DeLong, Krugman, and Thoma recommend Joseph E. Gagnon's advice to Bernanke and the Fed.

In his testimony to the Congress this week, Fed Chairman Ben Bernanke left the door open to further monetary stimulus but made it clear that such action is not imminent. This reluctance to act may seem puzzling given the widespread view that the economic recovery is too weak.... The Federal Reserve's own forecast shows that it will take at least three or four years for employment to return to its long-run sustainable level. This extended period of high unemployment represents a massive waste of productive labor and untold personal suffering of unemployed workers. The Fed should be aiming to get us back on track within two years. And the urgency of Fed action is all the more important because Congress has refused to provide more stimulus....

Clearly, the case for monetary stimulus is strong. But what form should it take?... [T]he Fed... should return to its traditional roles of lending to the banking system and buying Treasury securities.... [T]he Fed should lower the interest rate it pays on bank reserves to zero.... [T]he Fed should bring down the rates on longer-term Treasury securities by targeting the interest rate on 3-year Treasury notes at 0.25 percent and aggressively purchasing such securities whenever their yield exceeds the target.... Finally, the Fed could bolster the stimulative effects of these actions by establishing a full-allotment lending facility to enable banks to borrow (with high-quality collateral) at terms of up to 24 months at a fixed interest rate of 0.25 percent.

These measures are all within the Federal Reserve's established powers. They pose essentially no risk to the Fed's balance sheet. They would reduce unemployment roughly as much as a 2-year $600 billion fiscal package and yet they would actually reduce the federal budget deficit. And they can be reversed quickly should the balance of risks shift from deflation to inflation.

Given the unsatisfactory outlook for unemployment and inflation and the lack of action by Congress, that is the right medicine for the US economy now.

Sewell Chan reports:

The Fed has already held the main short-term interest rate it controls at nearly zero since December 2008, and bought more than $1.5 trillion in mortgage-backed securities and other government debts to place downward pressure on long-term interest rates. 

Mr. Bernanke outlined on Thursday three options being discussed by the Fed, but told Mr. Watt, "The effectiveness of these actions would depend in part on financial conditions. If financial conditions became more stressed, I think those steps would be more effective, relatively speaking"

First, he said, the Fed could make clear to the markets that it planned to keep the federal funds rate, currently set at zero to 0.25 percent, for even longer than the "extended period" it has been projecting for months.

Second, the Fed could lower the interest rate it pays on excess reserves -- deposits banks hold at the Fed in excess of what they are required to -- from its current level of 0.25 percent. 

Third, the Fed could expand its balance sheet, which already stands at $2.3 trillion, primarily by purchasing additional assets, whether in the form of additional government debts and mortgage bonds, or in the form of new assets, like municipal bonds.

Krugman blogs:

We don’t know how well the Gagnon plan would actually work -- but there’s no harm in trying, and large potential benefits. The only possible reason for the Fed not to be more aggressive now is fear of embarrassment, of not getting big results. And that’s no reason to sit still while the Fedfail Index keeps deteriorating.