cash, based on a rate or price determined in a separate highly liquid market with a very large or virtually unlimited deliverable supply. furthermore, prices established in otc transactions do not serve a price - discovery function. thus, even if the price of an otc contract were somehow manipulated, the adverse effects on the economy would be quite limited. with respect to fraud and other unfair practices, the professional counterparties that use otc derivatives simply do not require the protections that cea provides for retail investors. if professional counterparties are victimized, they can obtain redress under the laws applicable to contracts generally. the working group also considered whether the introduction of centralized mechanisms for the trading and settling of what heretofore have been purely bilaterally negotiated and settled transactions would give rise to a need for additional regulation. in the case of electronic trading systems, the working group concluded that regulation under the cea was unnecessary and that such systems should be excluded from the act, provided that the contracts are not based on non - financial commodities with finite supplies and that the participants are limited to sophisticated counterparties trading solely for their own accounts. electronic trading of such contracts by such counterparties, it was reasoned, would be no more susceptible to problems of manipulation and fraud than purely bilateral transactions. it was suggested that some limited regulation of such systems might become necessary in the future if such trading systems came to serve a price - discovery function. but it was agreed that creation of a regulatory system for such systems in anticipation of problems was inappropriate. as i have already noted, the vast majority of otc derivatives simply are not susceptible to manipulation. thus, even if those contracts come to play a role in price discovery, regulation of the trading mechanism might still be unnecessary. in the case of clearing systems for otc derivatives, the working group concluded that government oversight is appropriate. clearing tends to concentrate risks and responsibilities for risk management in a central party or clearinghouse. consequently, the effectiveness of the clearinghouse ’ s risk management is critical for the stability of the markets that it serves. depending on the types of transactions cleared, such oversight might appropriately be conducted by the cftc under the cea. alternatively, it might be conducted by the securities and exchange commission, the federal reserve, the office of the comptroller of the currency, or a foreign financial regulator that one of the us regulators has determined satisfies appropriate standards. provided such government oversight is in place, otc transactions that would otherwise be excluded from

/ 26 / business / tough - decision - time - for - federal - reserve - new - vice - chairman - stirs - board - s - pot. html? pagewanted = all & src = pm. see milton friedman ( 1962 ), “ should there be an independent monetary authority? ” in leland b. yeager, ed., in search of a monetary constitution ( cambridge, mass. : harvard university press ), pp. 219 – 43 ; and james tobin ( 1992 ), “ prepared statement, ” in the monetary policy reform act of 1991, hearing before the subcommittee on international finance and monetary policy of the committee on banking, housing, and urban affairs, u. s. senate, november 13, 1991, s. 1611, 102 cong. ( washington : government printing office ), pp. 25 – 33. bis central bankers ’ speeches the policy directive upon its adoption, and in 1981 the case was resolved in favor of deferred disclosure. 6 ironically, while this transparency lawsuit was wending its way through the courts, robert lucas and others were publishing research that would garner several nobel prizes and ultimately overturn the traditional wisdom that secrecy regarding policy actions was the best policy. 7 a key insight of these scholars was that monetary policy affects employment, incomes, and inflation to a large extent through its effects on the public ’ s expectations about future policy. many spending decisions, such as financing the purchase of a home or businesses ’ capital expenditures, depend on longer - term interest rates that are connected to monetary policy through expectations of short - term interest rates over the lifetime of a mortgage or an investment project. in other words, the effect of monetary policy on the economy today depends not only, or even primarily, on the fomc ’ s current target for the federal funds rate or the quantity of assets on its balance sheet, but rather on how the public expects the federal reserve to set the paths of these variables in the future. these expectations influence longer - term interest rates and asset prices as well as the public ’ s views concerning the likely future paths of income and inflation. the history of oil price shocks is a good example to illustrate this point. in the 1970s, two large oil price shocks led to sharp increases in general inflation that were not met with prompt inflation - fighting actions by the federal reserve. this delay left the public unsure whether the federal reserve would act to reverse the increase in inflation, and expectations of longer - term inflation ratcheted up.