The Fed's ability to raise and lower short-term interest rates is its primary control over the economy.
The FOMC has considerable control over short-term interest rates. We have much less influence over long-term rates, which are set in the marketplace.
Monetary policy is like juggling six balls... it is not 'interest rate up, interest rate down.' There is the exchange rate, there are long term yields, there are short term yields, there is credit growth.
The degree of monetary policy ease should be associated with the level of real interest rates, not nominal interest rates.
Under a cold turkey strategy, at each policy meeting the Federal Open Market Committee would make its best guess about where it ultimately wants the funds rate to be and would move to that rate in a single step.
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.
If you believe in free markets, why do we have to have the Federal Reserve set interest rates?
