History of the FOMC's Policy Normalization Discussions and Communications
The following material provides a chronological account of the Federal Reserve's decisions, discussions, and communications related to normalizing the stance of monetary policy, beginning in 2014.
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:
- The Committee will determine the timing and pace of policy normalization--meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve's securities holdings--so as to promote its statutory mandate of maximum employment and price stability.
- 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.
- During normalization, 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 intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.
- The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.
- The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.
- The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
- The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.
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.
When economic conditions warrant the commencement of policy firming, the Federal Reserve intends to:
- Continue to target a range for the federal funds rate that is 25 basis points wide.
- Set the IOER rate equal to the top of the target range for the federal funds rate and set the offering rate associated with an ON RRP facility equal to the bottom of the target range for the federal funds rate.
- Allow aggregate capacity of the ON RRP facility to be temporarily elevated to support policy implementation; adjust the IOER rate and the parameters of the ON RRP facility, and use other tools such as term operations, as necessary for appropriate monetary control, based on policymakers' assessments of the efficacy and costs of their tools. The Committee expects that it will be appropriate to reduce the capacity of the facility fairly soon after it commences policy firming.
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.
- The Committee intends to gradually reduce the Federal Reserve's securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps.
- For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
- For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.
- The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve's securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.
- Gradually reducing the Federal Reserve's securities holdings will result in a declining supply of reserve balances. The Committee currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis; the level will reflect the banking system's demand for reserve balances and the Committee's decisions about how to implement monetary policy most efficiently and effectively in the future. The Committee expects to learn more about the underlying demand for reserves during the process of balance sheet normalization.
- The Committee affirms that changing the target range for the federal funds rate is its primary means of adjusting the stance of monetary policy. However, the Committee would be prepared to resume reinvestment of principal payments received on securities held by the Federal Reserve if a material deterioration in the economic outlook were to warrant a sizable reduction in the Committee's target for the federal funds rate. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.
Following its January 2019 FOMC meeting, the FOMC issued a Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, which stated that the Federal Reserve intends to continue to implement monetary policy in a regime with an ample supply of reserves and in which control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required.
After extensive deliberations and thorough review of experience to date, the Committee judges that it is appropriate at this time to provide additional information regarding its plans to implement monetary policy over the longer run. Additionally, the Committee is revising its earlier guidance regarding the conditions under which it could adjust the details of its balance sheet normalization program. Accordingly, all participants agreed to the following:
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The Committee intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required.
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The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy. The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.
At the conclusion of the March 2019 FOMC meeting, the FOMC issued a Statement of Balance Sheet Normalization Principles and Plans that provided information regarding its plans for the size of its securities holdings and the transition to the longer-run operating regime.
At the conclusion of its July 2019 meeting, the FOMC announced that it intended to cease the runoff of its securities portfolio, noting that beginning in August 2019, principal payments received from agency debt and agency MBS up to $20 billion per month would be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month would continue to be reinvested in agency MBS. Also beginning in August, all maturing Treasury securities in the SOMA portfolio would be rolled over at Treasury auctions following usual practices.
On October 11, 2019, the FOMC released a statement that outlined its plans to ensure that the level of reserves in the banking system remains ample.
Consistent with its January 2019 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, the Committee reaffirms its intention to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required. To ensure that the supply of reserves remains ample, the Committee approved by notation vote completed on October 11, 2019 the following steps:
- In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Federal Reserve will purchase Treasury bills at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.
- In addition, the Federal Reserve will conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation.
These actions are purely technical measures to support the effective implementation of the FOMC's monetary policy, and do not represent a change in the stance of monetary policy. The Committee will continue to monitor money market developments as it assesses the level of reserves most consistent with efficient and effective policy implementation. The Committee stands ready to adjust the details of these plans as necessary to foster efficient and effective implementation of monetary policy.
In connection with these plans, the Federal Open Market Committee voted unanimously to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
"Effective October 15, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 percent. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.70 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
As a response to the COVID-19 pandemic, in addition to lowering the target range for the federal funds rate to near zero and establishing emergency credit and lending facilities, the Federal Reserve began purchasing very sizable quantities of Treasury securities and agency mortgage-backed securities in order to support the smooth functioning of these markets in the spring of 2020. Thereafter, asset purchases continued at a more moderate pace to help foster accommodative financial conditions and smooth market functioning, thereby supporting the flow of credit to households and businesses.
At the conclusion of its November 2021 meeting, the FOMC announced that, in light of the progress the economy has made toward the Committee's goals, it decided to begin reducing the pace of asset purchases. At the January 2022 meeting, the FOMC issued a statement laying out high-level principles regarding its approach to reducing the size of the Federal Reserve's balance sheet including the sequencing for removing policy accommodation with the Committee's balance sheet and interest rate tools, the approach to balance sheet runoff, and the intended longer-run size and composition of portfolio holdings. At the May 2022 meeting, the FOMC announced plans for significantly reducing the size of the Federal Reserve's balance sheet.
FOMC Discussions of Normalization Leading to the Adoption of the Policy Normalization Principles and Plans in September 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 Discussions of Normalization Leading to the Augmentation of the Policy Normalization Principles and Plans in June 2017
FOMC Discussions Leading to the Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization in January 2019 and to the Balance Sheet Normalization Principles and Plans in March 2019