Should the Fed go there?

Just so happens that after the "negative" oil prices news, there is now discussion of another important macro variable heading to negative territory.  Interest rates, more specifically, the interest rate that the Fed pays banks on their reserves.  This interest rate forms the basis for many other interest rates in the economy. In this opinion piece, a prominent macroeconomist presents his rationale for why the Fed should readily wade into these somewhat uncharted negative waters.

The opinion piece doesn't go into all the nitty-gritty, so just in case you are wondering how this would happen, here is some background:

To target interest rates below zero, the Fed would not be using the usual Open Market Operations, but use another "tool" they have-- their cash window.  This is where banks can exchange their electronic reserves for actual cash/paper currency based on their customer needs. The Fed has some control over the "exchange rate" between the electronic reserves and the cash.  Usually this is just 1-for-1.  But to get interest rates below zero they would do something like this:

Suppose the Fed wants to establish a negative 1 percent paper currency interest rate at the cash window. Then, at the beginning of the year, it will stand to exchange paper currency for electronic currency at par (i.e. 1 for 1) with banks at the cash window. At the end of the year, (a) when a commercial bank comes to the cash window of the central bank and hands in a paper 100-dollar note to have the money put into its reserve account, the Fed would add only 99 dollars to that commercial bank’s reserve account; and (b) when a commercial bank came to the cash window of the Fed and asked for a paper 100-dollar note, only 99 dollars would be deducted from its reserve account.  (Agarwal & Kimball 2019)

 Test your understanding: "Macoronamics" Quiz #4