This gave rise to a new policy requirement resulting from the so-called "impossible trinity", which implies that autonomous national monetary policies are incompatible with fixed exchange rate objectives in an environment of free capital movements. As a result, national authorities participating in EMS/ERM had to subordinate monetary and, to a large extent, fiscal policy to the achievement of exchange rate stability. This led logically to monetary union, with the creation of the ECB as a supranational institution and the introduction of the euro. 3. Operational requirements While consensus on the key policy objectives pursued over time has been crucial for effective exchange rate and monetary policy co-operation in Europe, one should not play down the importance of operational aspects in the day-to-day management of the EMS/ERM. Three main lessons can be drawn in this regard. First, the operational framework had to be flexible in order to withstand episodes of tension as well as to adjust to changing economic and financial market conditions. In the European experience, examples of tension and changing conditions were the episodes of US dollar misalignment in the 1980s and 1990s and the asymmetric shock caused by German reunification in the early 1990s. In the EMS/ERM, flexibility was ensured through fluctuation bands around central exchange rates, which were either narrow (+/-2.25%) or wide (+/- 6%) depending on the degree of convergence of the countries concerned. The system became even more flexible when a +/- 15% fluctuation band was introduced following the crises in 1992 and 1993.

Given these developments, the FOMC began adjusting the mix of its tools in December. The Committee, however, is maintaining the overall highly accommodative stance of policy. The Committee modestly reduced the pace of its monthly asset purchases from $ billion to $ billion in three separate $ billion steps. In addition, with the unemployment rate approaching the 6-1/2 percent threshold that was established in December 2012, the Committee decided it was time to update its forward guidance on the future path of shortterm interest rates. Our policy statement now emphasizes that when deciding how long short-term rates will remain at their current level, the Committee will use a wide range of information to assess the realized and expected progress toward our dual mandate goals of maximum employment and price stability. The statement also indicates that given the Committee’s current assessment of these factors, it likely will be appropriate to keep the fed funds rate at its current level for a considerable period after the asset purchase program ends. Furthermore, even after the economy lifts off and employment and inflation are near mandate-consistent levels, economic conditions likely will warrant keeping short-term rates below their typical long-run level for some time. The various asset purchases the Fed has undertaken since 2008 have expanded our balance sheet more than fourfold, to over $ trillion dollars. Moreover, according to the FOMC’s projections and the latest market expectations, by the time the policy rate increases, it will have been near zero for about seven years.