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Policy Normalization

FOMC Communications related to Policy Normalization

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.

At its meetings in November and December 2018 and January 2019, the FOMC discussed issues associated with its longer-run implementation framework for monetary policy and balance sheet normalization. Following the January 2019 FOMC meeting, the Federal Reserve issued the following statement:

Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization

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:

  • 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.

  • 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.

History of the FOMC's Policy Normalization Discussions and Communications

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 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 FOMC meeting, the Federal Reserve made another 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; these administered rates stand 10 basis points below the top of the fed funds target range.

FOMC Discussions of Normalization Leading to the Adoption of the Policy Normalization Principles and Plans in September 2014

Policy Normalization Principles and Plans, September 2014

FOMC Discussions of Normalization Leading to the Augmentation of the Policy Normalization Principles and Plans in March 2015

Addendum to the Policy Normalization Principles and Plans, March 2015 (PDF)

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

Addendum to the Policy Normalization Principles and Plans, June 2017 (PDF)

FOMC Discussions Leading to the Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization

Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization

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Last Update: January 30, 2019