Raising the rate of interest paid on excess reserves should play a central role in the eventual normalization of short-term interest rates. An overnight reverse repo facility could also play a useful part in setting a floor under money market rates.
With these and other possible tools, we will be able to raise rates and maintain them near their targeted level at the appropriate time. Another important question is whether monetary policymakers should alter their basic framework of flexible inflation targeting to take financial stability into account.