The FOMC has carefully laid out a clear and transparent normalization strategy and is implementing that strategy, and I believe that the confidence engendered by this clarity and transparency has been of great importance in maintaining market stability, both in the United States and globally. Experience so far has shown that the Federal Reserve’s monetary policy implementation framework has continued to provide appropriate control over the federal funds rate, even as the FOMC has moved to reduce the size of the balance sheet gradually and predictably. This stability has supported the orderly functioning of the broader set of dollar money market rates that are important to financial conditions in the United States and around the world. Then, I will discuss the recent technical adjustment to the rate of interest paid on reserves (IOR). The Federal Reserve made the adjustment to provide greater comfort that the effective federal funds rate would remain within the target range set by the FOMC. 3 I will discuss how this adjustment has had exactly the intended effect on money market conditions, and how it has reinforced my certainty that the Federal Reserve is well positioned to maintain the public’s high 1  I would like to thank James Egelhof, Jacqueline Yen and Samuel Zief for their assistance in the preparation of these remarks, Vivek Manjunath for his assistance with data, and colleagues in the Federal Reserve System for numerous insightful comments and suggestions. 2 See Powell, “Monetary Policy Influences on Global Financial Conditions and International Capital Flows,” May 8, 2018.
I expect that the Desk will conduct operational readiness exercises during periods of no reinvestment to ensure it remains prepared to reinvest if needed. 13 Flexibility When Needed: The Technical Adjustment All of this news is encouraging, and it confirms the efficacy of the FOMC’s plan to normalize the stance of policy. I’d like to turn back to overnight rates for a moment, to speak about the recent technical adjustment to the IOR rate and try to answer a few questions that have emerged. Although they remained within the FOMC’s target range, rates paid on the bulk of federal funds trading had ticked up, as can be seen in Figure 5. By April 2018, the effective federal funds rate was five basis points below the top of the range. This rise raised a question as to whether the effective federal funds rate might print above the top of the FOMC’s target range, absent a change in our operational settings. The target range is an important feature of the FOMC’s public communications, and maintaining federal funds rates within it is therefore taken quite seriously. Public confidence in our ability to maintain rates within the target range is important for ensuring that expectations for  12  Philadelphia Fed President Harker used this expression first in relation to balance sheet normalization. See June 2018 FOMC minutes. The Markets Group conducts small-value exercises in both domestic and foreign financial markets for the purpose of testing operational readiness.