Former Dallas Fed President Bob McTeer, writing on his Economic Policy blog, proposes that the Fed allow interest rates to rise while keeping monetary policy accommodative. He claims this is "heresy." He explains that the reason for his proposal was discussion by members of the FOMC proposing that quantitative easing be reversed first even while policy interest rates remain near zero.
I agree with his proposal. I think all interest rates should be left free to adjust according to market forces rather than manipulated by the Fed. If a large quantity of base money has the consequence of market forces driving certain interest rates down to zero, then so be it. But if those interest rates rise above zero, despite the quantity of base money, the Fed should not increase (or decrease) base money to keep them at zero.
On the other hand, I believe that a much more important policy change is to target the growth path of nominal GDP. Base money should adjust however much it takes to get nominnal GDP the target level, and interest rates, even short and safe ones, should be free to adjust with the supply and demand for credit.
I suppose that the Fed's "lower the unemployment rate to 6.5% as long as medium term inflation expectations don't rise above 2.5%," might be consistent with a "high" quantity of base money and "high" short term interest rates. I even think a high permanent target for base money, or some broader measure of the quantity of money would be consistent with higher short term interest rates. However, I am more and more convinced that much of the liquidity effect that the Fed uses to manipulate short term rates are intimately tied to termporary shifts if base money--shifts that should have approximately no effects on nominal spending on output.