For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral.
Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect 15 already conferred by lower interest rates on government securities. The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt.