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

In recent weeks, the Federal Reserve has conducted three more auctions (most recently, last Monday) for amounts of $30 billion each. The spread over the minimum bid rate was about 7 basis points for the January 14 auction, 2 basis points for the January 28 auction, and 15 basis points for the February 11 auction; these spreads were much lower than in December, apparently reflecting some subsequent easing in the pressures on banks' access to term funding.

The TAF appears to have been quite successful in overcoming the two problems with conventional discount window lending. Thus far, the TAF appears to have been largely free of the stigma associated with borrowing at the discount window, as indicated by the large number of bidders and the total value of bids submitted.9 Furthermore, because the Federal Reserve was able to predetermine the amounts to be auctioned, the open market desk has faced minimal uncertainty about the effects of the operation on bank reserves; hence, the TAF has not hampered the Federal Reserve's ability to keep the effective federal funds rate close to its target.

Isolating the impact of the TAF on financial markets is not easy, particularly given other recent market developments and the evolution of expectations regarding the federal funds rate. Nonetheless, the interest rates in term markets provide some evidence that the TAF may have had significant beneficial effects on financial markets.

It's not our job to prevent people from suffering losses who presumably knowingly took risks. That's not our job and we certainly don't want to be perceived as having that as our goal, as bailing out people and leading to a psychology in which they feel, 'Don't worry about taking risks in the future because nothing bad could happen because the Fed will bail us out'. That would be very, very bad. That's the moral hazard problem.

...

Our focus has to be on the economy and the innocent bystanders ... Our job is to do our best to create a firewall so the fire
doesn't hurt innocent victims, all the rest of the people in the economy who have nothing to do with this.

From press Q&A as reported by Market News International

There is a great deal of soul-searching that's going on all over the place and that's entirely appropriate. We're doing soul-searching within the Federal Reserve system, asking ourselves whether or not there are things we should have known or should have done and should do going forward.

At this point conclusions about cause and effect are more speculation than science. But I am persuaded that the liquidity conditions created by foreign-owned dollar surpluses trying to find an investment home in this country contributed to markets' recent unstable conditions.

I am also persuaded these financial imbalances are not likely to disappear in the foreseeable future. We must live with them, and policymakers must be mindful of them.

In my view, we should not—in pursuit of market order—impose excessive regulatory constraints that undermine the innovation and competitiveness that are, in the long run, the foundation of thriving financial markets and institutions.

Finally, in my view, we should not become identified with "investment protectionism." Trade protectionism is widely understood and debated. Investment protectionism refers to differentiated treatment of capital providers based on national identity and citizenship as well as denial of certain investment opportunities to nonresidents or noncitizens. There are some legitimate national security concerns in certain industries, such as defense, but such concerns can be easily exaggerated.

I see the growth risks as skewed to the downside for the near term. In circumstances like these, we can’t rule out the possibility of getting into an adverse feedback loop—that is, the slowing economy weakens financial markets, which induces greater caution by lenders, households, and firms, and which feeds back to even more weakness in economic activity and more caution. Indeed, an important objective of Fed policy is to mitigate the possibility that such a negative feedback loop could develop and take hold.

I believe recent actions helped address the risks to the economic forecast I just referenced—that is, weakness in the first half of 2008 followed by improvement in the second half, with inflation moderating from recent levels. The liquidity injections and easing of monetary policy should help housing and financial markets stabilize and avoid an "adverse feedback loop" in which a continuing decline in housing prices fuels financial market volatility with spillover to the broader economy.

I think for the next several month's there'll always be a chance that a shoe's going to drop. It induces portfolio shifts and financial
sector adjustments ... I don't think that the magnitude of shocks is likely to be big enough to threaten the financial system in a material way. And I think the magnitude of issues is likely to decline over time, if they occur. But you can't tell what you don't know. Unexpected stuff can always happen

From press Q&A, as reported by Market News International

Putting it all together, I expect growth to be very weak for several more months, but to improve toward the end of this year. Clearly, the most cogent risks to the growth outlook are on the downside. With the strains in housing persisting, a substantial slowdown in business spending could raise the odds of a recession. This risk would be heightened if December's job market weakness proved persistent, pulling down prospects for personal income and household spending. Nevertheless, I believe the most likely outcome is for growth to continue and to improve. I should note that my baseline outlook does not depend on an overly sanguine view of financial market conditions, which are, after all, a significant source of uncertainty right now.

[I] n today’s situation we are fortunate that most financial institutions have entered the current problems with significant capital cushions and that many U.S. financial institutions are moving to proactively address the problems. However, the potential for a credit crunch remains. Commercial banks are still an important source of liquidity and there are troubling developments at work.

The introduction of the TAF was aimed at addressing the Fed’s objectives for financial stability, not its objectives for monetary policy.

Going forward, we must be careful to distinguish when financial conditions call for Fed actions to help markets function effectively, such as we are now seeing with the Term Auction Facility, as opposed to situations when a change in the overall stance of monetary policy is called for.

When such a shock occurs, market participants may be unsure about the appropriate response, and the central bank may also be unsure. Nevertheless, market participants have good reason to believe that the central bank will respond as the appropriate response becomes clear. Confidence in the central bank in this sense helps to stabilize markets.

We have a way to go before full recovery and must acknowledge that shocks and accidents might happen. Phrasing it politely, as an Aussie-Texan, I suspect some real "cow patties" remain in some prominent institutional punchbowls in the U.S. and abroad, and they will undoubtedly come to light before too long. I would submit, however, that we are on our way back to markets priced by reason rather than fantasy and that systemic risk has been lessened substantially.

What creates generalized financial turmoil out of a market problem is that investors flee riskier assets of all types, with little regard to whether the assets are connected to the original problem or not. However, a flight to quality typically does not last very long. Investors start to make the relevant distinctions as they search for good assets trading at distressed prices. That process is certainly observable today.