Christopher J. Neely

English

Research Papers in Economics

November 2001
MonetaryTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
www.stls.frb.org/research
September 11, 2001
The September 11 terrorist attack on the World Trade
Center and the Pentagon was not only a human tragedy but
also an event with potentially serious ramifications for the
economy. Although the airline and insurance industries
face severe long-term problems as a result of the attack,
the event posed an immediate threat to the entire economy
by disrupting the payments and financial systems. Speci-
fically, while the attack increased firms’ and individuals’
demand for liquidity, heightened uncertainty and the
possibility of falling asset prices also threatened to reduce
lending by banks and other intermediaries. Significant
disruption to the payments system or lending has the poten-
tial to slow economic activity markedly.
In response to the attack, the Federal Reserve provided
additional liquidity through several channels to help
restore confidence and ensure the continued functioning
of the financial and payments systems. First, the Fed’s
New York Trading Desk injected an unusual amount of
liquidity through repurchase agreements (repos). The
accompanying table shows that the Fed held $61 billion
of securities acquired under repurchase agreements on
September 12, versus an average of $27 billion on the
previous ten Wednesdays (see table) and about $12 billion
on September 13, 2000.
Second, the Federal Reserve lent money directly to
banks through the discount window. The $45 billion in
discount loans outstanding on September 12 dwarfed the
$59 million average of the previous 10 Wednesdays.
Third, the Federal Reserve—along with the Comptroller
of the Currency—urged banks to restructure loans for
borrowers with temporary liquidity problems. To assist such
restructuring, the Fed stood ready with additional funds. 
Fourth, because transportation difficulties prevented
checks from being cleared in a timely manner, the Federal
Reserve extended almost $23 billion in check “float” on
September 12, some 30 times the average float over each
of the 10 previous Wednesdays. 
Fifth, the Federal Reserve quickly established or
extended “swap lines” with foreign central banks, such as
the European Central Bank, the Bank of England, and the
Bank of Canada. These accords enable central banks to
temporarily exchange currencies to meet liquidity needs
in foreign currencies. For example, the Fed and the Euro-
pean Central Bank might swap dollars for euros for a speci-
fied period of time, to enable the ECB to loan dollars to
branches of European banks operating in the United States. 
Finally, the FOMC reduced the federal funds rate target
by 1/2 percentage point, to 3 percent, early on Monday,
September 17, while retaining the balance of risks toward
economic weakness in its public statement. This action was
interpreted as a confidence-boosting measure for the reopen-
ing of the New York Stock Exchange later that morning.
Deposits at Federal Reserve Banks conveniently
summarize the liquidity provided to the economy. On
September 12, this measure stood at $102 billion, more
than 5 times the average of the previous 10 Wednesdays.
As in previous periods of financial stress (e.g., the crash
of 1987, the Russian default of 1998, and the Y2K scare)
the Federal Reserve’s actions helped ensure the smooth
functioning of the payments and financial systems, thereby
minimizing the economic repercussions of the tragedy.
—Christopher J. Neely
Monetary Conditions
Deposits at 
Discount Federal 
window Reserve 
Repos lending Float Banks
Average of Wednesdays  27298 59 720 19009
from July 4 to 
September 5, 2001
September 12, 2001 61005 45528 22929 102704
September 19, 2001 39600 2587 2345 13169
NOTE: Data were taken from the H.4.1 statistical release from the Board of
Governors. Only weekly averages and Wednesday figures are available in that
report. Figures are reported in millions of U.S. dollars. Deposits at Federal Reserve
Banks is the sum of “service related balances and adjustments” and “reserve
balances with FR Banks.”

September 11, 2001

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September 11, 2001

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