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.
This operating framework changed as the financial crisis deepened. By December 2008, the FOMC had lowered its target for the federal funds rate from a point target of 5¼ percent in mid-2007 to a target range of zero to ¼ percent. With the federal funds rate and other shortterm interest rates effectively at the zero lower bound, the FOMC’s operating objective for OMOs was expanded to include adjustments in the size and composition of the Federal Reserve’s securities portfolio. In particular, the FOMC initiated large-scale asset purchases (LSAPs) of agency mortgage-backed securities (MBS), agency debt, and later longer-term Treasury securities, in order to put downward pressure on longer-term interest rates, support mortgage markets, and help make broader financial conditions more accommodative. The expansion of the domestic securities portfolio that resulted from LSAPs vastly increased the supply of reserve balances in the system (Figure 1). 4 Importantly, in October 2008, the Fed was granted authority to pay interest on depository institutions’ reserve balances. 5 In an environment of elevated reserve balances that resulted from the Fed’s asset purchases, the payment of interest on excess reserves (IOER) – currently at a rate of ¼ percent – has kept the overnight federal funds rate within its target range (Figure 2).