By Fan Jianjun, Department of Macroeconomic Research, DRC

Research Report, No.220, 2018 (Total 5495) 2018-12-20

Abstract: In order to correctly understand the current process of interest rate increase in the United States or the process of interest rate normalization, it is necessary to summarize the interest rate policy of the United States in the past 20 years. The federal funds rate had always been a major tool of the US monetary policy until the Federal Reserve (Fed) cut its federal funds rate target to zero in December 2008. After that, the quantitative easing measures including buying and selling mortgage-backed securities (MBS) and US treasury bonds characterized by large-scale expansion of the Fed’s balance sheet became the core tool of the US monetary policy. Although the Fed has started a new round of interest rate hike since December 2015, the federal funds rate has not resumed its core position in the US monetary policy. The current interest rate normalization process of the U.S. is realized mainly through raising the interest rate of excess deposit reserves. Therefore, the interest rate of excess deposit reserves will play an extremely important role in the US interest rate policy until the Fed’s balance sheet becomes normalized.

Key words: interest rate normalization, federal funds rate, the United States