History of the FOMC's Policy Normalization Discussions and Communications
The Federal Open Market Committee (FOMC) outlined its approach to monetary policy normalization in the Policy Normalization Principles and Plans that it issued after its September 2014 meeting. The FOMC indicated that there would be two main components to policy normalization: gradually raising its target range for the federal funds rate to more normal levels and gradually reducing the Federal Reserve’s securities holdings. The Committee augmented these Principles and Plans at its March 2015 FOMC meeting by announcing more details about the approach it would use to raise the federal funds rate and other short-term interest rates. At its December 2015 meeting, the FOMC decided that economic conditions and the economic outlook warranted taking the first step in normalizing the stance of monetary policy; accordingly, the Committee voted to raise the target range for the federal funds rate for the first time since December 2008. The postmeeting statement announced the change in policy; the accompanying implementation note provided operational details. The Committee has continued to gradually raise the target range for the federal funds rate as the economy has strengthened and the economic outlook has evolved. Following its June 2017 FOMC meeting, the FOMC announced additional details about its planned approach for gradually reducing the Federal Reserve's securities holdings over time. At its September 2017 meeting, the FOMC agreed to start the program for gradually reducing the Federal Reserve’s securities holdings in October 2017.
Policy Normalization Principles and Plans
Over the spring and summer of 2014, the FOMC discussed ways to normalize the stance of monetary policy and the Federal Reserve's securities holdings. The discussions were part of prudent planning and did not imply that normalization would necessarily begin soon. The Committee continued to judge that many of the normalization principles that it adopted in June 2011 remained applicable. However, in light of the changes in the System Open Market Account (SOMA) portfolio since 2011 and enhancements in the tools the Committee would have available to implement policy during normalization, the Committee concluded that some aspects of the eventual normalization process would likely differ from those specified earlier. The Committee also agreed that it was appropriate to provide additional information regarding its normalization plans. In September 2014, all FOMC participants but one agreed on the following key elements of the approach they intended to implement when it became appropriate to begin normalizing the stance of monetary policy:
At the March 2015 FOMC meeting, all participants agreed to augment the Committee's Policy Normalization Principles and Plans by providing the following additional details regarding the operational approach the FOMC intended to use when it became appropriate to begin normalizing the stance of monetary policy.
At the June 2017 FOMC meeting, all participants agreed to further augment the Committee's Policy Normalization Principles and Plans by providing the following additional details regarding the approach the FOMC intends to use to reduce the Federal Reserve's holdings of Treasury and agency securities once normalization of the level of the federal funds rate is well under way.
Following the June 2018 FOMC meeting, the Federal Reserve made a small technical adjustment to the interest rates paid on required and excess reserve balances relative to the top of the target range for the federal funds rate. (This adjustment was discussed by policymakers during the May 2018 joint meeting of the FOMC and Board, and was reviewed in the meeting minutes.) The interest rates paid on required and excess reserve balances were set 5 basis points below the top of the target range for the federal funds rate; these changes were intended to foster trading in the federal funds market at rates well within the FOMC's target range. Following the December 2018, May 2019 and September 2019 FOMC meetings, the Federal Reserve made three additional technical adjustments to the interest rates paid on required and excess reserve balances relative to the top of the target range for the federal funds rate; as of September 2019, these administered rates stand 20 basis points below the top of the fed funds target range. In addition, at the September 2019 FOMC meeting, the Federal Reserve lowered the offered rate on ON RRP operations to a level 5 basis points below the bottom of the target range.
The preceding communications were revised and replaced by the recent FOMC Communications Related to Policy Normalization, which includes the Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization released after the January 2019 meeting. This statement indicated that the FOMC intends to continue to implement monetary policy with an ample supply of reserves in the longer run. The Balance Sheet Normalization Principles and Plans statement issued following the March 2019 meeting described the Committee’s plans for slowing the pace of runoff of its securities holdings and the associated decline in reserves. In that statement, the Committee noted that when it judges that reserve balances had declined to an appropriate level, the SOMA portfolio will hold no more securities than necessary for efficient and effective policy implementation. Once that point is reached, the Committee would begin increasing its securities holdings to keep pace with trend growth of the Federal Reserve's non-reserve liabilities and maintain an appropriate level of reserves in the system. At its July 2019 meeting, the Committee decided to conclude the reduction of its securities holdings in August, two months earlier than previously indicated. On October 11, 2019, the FOMC released a statement that outlined plans to purchase Treasury bills at least into the second quarter of 2020 in order to maintain an ample supply of reserve balances at or above the level that prevailed in early September 2019.
FOMC Discussions of Normalization Leading to the Adoption of the Policy Normalization Principles and Plans in September 2014
- Minutes of the Federal Open Market Committee, April 29-30, 2014
- Minutes of the Federal Open Market Committee, June 17-18, 2014
- Minutes of the Federal Open Market Committee, July 29-30, 2014
FOMC Discussions of Normalization Leading to the Augmentation of the Policy Normalization Principles and Plans in March 2015
FOMC Decision to Commence the Normalization Process
- FOMC statement, December 2015
- Implementation note, December 2015
- FRBNY Desk statement, December 2015
FOMC Discussions of Normalization Leading to the Augmentation of the Policy Normalization Principles and Plans in June 2017
- Minutes of the Federal Open Market Committee, March 14-15, 2017
- Minutes of the Federal Open Market Committee, May 2-3, 2017