Payment of interest on these balances is our principal tool for keeping the federal funds rate in the FOMC’s target range. This tool has made it possible for us to gradually return interest rates to a more normal level without disrupting financial markets and the economy.
As I mentioned, after many years of running below our longer-run objective of 2 percent, inflation has recently moved close to that level. Our challenge will be to keep it there. Many factors affect inflation—some temporary and others longer lasting. Inflation will at times be above 2 percent and at other times below.