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Monetary Policy Normalization in the United States

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  • Stephen D. Williamson

Abstract

Because of the Federal Reserve?s unconventional approaches to monetary policy during the Great Recession and recovery, the Fed now finds itself in an unconventional situation. Short-term nominal interest 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 situation and the challenges this creates in returning Fed policy to ?normal??a state in which the Fed?s nominal interest rate target is above zero and its balance sheet is reduced in size.

Suggested Citation

  • Stephen D. Williamson, 2015. "Monetary Policy Normalization in the United States," Review, Federal Reserve Bank of St. Louis, vol. 97(2), pages 87-108.
    • Handle: RePEc:fip:fedlrv:00038
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    References listed on IDEAS

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    1. Gara M. Afonso & Alex Entz & Eric LeSueur, 2013. "Who’s Borrowing in the Fed Funds Market?," Liberty Street Economics 20131209, Federal Reserve Bank of New York.
    2. Antoine Martin & James J. McAndrews & Ali Palida & David R. Skeie, 2013. "Federal Reserve tools for managing rates and reserves," Staff Reports 642, Federal Reserve Bank of New York.
    3. Stephen D. Williamson, 2014. "Monetary policy in the United States: a brave new world?," Review, Federal Reserve Bank of St. Louis, vol. 96(2), pages 111-122.
    4. Michael Woodford, 2012. "Methods of policy accommodation at the interest-rate lower bound," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 185-288.
    5. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
    6. Mark Gertler & Peter Karadi, 2013. "QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 5-53, January.
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    Cited by:

    1. Stephen D. Williamson, 2016. "Current Federal Reserve Policy under the Lens of Economic History: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 54(3), pages 922-934, September.
    2. Silvia Bressan, 2018. "The impact of banks’ liquidity reserves on lending," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(4), pages 337-345, November.
    3. Beckworth, David, 2017. "Permanent versus temporary monetary base Injections: Implications for past and future Fed Policy," Journal of Macroeconomics, Elsevier, vol. 54(PA), pages 110-126.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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