— would rise. other market interest rates would then increase accordingly. after the crisis, however, reserves were plentiful because the federal reserve funded its largescale asset purchases through adding reserves to the system — crediting the bank accounts of those who were selling assets to the fed. moreover, in light of the fomc ’ s decision not to sell the longer - term securities it acquired, reserves were likely to remain plentiful for the foreseeable future. consequently, when the time came to remove accommodation, a key question for the committee was how to raise the federal funds rate in an environment of abundant reserves. 10 an important part of the answer to that question came in the federal reserve ’ s authority to pay interest on excess reserves. the congress granted the federal reserve that authority in 2006, to become effective in 2011. however, in the fall of 2008, the congress moved up the effective date to october 2008. having authority to pay interest on excess reserves means that the federal reserve can influence the federal funds rate and other short - term interest rates regardless of the amount of excess reserves in the banking system. the mechanics of the new framework are straightforward : banks will generally only provide short - term funding at an interest rate around or above what they could earn at the fed. as a result, if the federal reserve raised the rate it paid, other short - term lending rates would likely rise as well. 11 this new approach for raising shortterm interest rates is working well : since december 2015, we have raised the interest paid on excess reserves and the target range for the federal funds rate by 100 basis points, and the effective federal funds rate has risen accordingly. 12 3 / 7 bis central bankers'speeches a closer look at our balance sheet strategy in light of our recent decision to start reducing our securities holdings this month, i would like to discuss a few aspects of our balance sheet strategy. 13 the fomc anticipated that its decision to maintain the size of the federal reserve ’ s securities holdings at an elevated level until sometime after the beginning of rate hikes would keep some downward pressure on longer - term interest rates well after the end of its asset purchase programs. although estimates of the effect of our securities holdings on longer - term interest rates are subject to uncertainty, a recent study reported that the federal reserve ’ s securities holdings were reducing the term premium on the 10 - year treasury yield by roughly 1 percentage point at the end of 2016. 14 the guidance that the fomc

##reciably reduce longer - term interest rates. 3 the fomc ’ s goal in lowering longer - term interest rates was to help the u. s. economy recover from the recession and stem the disinflationary forces that emerged from it. some have suggested that the slow pace of the economic recovery proves that our unconventional policy tools were ineffective. however, one should recognize that the recovery could have been much slower in the absence of our unconventional tools. indeed, the evidence strongly suggests that forward rate guidance and securities purchases — by substantially lowering borrowing costs for millions of american families and businesses and making overall financial conditions more accommodative — did help spur consumption and business spending, lower the unemployment rate, and stave off disinflationary pressures. 4 other central banks also deployed unconventional policy tools in the years that followed the financial crisis. 5 evidence accumulated from their experience also supports the notion that these tools have helped stimulate economic activity in their countries after their short - term interest rates were lowered to near - zero — and, in some cases, even below zero. 6 meeting the challenge of scaling back accommodation by 2014, the u. s. economy was making notable progress toward the fomc ’ s goals of maximum employment and price stability. the unemployment rate had dropped to 6 percent by midyear — well below its great recession peak of 10 percent — and other measures of labor market conditions were also showing significant improvement. in addition, inflation, as measured by the change in the price index for personal consumption expenditures, had reached about 1 - 3 / 4 percent by mid - 2014 after hovering around 1 percent in the fall of 2013. reflecting that progress, the federal reserve ’ s focus was shifting from providing additional monetary policy accommodation to scaling it back. 7 a key question for the fomc then was how to reduce the degree of accommodation in the context of a vastly expanded federal reserve balance sheet. one possible approach was to start by reducing the federal reserve ’ s securities holdings while short - term interest rates remained at the lower bound. we could allow securities to roll off the federal reserve ’ s balance sheet and even sell securities, thereby putting upward pressure on long - term rates while calibrating the pace and configuration of the reduction in our holdings as warranted by our maximum employment and price stability objectives. eventually, once our securities holdings had shrunk sufficiently, the fomc could start nudging up its short - term interest rate target. one problem of this