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The challenges for monetary policy normalisation in the United States in the current economic situation

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  • Juan Carlos Berganza
  • Javier Vallés

Abstract

In December 2015 the Federal Reserve System, the central banking system of the United States, raised its official interest rate for the first time after having held it close to 0% for seven years and having embarked on a range of unconventional monetary policy measures to mitigate the impact of the financial crisis. At its latest meeting, in September 2016, the Federal Reserve decided to leave the official interest rate unchanged, although it said that the probability of a future hike had increased. This article reviews some of the features of the expected tightening cycle of monetary policy in the United States in a complex economic situation in which it is likely that it will take a long time for monetary policy to return to normal. This article reviews some of the factors that will influence this process, including monetary policy management and the estimated decrease in the equilibrium real interest rate, in a context in which the official interest rate is close to its effective minimum. From the global standpoint, the shortage of safe assets (which may lead to enduring low levels of the term structure of interest rates), the divergence of its monetary policy stance from that of other central banks, such as the ECB and the Bank of Japan, and developments in emerging economies, particularly China, will also influence monetary policy decisions in the United States.

Suggested Citation

  • Juan Carlos Berganza & Javier Vallés, 2016. "The challenges for monetary policy normalisation in the United States in the current economic situation," Economic Bulletin, Banco de España, issue SEP, pages 45-56, September.
    • Handle: RePEc:bde:journl:y:2016:i:9:n:4
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    References listed on IDEAS

    as
    1. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    2. Thomas Laubach & John C. Williams, 2015. "Measuring the natural rate of interest redux," Working Paper Series 2015-16, Federal Reserve Bank of San Francisco.
    3. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
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