, disruptions in the connectivity of communication lines and the shift to backup sites caused delays in payments and settlements, with billions in funds building up at a small number of participants unable to send out funds covered by similar amounts of federal reserve open market operations, overdrafts, and loans to those who could not receive. to facilitate the channeling of dollar liquidity to foreign financial institutions operating in the united states and to meet all appropriate demands for dollar liquidity, thirty - day currency swap lines were arranged with major central banks, again in record volume. fed and bank balance sheets ballooned with the maldistribution of reserves, and domestic and foreign operations, but there was no fear of either credit or liquidity risk. fed funds borrowers and lenders, forced to deal directly because brokers were temporarily unavailable, quickly reached agreements to trade at the targeted federal funds rate. similarly, in response to losses of personnel and equipment at some participants, dealers agreed voluntarily to extend settlement in the treasury market to t + 5. crucially, lenders - - banks in particular - - stepped up to meet their commitments, real and implied, to avoid the disruptions that were a large part of the terrorists'objective. the list of adjustments and innovations goes on and on. but the point is clear that we are blessed with a financial system that is creative, that is flexible, that is innovative. banks - - including the central bank - were there when they were needed and did what was required with dispatch. we should be proud of the banking system's role in minimizing the economic fallout of that tragic day.

and will begin to dominate. so even the catch - up story plays a role in the upward trend in inflation. a second reason that nominal compensation is so difficult to factor into an inflation forecast is that compensation practices are changing. for example, our measurement has not caught up with the increased importance of stock options. stock options are incorporated, based on gains upon exercising the options, in the productivity and cost measure, but not in the eci. in addition, many ways in which firms are recruiting and retaining workers - such as in - house fitness and child care centers, flexible hours, educational assistance, on - site personal services, and in - kind payments - are not reflected in compensation measures ( although hiring and referral bonuses will be included in the eci in the next release ). finally, the growing importance of variable pay and of temporary workers may have important implications for wage dynamics that are not fully understood. so what is the outlook for inflation, and how does it relate to the interplay of new economy forces and traditional supply and demand considerations? in my judgment, we took the benefits of both the earlier favorable relative price shocks and the productivity shock, partly in a decline in the unemployment rate below the nairu and partly in a decline in inflation. this is not a statement about what policymakers planned, but rather about what evolved as we responded to unexpected developments in inflation and growth. at any rate, we could have taken more of the benefits of the favorable supply shocks in lower inflation, but given that inflation was already so low, the combination we ended up with seems, after the fact, to have been reasonable. at some point, however, when the temporary disinflationary impetus of the favorable supply developments dissipate, not only will there be some rebound in inflation, but unless a transition is made back to sustainable utilization rates, there will be a risk of a continuous upward movement in inflation. during that transition, at least some of the earlier decline in core inflation will be reversed. to be sure, it has been difficult to be precise about both sustainable utilization rates and the path of inflation because of uncertainties about the nairu and other aspects of inflation dynamics in a period of significant structural change. but i believe the qualitative story that i have set out is the right one. given our uncertainty about sustainable utilization rates and wage - price dynamics in the new economy, however, policy setting must remain flexible and responsive to new information about both the supply and the demand