if ever a situation existed in which the fabric of business and consumer confidence, both here and abroad, was vulnerable to being torn, the shock of september 11 was surely it. in addition to the horrific loss of life, enormous uncertainties accompanied the unfolding events and their implications for the economy. indeed, for a period of weeks, u. s. economic activity did drop dramatically in response to that shock. in the immediate aftermath of the strikes, the federal reserve engaged in aggressive action to counter the effects of the shock on payment systems and financial markets. we provided a huge volume of reserves through open market operations, the discount window, and other means to facilitate the functioning of the financial system. we worked closely with many market participants, industry groups, and other government officials on a broad range of financial infrastructure problems that needed to be resolved quickly and in the common interest. still, market functioning was impaired for a time. the substantial damage to trading, settlement, and communications facilities forced many market participants to their backup sites. owing in part to careful and thorough contingency planning, many firms, markets, and exchanges were able to resume business within a few hours or days of the attacks. nonetheless, the episode did reveal threats to, and vulnerabilities of, the operations of financial institutions that had not been previously considered and illustrated the significant interdependence of the modern financial infrastructure. institutions will need to continue to work diligently toward ensuring that their backup capabilities are adequate. we at the federal reserve have been reexamining intensively our own contingency capabilities to ensure that our central banking functions can be performed in the most pressing of emergency circumstances. in the weeks following the attacks, along with the drops in activity and confidence, equity prices fell markedly, and lenders became more cautious, boosting risk premiums, especially on credits already considered to be weak. in response, the federal reserve reduced short - term interest rates considerably further. longer - term yields, including mortgage rates, fell to extraordinarily low levels. the monetary stimulus that we provided was visible not only in interest rates but also in a rapid growth of liquidity over the final months of the year, as gauged by the broad monetary aggregates. as the fourth quarter progressed, business and consumer confidence recovered, no doubt buoyed by successes in the war on terrorism. the improved sentiment seemed to buffer the decline in economic activity. indeed, in the past several months, increasing signs have

of y2k and the extraordinarily low cost of equity capital available to many firms. nonetheless, if the recent more - favorable economic developments gather momentum, uncertainties will diminish, risk premiums will fall, and the pace of capital investment embodying new technologies will increase. even a subdued recovery beginning soon would constitute a truly remarkable performance for the american economy in the face of so severe a decline in equity asset values and an unprecedented blow from terrorists to the foundations of our market systems. for, if the tentative indications that the contraction phase of this business cycle is drawing to a close are ultimately confirmed, we will have experienced a significantly milder downturn than the long history of business cycles would have led us to expect. crucially, the imbalances that triggered the downturn and that could have prolonged this difficult period did not fester. the obvious questions are what has changed in our economy in recent decades to provide such resilience and whether such changes will persist into the future. doubtless, the substantial improvement in the access of business decisionmakers to real - time information has played a key role. thirty years ago, the timeliness of available information varied across companies and industries, often resulting in differences in the speed and magnitude of their responses to changing business conditions. in contrast to the situation that prevails today, businesses did not have real - time data systems that enabled decisionmakers in different enterprises to work from essentially the same set of information. in those earlier years, imbalances were inadvertently allowed to build to such an extent that their inevitable correction engendered significant economic stress. that process of correction and the accompanying economic and financial disruptions too often led to deep and prolonged recessions. today, businesses have large quantities of data available virtually in real time. as a consequence, they address and resolve economic imbalances far more rapidly than in the past. the apparent increased flexibility of the american economy arguably also reflects the extent of deregulation over the past quarter century. certainly, if the energy sector were still in the tight regulatory fetters of the 1970s, our flexibility today would be markedly less. that the collapse of enron barely registered in the relatively recently developed markets for natural gas and electric power was encouraging. although the terrorist attacks hit air travel especially hard over the past few months, deregulation of that industry has demonstrably increased the quantity and flexibility, if not the profitability, of air travel over the past twenty years. truck