For the last quarter-century, the Federal Reserve has basically used one tool—the Fed funds rate—to run monetary policy. When the economy was running too hot, the Fed raised rates. When the economy was running below potential, the Fed cut rates. It was simple, and at the core, straightforward.

But today's announcement by the Fed is something very different: a window into a newfangled world where monetary policy is as innovative as the financial markets. Over the past 25 years, Wall Street wizards have moved away from plain-vanilla equity and debt, and constructed a staggering array of derivatives and other new forms of financial instruments. But while these instruments have been highly beneficial for growth, economists and policymakers have repeatedly worried about a major financial crisis triggered by out-of-control derivatives.

The long-feared crisis is now upon us—and the Fed, led by Chairman Ben Bernanke, is responding with a wave of new policy instruments. First came the Term Auction Facility, introduced in December, which allowed the Fed to better pump out money to banks without cutting interest rates. That was good, but it wasn't enough.