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The Normalization Process of the United States Monetary Policy (No.45, 2019)


By Fan Jianjun, Department of Macroeconomic Research, DRC

Research Report, No.45, 2019 (Total 5545) 2019-4-2

Abstract: The normalization process of the US monetary policy includes two aspects: interest rate normalization process (also known as “interest rate increase” process) and balance sheet normalization process (also known as “contraction” process). The former refers to the gradual increase of the Federal Benchmark Interest Rate (US Benchmark Interest Rate) and other short-term interest rates from the zero-interest rate range (0-0.25%) to the “normal” interest rate range. The latter refers to the reduction of the Federal Reserve’s holdings of securities assets (or excess deposit reserve) to “just” the “normal” level of monetary policy operation. The Federal Reserve has repeatedly noted that its monetary policy normalization process will adopt a relatively prudent, robust and flexible operational strategy, which can be interrupted at any time by the economic downturn performance. Overall, the effect of the Federal Reserve’s “deflation” is much greater than that of the “interest rate hike”. If things go well, the Federal Reserve is expected to take roughly four to five years to complete its balance sheet normalization process. Given the fact that the Federal Reserve has recently indicated that it will take an appropriate opportunity to suspend the normalization of monetary policy this year, it is expected that the normalization of monetary policy in the United States will linger on for some time.

Key words: monetary policy, normalization process, the United States