For release: Oct. 18, 2001
Contact: Joe Elstner, (314) 444-8902, Charles B. Henderson, (314) 444-8311

Fed Played Key Role in Payments System after Attacks: St. Louis Fed's Poole

Link to speech

DAVIS, Calif. -- "The importance of the Federal Reserve's role in the country's payments system became fully evident on September 11. The Fed provided an enormous amount of extra liquidity to the financial system. It wasn't a monetary policy action in the conventional sense, but a response to the physical disruption of the payments system."

That was the viewpoint of William Poole, Federal Reserve Bank of St. Louis president, as he spoke on the campus of the University of California at Davis.

"To understand what the Fed did," said Poole, "consider your situation if your income stopped and you were unable to borrow funds or sell securities because the markets were closed. Depending on your access to cash, you'd be forced, within a few days, to default on bills coming due. Nonfinancial and financial firms are in a similar situation, except that financial firms especially rely heavily on daily and even hourly receipts to meet payment obligations."

Poole noted that in the absence of Fed intervention, there might have been a "cascade of defaults" as firms owed money that was not arriving would be unable to meet their debts, which would have spread the problem throughout the world economy.

Poole said the Fed provided extra liquidity to the markets in several ways: making loans to banks through the Fed's "discount window," giving credit for deposited checks being cleared through the Fed before the amounts were deducted from other banks' accounts, and purchases of securities on the open market. The Fed also arranged currency swap agreements with several foreign banks, enabling them to provide dollars to their financial institutions.

Poole stressed another aspect of Fed operations aimed at the payment system: letting banks know that extra cash was available on short notice. After September 11, Poole said, "Some banks experienced a modest increase in demand for currency. Frightened depositors withdrew cash from teller windows and ATMs. If those sources of cash had run dry, word would have spread rapidly and additional people would have lined up to make withdrawals at ATMs. We made it clear to banks that cash was available and maintained our operations to ensure all demands were met. A modest amount of extra cash was shipped to banks requesting it. I personally heard of no ATMs running dry and in a matter of days the extra cash demand disappeared. Here again, the Fed's role was to maintain normal functioning of the payments system. By doing so, we helped maintain public confidence in difficult and uncertain circumstances."

Concerning the economy, Poole said he shares the general uncertainty about the economy's near-term outlook. But, he said, the U.S. has "resilient people" and that the country is already acting to address its problems. He cited airline fare adjustments and zero-interest car financing as examples. Poole reminded his audience that the rate of inflation is low and expected to stay low. "In many past periods of stress, rising inflation expectations complicated things tremendously," he said.

Poole said the Fed will be watching economic data very carefully. "If necessary, more monetary policy ease will be put in place," he said. "As data arrive suggesting revival of growth, we'll have to watch to be sure we're not observing a false dawn. We'll also have to be careful not to overstay policy ease." Poole noted that those comments were "one hand, other hand" and might not be satisfying, but "it beats a firm commitment that's oblivious to new information. We're paid to exercise our best judgment, and that is what we will do."

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