credit to finance investment and expand business operations remains quite uneven : generally speaking, large firms in good financial condition can obtain credit in capital markets easily and on favorable terms. larger firms also hold considerable amounts of cash on their balance sheets. by contrast, surveys and anecdotes indicate that bank - dependent smaller firms continue to face significantly greater problems in obtaining credit, reflecting in part weaker balance sheets and income prospects that limit their ability to qualify for loans as well as tight lending standards and terms on the part of banks. the federal reserve and other banking regulators have been making significant efforts to improve the credit environment for small businesses, and we have seen some positive signs. in particular, some of the reduction in household debt burdens is the result of defaults and writedowns rather than higher saving. banks are no longer tightening lending standards and terms and are reportedly becoming more proactive in seeking out creditworthy borrowers. although the pace of recovery has slowed in recent months and is likely to continue to be fairly modest in the near term, the preconditions for a pickup in growth next year remain in place. stronger household finances, a further easing of credit conditions, and pent - up demand for consumer durable goods should all contribute to a somewhat faster pace of household spending