Instead, the FOMC’s approach promotes the use of the federal funds rate as the active monetary policy instrument—an instrument with which it has much greater experience, likely helping to minimize the risk of an error in the early and still-vulnerable stages of the economy’s recovery.40 Running down the balance sheet passively, in a gradual and predictable manner, once normalization of short-term interest rates is well underway puts the balance sheet’s normalization in the background. The stock view of central bank purchase programs holds that given an expected path of the portfolio, the pace of actual changes in the portfolio should have little direct effect on asset prices. Assuming markets anticipate a gradual unwind in the portfolio, asset prices would adjust gradually over time. Nevertheless, central banks may wish to mitigate any possible risk that flow effects associated with overly fast flows of securities into private hands interfere with monetary policy implementation or disrupt market functioning. A conservative feature in the Fed’s approach is therefore a one-year transition period during which gradually rising redemption caps are phased in, thus allowing financial markets and the U.S. Treasury time to adjust to the Fed’s declining market presence. These design features likely enhance overall program effectiveness. However, this outcome is traded off against a more rapid achievement of balance sheet normalization—something some policymakers might hold as a desirable objective. For example, they might see a smaller balance sheet as one that offers greater capacity for using asset purchases more fully again in the future.
This is to supplement the central banks’ instruments in such a way that – alongside the maintenance of price stability – central banks can also make a greater contribution to financial stability than they have done in the past. The specific tools being referred to here are the macroprudential instruments that have attracted increasing interest in recent years, and that have been introduced in many countries. Such instruments can be used in a supplementary manner, as required. In the case of Switzerland, the SNB has a statutory mandate to pursue a monetary policy serving the interests of the country as a whole, to ensure price stability and in so doing, to take due account of the development of the economy. Within this primary framework, it also has the task of contributing to the stability of the financial system. There is no contradiction between these tasks if target hierarchy is observed. As far as financial stability is concerned, the SNB works closely together with the Swiss Financial Market Supervisory Authority and the Federal Department of Finance to create a regulatory environment that promotes stability. The SNB concentrates on the macroeconomic and macroprudential aspects of regulation. For the macroprudential tasks, a new instrument was created this year – the countercyclical capital buffer. According to the relevant regulation, this buffer can be activated by the Federal Council following a proposal by the SNB.