FOMC Minutes: Monetary Policy Normalization Discussion

From the Fed: Minutes of the Federal Open Market Committee, April 29-30, 2014 . Excerpt on Monetary Policy Normalization:

In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, meeting participants discussed issues associated with the eventual normalization of the stance and conduct of monetary policy. The Committee's discussion of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon. A staff presentation outlined several approaches to raising short-term interest rates when it becomes appropriate to do so, and to controlling the level of short-term interest rates once they are above the effective lower bound, during a period when the Federal Reserve will have a very large balance sheet. The approaches differed in terms of the combination of policy tools that might be used to accomplish those objectives. In addition to the rate of interest paid on excess reserve balances, the tools considered included fixed-rate overnight reverse repurchase (ON RRP) operations, term reverse repurchase agreements, and the Term Deposit Facility (TDF). The staff presentation discussed the potential implications of each approach for financial intermediation and financial markets, including the federal funds market, and the possible implications for financial stability. In addition, the staff outlined options for additional operational testing of the policy tools.

Following the staff presentation, meeting participants discussed a wide range of topics related to policy normalization. Participants generally agreed that starting to consider the options for normalization at this meeting was prudent, as it would help the Committee to make decisions about approaches to policy normalization and to communicate its plans to the public well before the first steps in normalizing policy become appropriate. Early communication, in turn, would enhance the clarity and credibility of monetary policy and help promote the achievement of the Committee's statutory objectives. It was emphasized that the tools available to the Committee will allow it to reduce policy accommodation when doing so becomes appropriate. Participants considered how various combinations of tools could have different implications for the degree of control over short-term interest rates, for the Federal Reserve's balance sheet and remittances to the Treasury, for the functioning of the federal funds market, and for financial stability in both normal times and in periods of stress. Because the Federal Reserve has not previously tightened the stance of policy while holding a large balance sheet, most participants judged that the Committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted. Participants generally favored the further testing of various tools, including the TDF, to better assess their operational readiness and effectiveness. No decisions regarding policy normalization were taken; participants requested additional analysis from the staff and agreed that it would be helpful to continue to review these issues at upcoming meetings.
emphasis added