Once you turn base money into short-term debt, can you go back? by Izabella Kaminska 

Forget about the $1 trillion coin debate. 

The most exciting wonky discussion being had right now is between Steve Randy Waldman and Paul Krugman over whether “base money” and short-term debt are perfectly substitutable or not, and what that may or may not mean for central bank policy. 

We confess that we have a bit of a vested interest here because for a long time we’ve been arguing much the same point as Waldman. 

That’s not to say that Krugman is necessarily wrong; he may just be taking Waldman slightly too literally....

Comments at Waldman's latest post:

 Carter writes:

Having paid a lot of attention to speeches by Dudley, Brian Sacks, etc, I suspect that there is a “middle path” that the Fed may take once growth warrants higher rates. Consistent with a “risk management” philosophy, the Fed will not want to surprise markets by raising rates much more quickly thatn the forwards. They played that game in the 1990s, and the result was Orange County and LTCM and BT’s clients. 

One might consider that the Fed will raise the short rates “in an orderly fashion” and perhaps use interest on reserves (a tool they are now enamored of) to “tail-the-hedge”. This means they may raise IOER faster than nominal fed funds

Fedwatch writes: 

Not sure if it’s been noted yet in these comments, but the April 2011 minutes are telling 

http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20110427.pdf#page=4 

Normalization steps were discussed, and “Most participants saw changes in the target for the federal funds rate as the preferred active tool for tightening monetary policy when appropriate.” And work how? “Most of these participants indicated that they preferred that monetary policy eventually operate through a corridor-type system in which the federal funds rate trades in the middle of a range, with the IOER rate as the floor and the discount rate as the ceiling of the range, as opposed to a floor-type system in which a relatively high level of reserve balances keeps the federal funds rate near the IOER rate.”