What does the Federal Reserve mean when it talks about the "normalization of monetary policy"?
The global financial crisis that began in 2007 had profound effects on the U.S. economy and other economies around the world. To support a return to maximum employment and price stability, the Federal Reserve reduced short-term interest rates to about zero and took unconventional policy measures to put downward pressure on longer-term interest rates. The term "normalization of monetary policy" refers to plans for returning the level of short-term interest rates and the Federal Reserve's securities holdings to more normal levels. At its December 2015 meeting, the Federal Open Market Committee (FOMC) decided to begin the normalization process by modestly raising its target range for the federal funds rate.
Following its September 2014 meeting, the FOMC published a statement of Policy Normalization Principles and Plans describing the overall strategy it intends to follow in normalizing the stance of monetary policy following the period of extraordinarily accommodative policies taken in the aftermath of the 2008-09 recession. These plans were further elaborated in the minutes of the March 2015 FOMC meeting.
To learn more about the FOMC's recent policy actions and Chair Janet Yellen's press conference remarks after the FOMC's December 2015 meeting, go to http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm. More information about the FOMC's normalization principles and plans is available at http://www.federalreserve.gov/monetarypolicy/policy-normalization.htm