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These government lending programs, by targeting particular market sectors, alter the allocation of credit across markets. Consequently, although some market segments benefit from reduced funding costs, others may actually see their costs rise as credit is diverted to those markets that have been targeted for support. An alternative approach to expanding the monetary base is to do it in a way that is more neutral across market segments. As risky financial assets are presumably priced in relation to U.S. Treasury securities, which are free of credit risk, purchasing Treasuries is likely to have little effect on the relative credit spreads on different financial instruments. This is one reason I expressed my preference, in my dissent at the last FOMC meeting, for managing the monetary base by purchasing U.S. Treasury securities rather than through targeted credit programs.

Even though the conventional measure of the stance of monetary policy is the central bank's interest rate target, monetary policy fundamentally is always about the amount of monetary liabilities issued by the central bank--also known as the "monetary base." After all, hitting an interest rate target requires varying the quantity of central bank money, reducing the supply to raise rates, and increasing the supply to reduce rates. Even when the policy rate has been driven down to zero, central banks can still dictate the supply of central bank money.