I will then discuss the implications of these changes for the Federal Reserve’s balance sheet and for the eventual “normalization” of monetary policy when the Federal Open Market Committee (FOMC) believes it is appropriate to remove the extraordinary levels of monetary policy accommodation that it has provided. Finally, I will discuss some of the considerations that must be taken into account in normalizing monetary policy. As always, these are my views and do not necessarily reflect those of the New York Fed or the Federal Reserve System. The desk’s role in implementing monetary policy The Federal Reserve (the Fed) has a somewhat more complex organizational and governance structure than most other central banks around the world, so before discussing recent developments in the implementation of monetary policy, I’d like to take a moment to describe roles and responsibilities within the Federal Reserve System and where the Desk fits in. The statutory basis for U.S. monetary policy is found in the Federal Reserve Act, which was enacted just over 100 years ago.
Modern language around monetary policy objectives was added in 1977, when the Board of Governors of the Federal Reserve System and the Federal Open Market Committee were charged by Congress with maintaining “long run growth of the monetary and credit aggregates…so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The goals of maximum employment and price stability have come to be known as the Fed’s “dual mandate.” Formulating policy in pursuit of that dual mandate is the province of two separate-but-related policymaking entities within the Federal Reserve System (the System) – the Board of Governors of the Federal Reserve System (the Board of Governors) and the FOMC (which I also refer to as “the Committee”) – each of which has responsibility for certain policy tools. The FOMC is the principal body for monetary policymaking and consists of the seven members of the Board of Governors plus the presidents of the twelve Federal Reserve Banks (only five of whom are voting members in any given year). The FOMC is responsible for the use of open market operations (OMOs), which are purchases and sales of securities in the open market for the System Open Market Account (SOMA), the Fed’s securities  BIS central bankers’ speeches  1  portfolio. OMOs are traditionally the primary tool through which monetary policy is implemented. The Board of Governors is responsible for several complementary policy tools.