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 the Federal Reserve's statutory goals of maximum employment and price stability, the Federal Open Market Committee (FOMC) reduced short-term interest rates to nearly zero and held them at that exceptionally low level for seven years. The FOMC also undertook large-scale open-market purchases of longer-term U.S. Treasury securities and mortgage-backed securities (MBS) to put downward pressure on longer-term interest rates. The term "normalization of monetary policy" refers to plans for returning both short-term interest rates and the Federal Reserve's securities holdings to more normal levels.
In September 2014, 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.
At its December 2015 meeting, the FOMC decided to begin the normalization process by modestly raising its target range for the federal funds rate.
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.