The emergence of an important Fed insider. (Off The News).

WALK THROUGH the hallways of the Federal Reserve these days and it seems only one question is front and center: how to run if need be a "nontraditional" monetary policy. In other words, what if U.S. central bankers find, after lowering the Fed funds rate further and reaching a bottom (perhaps somewhere around 75 basis points), that a further reduction would be too disruptive to the money market fund industry? Would officials contemplate, in lieu of further cuts in the Fed Funds rate, buying Treasury securities of longer maturity as they "move out the yield curve"?

The question remains how to conduct such an operation. Would the Fed first buy the short end of the Treasury market and gradually move to longer maturities? Some have suggested instead that the Fed try to achieve a "neutral" approach to purchasing securities across the yield curve, a tricky feat to say the least. After all, reading markets can be difficult. The FOMC reduced short-term rates 25 basis points at its June meeting instead of the 50 basis points the "smart money" in the markets was expecting, and the long end of the bond market collapsed.

What's interesting is that should the Fed move to a nontraditional approach, a huge responsibility rests on the shoulders of a relatively unknown figure within the Fed system, Dino Kos, executive vice president of the markets group at the New York Fed and manager of the System Open Market Account for the Federal Open Market Committee. Indeed, Fed officials go out of their way to say that the system is lucky because Kos may be the best to have ever held this key position.

Indeed, Kos's most recent predecessor, U.S. Treasury Undersecretary for Domestic Finance Peter Fisher, notes that, "Dino is a shrewd observer of the behavior of traders and investors. I wish I didn't have to admit this, but the New York Fed traded up when Dino [took over after I went to Washington]. No one taught me more about financial markets." His most recent boss, Bill McDonough, who just stepped down as New York Fed President, adds, "If the Fed moves to a nontraditional policy, the open market desk couldn't be in better hands. Dino has a remarkable sensitivity for the job."