Each issue of The Regional Economist, published by the Federal Reserve Bank of St. Louis, features the section “Ask an Economist,” in which one of the Bank’s economists answers a question. The answer below was provided by Vice President and Economist Stephen Williamson.
Monetary policy normalization refers to the steps the Federal Open Market Committee (FOMC)—the Federal Reserve's monetary policymaking body—will take to remove the substantial monetary accommodation that it has provided to the economy since the financial crisis began in 2007. The committee has made it very clear that normalization is going to be data-driven. In other words, policy decisions will be based on the future performance of inflation, labor markets and gross domestic product (GDP), among other things.
In its "Policy Normalization Principles and Plans," announced in September 2014, the FOMC laid out a program that would ultimately allow the Fed to conduct monetary policy in essentially the same way it did before the beginning of the financial crisis. The principles and plans outline a sequence of actions by which normalization will be achieved:
Federal Reserve Board economists estimate that the normalization process will take about seven years once it starts.
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