By Thomas I. Palley

There is much debate over whether the Federal Reserve should tighten or further ease monetary policy. This dichotomous framing overlooks another possibility, which is whether the Fed should change the mix of its stance, tightening in some areas and further easing in others.

In particular, there are strong grounds for the Fed to abandon its support of the Treasury bond market and to gradually raise the federal funds rate (to say 1 per cent), while simultaneously increasing its purchases of mortgage-backed securities. If permissible, the Fed should also purchase state government bonds according to a per- capita formula.