Monetary Policy Normalization in the United States (Stephen D. Williamson)

Droblo - Martes, 28 de Julio

• 
• 
• 
• 
• • 
  • 
  • 

Monetary Policy Normalization in the United States Stephen D. Williamson The Great Recession, which began in late 2007 and continued until mid-2009, demar-cates some key changes in U.S. monetary policy. In 2015, the Federal Reserve’s balancesheet is much larger than before the Great Recession. From December 2007 to October2014, the Fed’s balance sheet (either total assets or total liabilities, which are equal) increasedmore than fourfold. Since late 2008, the Fed’s target interest rate, the federal funds rate, hasbeen close to zero. This long period of a zero interest rate policy, or ZIRP, is unprecedentedsince the Treasury-Federal Reserve Accord of 1951 modernized the approach to central bank-ing in the United States.In its “Policy Normalization Principles and Plans” (Board of Governors, 2014), the FederalOpen Market Committee (FOMC) proposed a program that should ultimately return the Fed’sbalance sheet to a state similar to that of December 2007.

 This does not literally mean a returnto a balance sheet of the same nominal size (in U.S. dollars) as before the financial crisis, butto a balance sheet that allows the Fed to implement monetary policy in the same way it did inDecember 2007, as discussed later in this article. In addition, the FOMC’s principles and plansoutline a sequence of actions by which “liftoff”—departure from a ZIRP—would be achieved,followed by a reduction in the size of the Fed’s balance sheet.The purpose of this article is first to take stock of the state of U.S. monetary policy and how that state was reached. This discussion is followed by an analysis of how the FOMC envisionsnormalization and the pitfalls that may arise on the road to normalization.

Because of the Federal Reserve’s unconventional approaches to monetary policy during the GreatRecession and recovery, the Fed now finds itself in an unconventional situation. Short-term nominalinterest rates have been close to zero for more than six years, and the Fed’s balance sheet is currently more than four times as large as in 2007. This article explains how and why the Fed got into this situ-ation and the challenges this creates in returning Fed policy to “normal”—a state in which the Fed’snominal interest rate target is above zero and its balance sheet is reduced in size. (JEL E32, E52)Federal Reserve Bank of St. Louis

Review

, Second Quarter 2015,

97 

(2), pp. 87-108.

Stephen Williamson is a vice president and economist at the Federal Reserve Bank of St. Louis and editor-in-chief of

Review 

. Joseph McGillicuddyprovided research assistance.© 2015, The Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the viewsof the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Articles may be reprinted, reproduced, published,distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, andother derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.

Federal Reserve Bank of St. Louis

REVIEW 

Second Quarter 2015 87

Droblo

[Volver]