When Normalizing Monetary Policy, the Order of Operations Matters

Karlye Dilts Stedman and Chaitri Gulati

Economic Bulletin, 2021, issue October 14, 2021, 4

Abstract: As economic conditions in the United States continue to improve, the FOMC may consider normalizing monetary policy. Whether the FOMC reduces the balance sheet before raising the federal funds rate (or vice versa) may affect the shape of the yield curve, with consequences for financial institutions. Drawing lessons from the previous normalization in 2015–19, we conclude that normalizing the balance sheet before raising the funds rate might forestall yield curve inversion and, in turn, support economic stability.

Keywords: Federal Open Market Committee (FOMC); Monetary Policy (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: 2021
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