Simon M Potter: Interest rate control during normalization Remarks by Mr Simon M Potter, Executive Vice President of the Markets Group of the Federal Reserve Bank of New York, at the SIFMA Conference on Securities Financing Transactions, New York City, 7 October 2014. *  *  *  I would like to thank Josh Frost, Lorie Logan, and Matthew Raskin for their excellent assistance in the preparation of these remarks and colleagues in the Federal Reserve System for numerous insightful comments and suggestions. Thank you, Rob. I appreciate the opportunity to participate in this important event. Securities financing markets are essential to the efficient functioning of the global financial system, and to the implementation of monetary policy in the United States and abroad. As you know, the Federal Open Market Committee (FOMC) recently published a statement on its policy normalization principles and plans. Today I would like to talk about these principles, and more specifically, about how the Committee plans to raise and control shortterm interest rates when it becomes appropriate to do so. Obviously, these plans are of interest to the Open Market Trading Desk (the Desk) as we must implement the directives issued by the FOMC after each meeting, and I am responsible for reporting to the FOMC on the transactions made to meet its operating target. I’ll also review the overnight reverse repurchase agreement (ON RRP) operations that the Federal Reserve has been testing for the past year, and explain recent changes the Committee made to these operations.
As was the case before the crisis and indicated in the June 2011 principles, the Committee intends to adjust the policy stance during normalization primarily through actions that directly influence the level of the fed funds rate and other short-term interest rates rather than through active management of the size or composition of the Fed’s securities holdings. Specifically, when economic conditions and the economic outlook warrant a less accommodative stance of monetary policy, the Committee will raise its target range for the fed funds rate. During normalization, the Committee intends to move the fed funds rate into the target range primarily by adjusting the rate of interest on excess reserve balances (IOER) that it pays. We expect changes in the IOER rate to have a significant influence on the fed  BIS central bankers’ speeches  1  funds rate and other short-term interest rates. However, to help control the fed funds rate, the Committee also intends to use an ON RRP facility and other supplementary tools, as needed. The Committee will use an ON RRP facility only to the extent necessary, and will phase it out when it is no longer needed to help control the funds rate. With regard to the Fed’s balance sheet, the Committee intends to reduce securities holdings in a gradual and predictable manner, primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.