Fed Governor Lael Brainard at the NBER ’s Monetary Economics Summer Institute

Normalization underway

“In the United States, in my assessment, normalization of the federal funds rate is now well under way, and the Federal Reserve is advancing plans to allow the balance sheet to run off at a gradual and predictable pace. And for the first time in many years, the global economy is experiencing synchronous growth, and authorities in the euro area and the United Kingdom are beginning to discuss the time when the need for monetary accommodation will diminish.”

 

The FOMC delayed balance sheet normalization for a reason

“the Federal Open Market Committee (FOMC) decided to delay balance sheet normalization until the federal funds rate had reached a high enough level to enable it to be cut materially if economic conditions deteriorate, thus guarding against the risk of returning to the effective lower bound (ELB) in an environment with a historically low neutral interest rate. The greater familiarity and past experience with the federal funds rate also weighed in favor of this instrument initially. Separately, for those central banks that, unlike the Federal Reserve, moved to negative interest rates, there may be special considerations associated with raising policy rates back into positive territory.”

He expects balance sheet normalization to start soon 

“If the data continue to confirm a strong labor market and firming economic activity, I believe it would be appropriate relatively soon to commence the gradual and predictable process of allowing the balance sheet to run off.”

He thinks the neutral real fed funds rates will remain close to zero

“In my view, the neutral level of the federal funds rate is likely to remain close to zero in real terms over the medium term. If that is the case, we would not have much more additional work to do on moving to a neutral stance… in recent days, we have begun to hear acknowledgement from other major central banks that they too are seeing conditions that suggest policy normalization could be on the table before too long, against the backdrop of a brighter global outlook…the pace and timing of how central banks around the world proceed with normalization, and the importance of balance sheet policy relative to changes in short term rates in these normalization plans, could have important implications for exchange rates and financial conditions globally.”

 

https://www.federalreserve.gov/newsevents/speech/brainard20170713a.htm