As prepared for delivery Date accessed: October 29, 2018  “U.S. Monetary Policy Normalization is Proceeding Smoothly” Remarks by Simon M. Potter Executive Vice President Federal Reserve Bank of New York at Banque de France Paris, France October 26, 2018  Thank you for the invitation to participate in today’s discussion about post-financialcrisis monetary policies. 1 My remarks today will focus on the implementation of monetary policy normalization. 2 The Federal Open Market Committee (FOMC) has carefully developed and articulated a clear and transparent normalization strategy and is implementing that strategy. This approach has instilled confidence—a key to maintaining market stability, which has supported the orderly functioning of the broader set of dollar money market rates that are important to policy transmission and financial conditions. 3 Against this backdrop, the FOMC has increased the federal funds target rate from the 0 to ¼ percent range that had been in effect between December 2008 and December 2015, to 2 to 2 ¼ percent at its last meeting. Additionally, since late last year, when the Federal Reserve began a program to reduce its securities holdings by reinvesting principal maturities only to the extent that they exceed gradually increasing caps, the FOMC has reduced the size of the portfolio holdings from nearly $ trillion to about $ trillion. 4 Notably, this month, the principal payments from the agency mortgage-backed securities (MBS) portfolios are below the level of the redemption caps.
Let me also note that the question of the appropriate longer-run balance sheet size, the point at which the Federal Reserve holds no more securities than necessary to implement monetary policy efficiently and effectively, is a related, but distinct policy judgement upon which the FOMC has made no decision as yet. We will be monitoring that broad range of indicators to search for evidence that we’re approaching the “steep” slope—and I have confidence that our data and analytics will help us to assess this effectively. 29 We have also conducted a new Federal Reserve survey specifically designed to support our efforts to obtain a high-quality estimate of where aggregate reserve scarcity might occur, and the preliminary survey results strongly support my view that reserve scarcity is some way off. 30 Finally, I am confident that the Federal Reserve has the effective tools and is prepared to take measures as appropriate to ensure that short-term rates remain wellcontrolled and efficiently transmit the stance of policy into broader financial markets. For example, another technical adjustment to the IOR rate, as discussed in the May FOMC meeting minutes, could be used to foster trading in the federal funds market at rates well within the FOMC's target range. Concluding Remarks I remain highly confident that the FOMC’s framework for the normalization of the stance of monetary policy—both in the overnight market and the balance sheet—will continue to proceed smoothly, without unnecessary surprise, disruption, or volatility in financial markets.