their triadic task effectively in the new conditions of time and space. the new context has been created by the market, evolves in response to market forces and basically meets the needs of private interests. it is a creature of the market much more than of public authorities. partly because of this evolution central banks and governments have become much more respectful of market forces, even humble. they are much more conscious that wealth and welfare are created primarily in and by the market. they know that this is a much more powerful beast than its would - be tamer. the effectiveness of both the instruments on which central bankers rely - banking operations and regulatory provisions - have been eroded by the innovation in market practices and the blurring of national frontiers. to some extent this is healthy. market players are not there to serve us, we are here to serve the economy. yet, this downsizing of our role should not be carried too far. there is still a public interest to be promoted that private actions cannot be counted upon to serve. there are still grounds for being proud to serve the public interest and for claiming that central banks should have the means to achieve their ends. the fact that markets are powerful, global and fast - moving, while central bank operations and regulations are national, intrusive and burdensome, does not mean the monetary system can do without a central bank or a bank regulator. 11. basle, the bis, the meetings of the community of central bankers, from the governors down to junior officials, are where our profession has strived, largely successfully, to maintain the upper hand over the reality that calls for its public function. the task is being performed notwithstanding the wide diversity of national laws, traditions, operational practices and institutional constraints. i am a convinced institutionalist, because i believe that without a “ rule of law ” liberty and peace - the key prerequisites for economic activity - cannot survive for long. and my basic training, as well as much of my professional experience, have been in the european arena, which is a highly institutionalized cooperative system. in international monetary cooperation basle stands at the “ soft ” end of the spectrum no legal basis, no written terms of reference, no extensive minutes. mostly personal contacts and work based on the key words of banking and central banking : confidence, trust, credibility, confidentiality. 12. although i started to attend bis meetings well before this tower was constructed ( in the old hotel building of the centralbahnstrasse ),

mr. meyer discusses the connection between policy makers and market participants in the united states remarks by mr. laurence h. meyer, a member of the board of governors of the us federal reserve system, before the fixed income summit of psa, the bond market trade association held in washington, d. c. on 12 / 9 / 97. monetary policy and the bond market : complements or substitutes? it is a pleasure to speak this afternoon at the fixed income summit. to some analysts, a meeting of the heads of the top fifty government securities dealers would represent a concentration of influence over the u. s. economy that perhaps even surpasses that of the meeting i will attend on september 30. indeed, some have argued that the activities of traders and investors in the bond market have become a major stabilizing force in the economy, even to the point of making the fomc redundant. this premise suggests an interesting theme for my address this afternoon - - the connection, or maybe more appropriately the symbiosis, between policy makers and market participants. the importance of market mechanisms the federal reserve has been most successful over the years when it has relied on market mechanisms to carry out its policy intent. regulation q, in its fixing of ceilings on deposit rates, distorted incentives and led to sudden and large swings in the pattern of intermediation. selective credit controls, in retrospect, were a blunt instrument that was too unpredictable and extreme to use effectively. and the board of governors has found that reserve requirements, which represent a tax on depositories because our reserves do not bear interest, are best held steady at the lowest level consistent with the efficient implementation of policy. instead, the federal reserve controls its balance sheet to influence a rate quoted by market participants any time that the reserve market is open - - the overnight federal funds rate. in truth, as you all know, movements in that rate have little direct significance, except to reserve managers and those relatively few others concerned with the overnight cost of funds. but how that rate gets transmitted along the term structure to yields on longer maturity instruments has broad significance that ultimately affects everyone in the economy. and that is where market participants come in. policymakers ’ influence is focused on the current short rate. it is the job of traders and investors to read our intentions from the public record, form their own judgments as to the course of economic activity and inflation that are based on, in addition to monetary policy, current and prospective fiscal policies and demand and