In July the Federal Reserve announced the creation of a special Y2K facility for liquidity for the fourth and first quarters: the Special Liquidity Facility—or SLF—which began operations in October. The SLF is designed to help banks manage their balance sheets flexibly in the face of risks of large deposit drawdowns to meet demand for currency or deposit transfers. The terms of SLF lending are also designed to provide the funds market more broadly with an alternative source of liquidity for meeting daily clearing and settlement, albeit one that comes at a premium of 150 basis points over the Fed Funds target rate. However, the impact of this facility in shaping expectations about the availability of year-end liquidity in the money markets appeared to be hampered during the summer by banks’ unwillingness to commit themselves to extend its benefits to their customers.

This is a testament to the extraordinary efforts of thousands of far-sighted technicians and business planners who, confronted with an intangible and abstract problem, have been able to convince businesses and governments to marshal vast resources for remedial actions. This has been a truly impressive feat. If we avoid fear-induced, significant economic responses in the months ahead, the Century Date Change will hopefully replicate the saga of "the dog that did not bark."

Although much work has been done within the United States and around the globe in anticipation of the century date change, we should not be complacent. There is still work to be done in terms of contingency planning and public communication. The Federal Reserve will continue its ongoing monitoring of progress. We also intend to have close contact with the markets and financial institutions through the date change. While we cannot know with certainty what the century rollover will bring, we should, based on what we know today, experience a smooth transition, perhaps even business as usual.

I would be remiss in this overview of near-term economic developments if I did not relay the ongoing efforts of the Federal Reserve, other financial regulators, and the private sector to come to grips with the rollover of their computer systems at the start of the upcoming century. While I have been in this business too long to promise that 2000 will open on an entirely trouble-free note, the efforts to address potential problems in the banking and financial system have been exhaustive. For our part, the Federal Reserve System has now completed remediation and testing of all its mission-critical applications, including testing its securities and funds-transfer systems with our thousands of financial institution customers.

As we have said previously, while we do not believe consumers need to hold excess cash because we expect the full array of payment options to work, we have taken precautions to ensure that ample currency is available. Further, the Federal Reserve established a special liquidity facility at which sound depository institutions with good collateral can readily borrow at a slight penalty rate in the months surrounding the rollover. The availability of this back-stop funding should make depository institutions more willing to provide loans and lines of credit to other financial institutions and businesses and to meet any deposit withdrawals as this century closes.

I have reached the conclusion that, now that the country is at last aggressively addressing the problem, the most important single element in our successfully navigating through the challenges presented by the "millennium bug" is how the public responds to it. There are very few places in our national life where the statement that "attitude can affect outcomes" is so compellingly demonstrated as in the banking sector, particularly as we work to address Y2K.

Early in 1996, the Federal Reserve began to have concerns about international progress on the Year 2000. Informal discussions within the Bank for International Settlements (BIS) Committee on Banking Supervision indicated that the Year 2000 was not then a priority in many countries. That has now changed.