Collectively, these innovations provide for much longer terms of lending, broader types of collateral, a wider class of counterparties, and a tighter spread between the primary credit rate and the target federal funds rate. All of these innovations are designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for promoting financial stability and economic growth.

Together these policy actions expand our role by providing liquidity in exchange for sound but less liquid securities. These policy innovations share important features of increasing both the term and the quantity of our lending and making additional quantities of highly liquid Treasury securities available to financial intermediaries. This is intended to reduce uncertainty among financial institutions and allow them to meet the liquidity needs of their clients.

While these policy actions represent major innovations in practice, they are in the spirit of the oldest traditions of central banking. As described by Walter Bagehot in his 1873 treatise Lombard Street, the job of the central bank is to "lend freely, against good collateral" whenever there is a shortage of liquidity in markets.

Everyone agrees that it is long-term interest rates and mortgages that ultimately determine the demand for homes and hence the price. What became clear in the early part of this decade is that central banks, not only the Fed, . . . began to lose control over long-term interest rates. That was a major issue in 2004. The Federal Reserve started to raise short-term rates very significantly and found that instead of long-term rates rising with them in unison, it failed . . . I call it the conundrum. What the conundrum was was evidence that long-term interest rates were being dominated by long-term forces.

On the power of the Fed

The very sophisticated financial community basically decided that this was a steal. They put very significant pressure on the securitizers to produce more paper. I was aware of it at the time. Then the securitizers began to pressure the lenders and underwriting standards became egregious. It wasn't that the Federal Reserve wasn't aware of the problem. What we didn't realize was the order of magnitude of the subprime lending, which started as a niche with no macroeconomic implications to something that became excessive, a huge part of the market that . . . was sold around the world.

There was a real serious concern about deflation. If you look at the notes of the Open Market Committee, the pressures were to go lower than 1 percent. There were no dissents. The only dissents were that we should go lower. People don't remember that period. [People thought there was] a threat to American stability because it looked as though we were replicating much of what Japan had done when it had fallen into a corrosive deflation.

Our forecast at the time said the chances were low, but the consequences to the country would have been so great that taking out insurance was by far the most sensible policy. I still believe that today.

On the decision to keep the federal funds rate at 1 percent from mid-2003 to mid-2004
 

The Federal Reserve has taken a very pro-active stance in response to what we view as economic developments. We have other tools to work in terms of market liquidity, the term auction facility, for example ...

I would discourage you from thinking that simply because, or because of, significant action in the credit market like we had yesterday that suddenly we are going to have a meeting of the Open Market Committee ... and that suddenly we are going to move Fed Funds rates. It doesn't work that way.

As reported by Market News International

Fisher said he disagreed with the view the Fed had been "pandering" to markets in cutting rates aggressively.

"We took the actions that were taken as a group in response to what we viewed as the prospective weakening of the US economy and were driven by economic considerations. In terms of the actions we take on the Fed Funds rate there are other tools we can use, for example the term auction facility addresses liquidity needs, and we will continue to develop our tool box," he said.

"My sense, from my personal perspective, is that 3.5% was a sufficient level. We have moved very quickly to that level. Going further to 3% might create a bit of a counter-reaction. In fact, it did create a bit of a counter reaction - that is long term rates went up including on jumbo mortgages and, of course, the dollar has weakened," he said [when asked about his January dissent].
...
"I trust in the wisdom of my colleagues."

As reported by Market News International

I would discourage you from thinking that simply because, or because of, significant action in credit markets like we had yesterday, that suddenly we are going to have an Open Market Committee meeting and that suddenly we are going to move Fed funds rates in response.

We reacted with very deliberate actions that took place ... in a very short period of timeframe, and I think that it shouldn't be the markets' expectation that we will continue to react in that manner.

As reported by Reuters.

We need to consider whether some of the changes that the Federal Reserve has implemented, such as the Term Auction Facility, should be made permanent.

Insurance against recession is not free. ... We have to have a balance (between) employment and financial risks with inflation risks

The TAF function, which I believe has had beneficial effects on financial markets to date, is expected to continue as long as necessary to address elevated pressures in short-term funding markets, and the Federal Reserve will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives.   

Although the danger is real, it is also true that oil futures prices for contracts several years ahead do not suggest continuing increases in oil prices of the magnitude observed over the past five years. That was also true five years ago—the futures market turned out to be wrong. However, my view is that policymakers should rely on the judgment of the markets unless we have solid evidence that the markets are wrong. My personal experience is that, although the markets obviously can be wrong, I have no confidence that my own judgment on something like oil prices will be systematically more accurate.

To the extent that people think consumer attitudes have soured, I think just going out there and trying to reassure people, I don't think that in and of itself is effective ...

I think actions speak louder than words and I think people will experience things on the ground that will either confirm their concerns or diminish them. We have a limited number of policy tools. I think we've used them, we could continue to use them, that remains to be seen.

From press Q&A as reported by Market News International

I believe that the Federal Reserve has been acting and will continue to act decisively, in the sense that our lowering of the federal funds rate target has reflected the evolution of the balance of risks to the macroeconomy. The disruption in financial markets poses a substantial downside risk to the outlook for economic growth, and adverse economic or financial news has the potential to cause further strains. In that light, the Federal Reserve's policy strategy is aimed at providing adequate insurance to help mitigate the risk of more-severe macroeconomic outcomes.

As a consequence of observing this process for 10 years, I have concluded that an FOMC attempt to provide forward guidance in the policy statement causes more communications difficulties than it solves.  A key reason is that the economy is subject to more shocks and reversals than one might think. ... Directional language tends to remain in the FOMC policy statement beyond the time it applies and removing the language creates the possibility of miscommunication.  Every change in the policy statement leads naturally to market questions as to what the change means and whether the change is meant to provide a hint about the future direction of policy.  To my mind, every time new language is inserted into the policy statement, there needs to be as much thought given as to how to exit from the language as to the rationale for inserting it.