ABSTRACT
Over the past several years United States finan cial markets have exper i enced their most serious stresses and strains since the great depres sion of the 1930s. These stresses and strains have been due to both domestic and inter na tional devel op ments. As a result market instru ments, insti tu tions, and usages have under gone marked changes, and the Federal Reserve System, as well as the other agen cies of the pecu li arly decent ral ized central bank of the United States, have respon ded by adjust ing their oper a tions: monet ary powers have been used in new ways. Some of these new uses of monet ary powers will be discussed under two
head ings:1 the guid ance of the evol u tion of finan cial markets and the manip u la tion of uncer tainty. As a result of these new uses, the domain of respons ib il ity of the Federal Reserve and the rela tion between it and other regu lat ory agen cies need to be reex amined. Central banking has always been a major determ in ant of what is known
with certainty, what is prob able, and what is purely conjec tural in finan cial
markets. The evol u tion and devel op ment of central banking has not been solely a reac tion to an independentlyevolving finan cial struc ture, but has been also a determ in ant of this evol u tion. A soph ist ic ated central bank has always cast a “wider net” than any narrow legis lated or contrac tural respon s ib il it ies. Thus it can be claimed that these new uses are not really new. The context, however, is new: monet ary policy oper a tions are now being under taken in a world where active monet ary and fiscal policy is used to “fine tune” the economy and where there is a wide accept ance of the view that this can be accom plished. As a result monet ary policy is being carried out without the constraints upon finan cial posi tions and exper i ment a tion with new finan cial market usages that might result from prospects of serious busi ness depres sions. That is, fear of the prover bial income and employ ment “rainy day” is atten u ated, and with this atten u ation the emphasis on assets to protect against rainy days has decreased.2
