agency securities in order to support the economy both by easing dislocations in market functioning and by driving down longerterm interest rates. consistent with the committee ’ s long - stated intention, in october 2017 we started the process of balance sheet normalization. we began gradually reducing the reinvestment of payments received as assets matured or were prepaid, allowing our holdings to shrink. the process of reducing the size of the portfolio is now well along. to frame the discussion of the final stages of normalization of the size of the balance sheet, it is useful to consider what the phrase “ normal balance sheet ” meant in the decades before the crisis. during that period, the main monetary policy decision for the fomc was choosing a target value for the federal funds rate. subject to that choice, the fed allowed the demand for its liabilities to determine the size of the balance sheet. this is a feature of “ normal ” that we are returning to : after normalization, the size of the fed ’ s balance sheet will once again be driven by the demand for our liabilities. to see what this means, consider figure 1, which shows the size of the fed ’ s balance sheet through time, as measured by total liabilities. the values are stated as a percentage of the dollar value of gdp, or gross domestic product. 1 liabilities began to the balance sheet had been steady at around 5 percent of gdp since about 1980, as currency slowly grew as a share of gdp, but the increase was offset by a decline in reserves. - 3grow sharply at the end of 2008 and continued to increase until the end of 2014. since that time, liabilities relative to gdp have fallen appreciably. to understand these changes, it is useful to focus on a snapshot of the balance sheet at three points in time : before the crisis, when the balance sheet was at its largest, and a rough projection for the end of this year ( table 1 ). in 2006, the dominant liability was currency held by the public, and the dominant asset was treasury securities. the fed ’ s asset purchase programs increased the balance sheet from just below 6 percent to nearly 25 percent of gdp by the end of 2014. 2 balance sheets must balance, of course, and the fed issued reserves as payment for the assets purchased. this action pushed reserves to nearly 15 percent of gdp. the committee has long said that the size of the balance sheet will be considered normalized when the

##b spells. 10 researchers have suggested many variations on makeup strategies. 11 for example, the central bank could target average inflation over time, implying that misses on either side of the target would be offset. by the time of the crisis, there was a well - established body of model - based research suggesting that some kind of makeup policy could be beneficial. 12 in light of this research, one might ask why the fed and other major central banks chose not to pursue such a policy. 13 the answer lies in the uncertain distance between models and reality. for makeup strategies to achieve their stabilizing benefits, households and businesses must be quite confident that the “ makeup stimulus ” is really coming. this confidence is what prompts them to raise spending and investment in the midst of a downturn. in models, confidence in the policy is merely an assumption. in practice, eggertsson and woodford ( 2003 ), for example, show that optimal policy at the elb entails a commitment to reflate the price level during subsequent economic expansions. see also wolman for a discussion of the effectiveness of price - level targeting at the elb. for a discussion of the relationship between price - level targeting and average - inflation targeting, see nessen and vestin ( 2005 ). the strategy in reifschneider and williams ( 2000 ), for instance, involves a central bank following a taylor rule modified to make up for shortfalls in policy accommodation during elb episodes. kiley and roberts ( 2017 ) study a strategy in which policymakers aim for inflation higher than 2 percent during normal times to compensate for below - target inflation during elb episodes. see also bernanke ( 2017 ) for a strategy in which low inflation is made up if it occurs when the federal funds rate is at or near the elb. see, for example, english, lopez - salido, and tetlow ( 2015 ) ; hebden and lopez - salido ( 2018 ) ; bernanke, kiley, and roberts ( 2019 ) ; and mertens and williams ( 2019 ). the bank of japan ( 2016 ) came closest, announcing in september 2016 an “ inflation - overshooting commitment ” ( p. 1 ). the commitment did not, however, come with any explicit goal for a degree or duration of overshoot. - 12 when policymakers considered these policies in the wake of the crisis, they had major questions about whether a central bank ’ s promise of good times