Quote

Paying interest on reserve balances enables the Fed to break the strong link between the quantity of reserves and the level of the federal funds rate and, in turn, allows the Federal Reserve to control short-term interest rates when reserves are plentiful.

As you know, in the latter part of 2008 and early 2009, the Federal Reserve took extraordinary steps to provide liquidity and support credit market functioning, including the establishment of a number of emergency lending facilities and the creation or extension of currency swap agreements with 14 central banks around the world.

If Congress wanted to intervene with the Federal Reserve, well, we created the Federal Reserve. We could uncreate it. But would you want Congress regulating the money supply? We'd have drowned in inflation, or gone bankrupt, decades ago.

The Fed's ability to raise and lower short-term interest rates is its primary control over the economy.

The Fed should make a clear commitment to stable money to reduce the swings in interest rates and inflation. Instead, it champions and flaunts unstable money. This encourages momentum trading and the growth of derivatives. Meanwhile, layers of financial regulation make Washington bigger and more powerful but don't fix the underlying problems.

And let the Fed sell bonds to bring bank reserves back down to required reserve levels, so we have restraint on bank lending and bank issuances of liability.

I think the Fed is not designed to have effective tools to deal with the economy. It should settle for just controlling the money supply. And - if it insists, it can worry about inflation.

It's appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time.