paid on excess reserves ( ioer ) held by depository institutions as its primary tool for keeping the federal funds rate in its target range. it supplements this tool by offering overnight reverse repos ( on rrps ) at a specified offering rate to a broad set of counterparties, including eligible money market funds, government - sponsored enterprises, primary dealers, and banks. 5 together, ioer and on rrps set a floor on rates, beneath which bank and nonbank financial institutions with access to these facilities should be unwilling to lend funds. 6 this framework has been working very well. since december 16, 2015, when the fomc began the process of normalizing the stance of monetary policy, it has raised its federal funds target range four times to a current range of 1 to 1¼ percent. the effective federal funds rate ( effr ) has been within the fomc ’ s prevailing target range on all but one day, and changes in the federal funds rate continue to transmit in a predictable and effective way to other money market rates. 7 balance sheet normalization commences … with normalization of the level of the federal funds rate well underway and interest rate control effectively established, the fomc has now begun the process of normalizing the fed ’ s balance sheet, using a program described this past june in an addendum to its policy normalization principles and plans. 8 specifically, as of last month, the fomc is gradually reducing the fed ’ s securities holdings by decreasing its reinvestment of principal payments received from those securities, with payments being reinvested only to the extent that they exceed gradually rising caps. 9 this process for reducing the balance sheet will run in the background, while changes in the target range for the federal funds rate are the fomc ’ s primary means of adjusting the stance of monetary policy. however, the fomc said it would be prepared to resume reinvestments if a “ material deterioration in the economic outlook were to warrant a sizable reduction in the committee ’ s target for the federal funds rate, ” and it would be prepared to use its “ full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal fund rate. ” these conditions help identify the types of circumstances that might lead to some adjustments in the balance sheet normalization process, although chair yellen has noted

simon potter : implementing monetary policy with the balance sheet keynote remarks by mr simon m potter, executive vice president of the markets group of the federal reserve bank of new york, at the ecb workshop on " money markets, monetary policy implementation and central bank balance sheets ", frankfurt am main, 6 november 2017. * * * i would like to thank deborah leonard for her assistance in the preparation of these remarks, and colleagues in the federal reserve system for numerous insightful comments and suggestions. i ’ d like to thank the european central bank ( ecb ), both for inviting me to give this keynote address and for organizing this conference on money markets, monetary policy implementation, and central bank balance sheets. i ’ d also like to congratulate all of the presenters and discussants, whose engaging research and critiques help to foster a deeper understanding of some of the many policy implementation issues central bankers face as we digest past challenges and prepare for future ones. this conference comes as several major central banks reached milestones using their balance sheets as active tools for providing monetary policy accommodation. the ecb just announced it will extend its bond purchasing program but scale back the pace of purchases starting next year. the bank of england completed purchases under its gilts and corporate bond purchases schemes and confirmed an upcoming close to the drawdown period for its term funding scheme. and the federal reserve has begun to reduce its sizable holdings of securities, built up through large - scale asset purchase programs ( lsaps ) over the past decade. my comments today will focus on the role that asset purchases may play in a central bank ’ s toolkit for implementing monetary policy. i will briefly review how the federal reserve successfully adapted its operating framework to be able to achieve interest rate control with a large balance sheet and began its gradual and predictable balance sheet normalization program. then, in thinking about the prospective use of asset purchases in providing additional monetary policy accommodation at the zero lower bound in the future, i will reflect on some lessons from the fed ’ s experience. among other lessons, we have learned that asset purchases have clear benefits at the zero lower bound, perhaps with more limited costs than initially raised ; that we had greater - than - expected capacity to conduct large purchases without harming market functioning ; and that credible communications about use of the balance sheet and expectations for short - term interest rates support adjustments in market pricing and smooth monetary policy transmission. as always, the views presented here are my own and do not necessarily reflect those of the federal