Earlier today I linked to a post by Ben Hunt of Salient Advisors. Hunt was concerned about the Fed’s recently-announced policies. Here’s a counter from John Taylor of Stanford University.
The two have different perspectives perhaps because they have different jobs. Hunt works for a money management firm and wants to make profitable investments. Taylor is an academic economist focused on fiscal and monetary policy. He wants the right policy for the economy in the long run. Taylor’s been opposed to the market-supporting, zero interest rate, quantitative easing policies from the start and believes the recent announcements are good ideas.
The Fed could also provide liquidity support if it needed to do so in this framework. Recall the events of 9/11 when the devastating physical damage led the Fed to provide effective lender of last resort loans. So you can have that kind of liquidity support in such a regime.
If it wanted to, the Fed could operate with corridor system in this framework. There would be a lower-interest rate on deposits at the floor of the corridor, a higher-interest rate on borrowing at the ceiling of the corridor, and, most important, a market-determined interest rate above the floor and below the ceiling.