NEWS Release - Minutes of the Federal Open Market Committee, November 1-2, 2016
Long-Run Monetary Policy Implementation Framework
Committee participants continued their discussion of potential long-run frameworks for monetary policy implementation, a topic last discussed at the July 2016 FOMC meeting. The staff provided briefings that summarized considerations regarding potential choices of policy rates, operating regimes, and balance sheet policies and highlighted tradeoffs associated with these choices.
The staff noted that if the long-run implementation framework was such that the supply of reserve balances was quite abundant, then operational tools that help establish a floor under short-term interest rates, such as the payment of interest on reserves and the overnight reverse repurchase agreement (ON RRP) facility, would remain important elements of the operating regime. Reserve requirements would probably not be necessary in this case, and the Federal Reserve could likely maintain control of short-term interest rates without needing to conduct frequent open market operations to adjust the supply of reserves. Such an approach could also be effective with an appreciably smaller balance sheet and supply of reserves than at present. In contrast, if in the long run the supply of reserves was quite small, such as was the situation before the financial crisis, either reserve requirements or voluntary reserve targets would probably be needed to help stabilize the demand for reserves and increase its predictability.
The Federal Reserve would likely need to conduct frequent open market operations in this case to maintain adequate control of short-term interest rates, and banks would probably trade actively in the federal funds market. Some shortterm interest rates could display greater volatility under this approach than one in which the level of reserve balances was relatively high, and operational tools to limit both downward and upward pressure on such rates would probably be needed. Regardless of the level of reserves, the policy rate in either of these cases could be an unsecured overnight market rate or an interest rate administered by the Federal Reserve. The FOMC might instead target an overnight Treasury repurchase agreement rate and use standing facilities to keep repurchase agreement rates close to the target level.
The staff noted the importance of having effective arrangements to provide liquidity in times of stress. Stigma associated with borrowing from the discount window has likely prevented it from effectively enhancing control of short-term interest rates and improving liquidity conditions in various situations. Possible options to provide appropriate liquidity when necessary while mitigating such stigma were mentioned. The staff discussed the possibility that changes in the size and composition of the Federal Reserve’s balance sheet, including the duration of its securities holdings, could be used to help achieve policymakers’ macroeconomic goals when short-term interest rates had declined to their effective lower bound—and conceivably when short-term interest rates were above that bound. The staff also described the possibility of using balance sheet policies to promote financial stability.
In the discussion that followed the staff presentations, policymakers agreed that decisions regarding the longrun implementation framework were not necessary at this time. They indicated that the current framework was working well and that, with the supply of reserve balances expected to remain large for a while, the present approach to policy implementation would likely remain appropriate for some time. Moreover, policymakers expected to benefit from accruing additional information before making judgments about a future implementation framework. For example, they acknowledged that recent changes in financial regulations were likely to continue to be an important factor in the ongoing evolution of financial markets. Policymakers also underscored the importance of taking account of the possibility that neutral short-term interest rates could remain quite low. For these reasons, policymakers emphasized that their current views regarding the long-run policy implementation framework were preliminary and they expected that further deliberations would be appropriate before decisions were made.
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