How will the Federal Reserve ensure that the size of its balance sheet won’t lead to excessive inflation?
Since the financial crisis, the Federal Open Market Committee (FOMC) has undertaken a highly accommodative monetary policy. In addition to maintaining an exceptionally low level for the federal funds rate, the Committee expanded the Federal Reserve's holdings of longer-term securities as a means to put downward pressure on longer-term interest rates and make broader financial conditions more accommodative. These actions have helped to support a stronger economic recovery and ensure that inflation, over time, is at levels consistent with the Committee's mandate to maintain maximum employment and stable prices. The FOMC monitors the stance of monetary policy, the economic outlook, and financial developments closely.
The Committee has the tools it needs to tighten monetary policy at the appropriate time. The FOMC issued its principles and plans for normalization in September 2014. In that document, the Committee indicated that during normalization it intends to continue to set a range for the federal funds rate and to use its policy tools to keep the funds rate in the target range. When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate. During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances. In addition, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate. The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.
September 17, 2014
June 19, 2013 (PDF)