Financial Update (Second Quarter 2003)



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Ferguson Reviews Lessons from 9/11

“The incidents of Sept. 11 taught us many lessons related to central banking and financial stability,” said Roger Ferguson, vice chairman of the Federal Reserve Board, in a recent speech at Vanderbilt University. “The farther we move away in time from (those) tragic events, . . . the more the lessons come into focus.”

Ferguson reviewed the actions taken by the Federal Reserve after the terrorist attacks on Sept. 11, 2001. The Fed quickly organized a response that emphasized three objectives:

  • providing sufficient liquidity to maintain financial stability and public confidence,
  • ensuring that Fed and private payment systems were operational, and
  • working with critical public- and private-sector participants to keep markets open or return them quickly to normal operations.

On Sept. 12, discount window lending to banks totaled about $46 billion, more than 200 times the daily average for the previous month.


One tool the Fed used to provide needed liquidity was discount window lending. In normal times, Ferguson said, the discount window functions as a “pressure valve” to help banks maintain smooth day-to-day operations, but during the crisis it served as “something closer to the floodgates of a great dam.” On Sept. 12, discount window lending to banks totaled about $46 billion, more than 200 times the daily average for the previous month.

The Fed also pumped additional liquidity into the system through its open market operations — buying and selling Treasury securities. Operating from its backup facility, the New York Fed’s trading desk remained opened for extended hours every day from Sept. 12 through Sept. 17 and engaged in a record level of transactions.

Through its policymaking body, the Federal Open Market Committee, the Fed further increased liquidity by decreasing the federal funds rate target from 3.5 percent to 3.0 percent on Sept. 17.

The financial and monetary effects of the events of Sept. 11 “were less severe than one might have imagined . . . largely because of the action by major market participants and the regulatory community, including the Federal Reserve System,” Ferguson noted.

He drew several lessons for central banking and the financial system from the events following Sept. 11. The most important lessons emphasized the importance of the Fed's roles — as lender of last resort; as central bank, supervisor and regulator; and as payment system operator — and the versatility of the wide range of tools the Fed is able to apply during a crisis.

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