– interacted importantly. without ioer authority, the federal reserve would have been reluctant to buy as many assets as it did because of the longerrun implications for controlling the stance of monetary policy. while we were buying assets aggressively to help bring the u. s. economy out of a severe recession, we also had to keep in mind whether and how we would be able to remove monetary policy accommodation when appropriate. that issue was particularly relevant because we fund our asset purchases through the creation of reserves, and those additional reserves would have made it ever more difficult for the pre - crisis toolkit to raise short - term interest rates when needed. the fomc considered removing accommodation by first reducing our asset holdings ( including through asset sales ) and raising the federal funds rate only after our balance sheet had contracted substantially. but we decided against this approach because our ability to predict the effects of changes in the balance sheet on the economy is less than that associated with changes in the federal funds rate. excessive inflationary pressures could arise if assets were sold too slowly. conversely, financial markets and the economy could potentially be destabilized if assets were sold too aggressively. indeed, the so - called taper tantrum of 2013 illustrates the difficulty of predicting financial market reactions to announcements about the balance sheet. given the uncertainty and potential costs associated with large - scale asset sales, the fomc instead decided to begin removing monetary policy accommodation primarily by adjusting short - term interest rates rather than by actively managing its asset holdings. 13 that strategy – raising short - term interest rates once the recovery was sufficiently advanced while maintaining a relatively large balance sheet and plentiful bank reserves – depended on our ability to pay interest on excess reserves. where do we go from here? what does the future hold for the fed ’ s toolkit? for starters, our ability to use interest on reserves is likely to play a key role for years to come. in part, this reflects the outlook for our balance sheet over the next few years. as the fomc has noted in its recent statements, at some point after the process of raising the federal funds rate is well under way, we will cease or phase out reinvesting repayments of principal from our securities holdings. once we stop reinvestment, it should take several years for our asset holdings – and the bank reserves used to finance them – to passively decline to a more normal level. but even after the volume of reserves falls substantially, ioer will still be important as

janet l yellen : the federal reserve ’ s monetary policy toolkit – past, present, and future speech by ms janet l yellen, chair of the board of governors of the federal reserve system, at the federal reserve bank of kansas city economic symposium “ designing resilient monetary policy frameworks for the future ”, jackson hole, wyoming, 26 august 2016. * * * the global financial crisis and great recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy. with the u. s. economy now nearing the federal reserve ’ s statutory goals of maximum employment and price stability, this conference provides a timely opportunity to consider how the lessons we learned are likely to influence the conduct of monetary policy in the future. the theme of the conference, “ designing resilient monetary policy frameworks for the future, ” encompasses many aspects of monetary policy, from the nitty - gritty details of implementing policy in financial markets to broader questions about how policy affects the economy. within the operational realm, key choices include the selection of policy instruments, the specific markets in which the central bank participates, and the size and structure of the central bank ’ s balance sheet. these topics are of great importance to the federal reserve. as noted in the minutes of last month ’ s federal open market committee ( fomc ) meeting, we are studying many issues related to policy implementation, research which ultimately will inform the fomc ’ s views on how to most effectively conduct monetary policy in the years ahead. i expect that the work discussed at this conference will make valuable contributions to the understanding of many of these important issues. my focus today will be the policy tools that are needed to ensure that we have a resilient monetary policy framework. in particular, i will focus on whether our existing tools are adequate to respond to future economic downturns. as i will argue, one lesson from the crisis is that our pre - crisis toolkit was inadequate to address the range of economic circumstances that we faced. looking ahead, we will likely need to retain many of the monetary policy tools that were developed to promote recovery from the crisis. in addition, policymakers inside and outside the fed may wish at some point to consider additional options to secure a strong and resilient economy. but before i turn to these longer - run issues, i would like to offer a few remarks on the near - term outlook for the u. s