Monetary Policy

Statement on Longer Run Goals Data Notes Abbreviations Summary Recent Economic and Financial Developments Monetary Policy Summary of Economic Projections

Monetary Policy

Monetary Policy Report submitted to the Congress on February 7, 2025, pursuant to section 2B of the Federal Reserve Act

The Federal Open Market Committee lowered the target range for the federal funds rate

After having held the target range for the policy rate at 5-1/4 to 5-1/2 percent between late July 2023 and mid-September 2024, the Federal Open Market Committee (FOMC) lowered the target range for the policy rate by a cumulative 100 basis points over the last three meetings of 2024, bringing the range to 4-1/4 to 4-1/2 percent (figure 47). The FOMC's decision to begin reducing the degree of policy restraint reflected the FOMC's greater confidence in inflation moving sustainably toward 2 percent and the judgment that it was appropriate to recalibrate the policy stance. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will carefully assess incoming data, the evolving outlook, and the balance of risks.

The FOMC has continued the process of significantly reducing its holdings of Treasury and agency securities

The FOMC began reducing its securities holdings in June 2022 and, since then, has continued to implement its plan for significantly reducing the size of the Federal Reserve's balance sheet in a predictable manner. Over the second half of last year, the FOMC reduced the size of the Federal Reserve's balance sheet with redemption caps of $25 billion per month on Treasury securities and $35 billion per month on agency debt and agency mortgage-backed securities (MBS). Any principal payments in excess of the agency debt and agency MBS caps are to be reinvested into Treasury securities, consistent with the FOMC's intention to hold primarily Treasury securities in the longer run.

The System Open Market Account holdings of Treasury and agency securities have declined about $2 trillion since the start of the balance sheet reduction and $297 billion since June 2024 to around $6.5 trillion, a level equivalent to 22 percent of U.S. nominal gross domestic product, down from a peak of 35 percent reached at the end of 2021 (figure 48). Reserve balances—the largest liability item on the Federal Reserve's balance sheet—have edged down $68 billion since late June 2024 to a level of around $3.2 trillion. Since the beginning of balance sheet runoff, reserves have been little changed because the reserve-draining effect of balance sheet runoff has been largely offset by a $1.8 trillion decline in balances at the overnight reverse repurchase agreement facility. (See the box "Developments in the Federal Reserve's Balance Sheet and Money Markets.")

48. Federal Reserve assets and liabilities

The FOMC has stated that it intends to maintain securities holdings at amounts consistent with implementing monetary policy efficiently and effectively in its ample-reserves regime. To ensure a smooth transition to ample reserve balances, the FOMC slowed the pace of decline of its securities holdings in June 2024 and intends to stop reductions in its securities holdings when reserve balances are somewhat above the level that the FOMC judges to be consistent with ample reserves. Once balance sheet runoff has ceased, reserve balances will likely continue to decline at a slower pace—reflecting growth in other Federal Reserve liabilities—until the FOMC judges that reserve balances are at an ample level. Thereafter, the FOMC will manage securities holdings as needed to maintain ample reserves over time.

Box 4. Developments in the Federal Reserve's Balance Sheet and Money Markets

The Federal Open Market Committee (FOMC) continued to reduce the size of the Federal Reserve's System Open Market Account (SOMA) portfolio. Loans extended under the Bank Term Funding Program—which made longer-term funding and liquidity available to eligible depository institutions amid the banking-sector developments of spring 2023 to help ensure the stability of the banking system and the ongoing provision of money and credit to the economy—have also decreased $106 billion to a level of $213 million since late June 2024.¹ Since the previous report, total Federal Reserve assets have decreased $413 billion, leaving the total size of the balance sheet at $6.8 trillion, $2.1 trillion smaller since the reduction in the size of the SOMA portfolio began in June 2022 (table A and figure A).²

Table A. Balance sheet comparison

Billions of dollars

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	January 29, 2025	June 26, 2024	Change (since June 2024)	Change (since Fed's balance sheet reduction began on June 1, 2022)
Assets
Total securities
Treasury securities	4,275	4,454	−179	−1,496
Agency debt and MBS	2,220	2,338	−118	−490
Unamortized premiums	247	264	−17	−90
Repurchase agreements	0	0	0	0
Loans and lending facilities
PPPLF	2	3	−1	−18
Discount window	3	7	−4	2
BTFP	0	107	−106	0
Other loans and lending facilities	8	11	−4	−27
Central bank liquidity swaps	0	0	0	0
Other assets	63	47	16	21
Total assets	6,818	7,231	−413	−2,097
Liabilities
Federal Reserve notes	2,298	2,302	−4	67
Reserves held by depository institutions	3,201	3,269	–68	–157
Reverse repurchase agreements
Foreign official and international accounts	375	390	−15	109
Others	122	490	−368	−1,843
U.S. Treasury General Account	812	744	67	31
Other deposits	176	154	22	−71
Other liabilities and capital	−165	−118	−47	−233
Total liabilities and capital	6,818	7,231	−413	−2,097

Note: MBS is mortgage-backed securities. PPPLF is Paycheck Protection Program Liquidity Facility. BTFP is Bank Term Funding Program. Components may not sum to totals because of rounding.

Source: Federal Reserve Board, Statistical Release H.4.1, "Factors Affecting Reserve Balances."

Reserves, the largest liability item on the Federal Reserve's balance sheet, have edged down $68 billion since late June 2024 to a level of about $3.2 trillion.³ Since the beginning of balance sheet runoff, reserves have been little changed because the reserve-draining effect of balance sheet runoff was largely offset by a $1.8 trillion decline in balances at the overnight reverse repurchase agreement (ON RRP) facility. Since June 2024, usage of the ON RRP facility has continued to decline to levels below $200 billion (figure B). Reduced usage of the ON RRP facility largely reflects money market mutual funds shifting their portfolios toward higher-yielding investments, including Treasury bills and private-market repurchase agreements.

Conditions in overnight money markets remained stable. The ON RRP facility continued to serve its intended purpose of supporting the control of the effective federal funds rate (EFFR), and the Federal Reserve's administered rates—the interest rate on reserve balances and the ON RRP offering rate—remained highly effective at maintaining the EFFR within the target range. Following the December 2024 FOMC meeting, the Federal Reserve made a technical adjustment to lower the ON RRP offering rate 5 basis points. The technical adjustment aligned the ON RRP offering rate with the bottom of the target range for the federal funds rate.

The Federal Reserve's deferred asset has increased $43 billion since late June to a level of around $221 billion.⁴ Negative net income and the associated deferred asset do not affect the Federal Reserve's conduct of monetary policy or its ability to meet its financial obligations.⁵

1. The remaining Bank Term Funding Program (BTFP) loans will mature by March 11, 2025. The BTFP was established under section 13(3) of the Federal Reserve Act with the approval of the Secretary of the Treasury. The BTFP offered loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions (DIs) against collateral such as U.S. Treasury securities, U.S. agency securities, and U.S. agency mortgage-backed securities. For more details, see Board of Governors of the Federal Reserve System (2024), "Bank Term Funding Program," webpage, https://www.federalreserve.gov/financial-stability/bank-term-funding-program.htm. Return to text

2. The last Federal Reserve Board statistical release H.4.1 ("Factors Affecting Reserve Balances") before the publication of the previous Monetary Policy Report on July 5, 2024, was dated June 26, 2024. As a result, this discussion refers to changes in the Federal Reserve's balance sheet since late June. Return to text

3. Reserve balances consist of deposits held at the Federal Reserve Banks by DIs, such as commercial banks, savings banks, credit unions, thrift institutions, and U.S. branches and agencies of foreign banks. Return to text

4. The deferred asset is equal to the cumulative shortfall of net income and represents the amount of future net income that will need to be realized before remittances to the Treasury resume. Although remittances are suspended at the time of this report, over the past decade and a half, the Federal Reserve has remitted over $1 trillion to the Treasury. Return to text

5. Net income is expected to turn positive again as interest expenses fall, and remittances will resume once the temporary deferred asset falls to zero. As a result of the ongoing reduction in the size of the Federal Reserve's balance sheet, interest expenses will fall over time in line with the decline in the Federal Reserve's liabilities. Return to text

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The FOMC will continue to monitor the implications of incoming information for the economic outlook

The FOMC is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will carefully assess incoming data, the evolving outlook, and the balance of risks. Its assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

In addition to considering a wide range of economic and financial data, the FOMC gathers information from business contacts and other informed parties around the country, as summarized in the Beige Book. The Federal Reserve has regular arrangements under which it hears from a broad range of participants in the U.S. economy about how monetary policy affects people's daily lives and livelihoods. In particular, the Federal Reserve has continued to gather insights into these matters through the Fed Listens initiative and the Federal Reserve System's community development outreach. Additionally, this year the Federal Reserve has begun a public review of its monetary policy framework. (See the box "Periodic Review of Monetary Policy Strategy, Tools, and Communications.")

Policymakers also routinely consult prescriptions for the policy interest rate provided by various monetary policy rules. These rule prescriptions can provide useful benchmarks for the consideration of monetary policy. However, simple rules cannot capture all of the complex considerations that go into the formation of appropriate monetary policy, and many practical considerations make it undesirable for the FOMC to adhere strictly to the prescriptions of any specific rule. Nevertheless, some principles of good monetary policy can be brought out by examining these simple rules. (See the box "Monetary Policy Rules in the Current Environment.")

Box 5. Periodic Review of Monetary Policy Strategy, Tools, and Communications

The Federal Reserve has begun its periodic public review of its monetary policy strategy, tools, and communication practices—the framework it uses to pursue its dual-mandate goals of maximum employment and price stability. Routine self-evaluation is healthy for any organization, and it is essential that the Federal Open Market Committee's (FOMC) monetary policy framework evolves as needed to best support the dual mandate amid an ever-changing economy. Accordingly, following the review that concluded in 2020, the FOMC indicated that it would carry out a thorough public review roughly every five years.

The review is focused on two specific areas: the FOMC's Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates the Committee's approach to monetary policy, and the Committee's policy communication tools. The Committee's 2 percent longer-run inflation goal is not a focus of the review.¹

Like the Federal Reserve's 2019–20 review of its monetary policy framework, the ongoing review will include outreach and public events attended by policymakers, community leaders, experts from outside the System, and other members of the public. As part of the public outreach associated with the review, the Federal Reserve Board will host a conference featuring economists and other analysts from outside the Federal Reserve System, who will discuss topics central to the review.²

The 2025 review will include a set of events hosted by the Federal Reserve as part of the Fed Listens initiative, which began with the FOMC's 2019–20 framework review and has continued since then. At Fed Listens events, the Board and Reserve Banks have engaged with a wide range of organizations—employee groups and union members, small business owners, residents of low- and moderate-income communities, workforce development organizations and community colleges, retirees, and others—to hear about how monetary policy affects peoples' daily lives and livelihoods.

FOMC participants discussed topics related to the review at the January 28–29, 2025, FOMC meeting, and these discussions will continue at subsequent meetings. At the end of the process, information and perspectives gathered during the review will inform policymakers' judgments about appropriate changes to the FOMC's monetary policy framework to best serve the American people.

1. See the November 22, 2024, press release "Federal Reserve Announces Additional Information about the Periodic Review of Its Monetary Policy Strategy, Tools, and Communications," available on the Board's website at https://www.federalreserve.gov/newsevents/pressreleases/monetary20241122a.htm. Return to text

2. See the September 20, 2024, press release "Federal Reserve Board Announces It Will Host the 2nd Thomas Laubach Research Conference on May 15–16, 2025," available on the Board's website at https://www.federalreserve.gov/newsevents/pressreleases/other20240920a.htm. Return to text

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Box 6. Monetary Policy Rules in the Current Environment

Simple interest rate rules relate a policy interest rate, such as the federal funds rate, to a small number of other economic variables—typically including the current deviation of inflation from its target value and a measure of resource slack in the economy. As part of their monetary policy deliberations, policymakers regularly consult the prescriptions of a variety of simple interest rate rules without mechanically following the prescriptions of any particular rule.

In 2024, the economy continued to make progress toward the Federal Open Market Committee's (FOMC) dual-mandate goals. Inflation moved a little closer to 2 percent in 2024 and ran well below its peak in 2022. While the labor market remains solid, labor market conditions generally eased. Accordingly, the simple policy rules considered here called for levels of the policy rate in 2024 that were, on average, lower than in the previous year. In support of its goals of maximum employment and inflation at the rate of 2 percent over the longer run, the FOMC has reduced the target range for the federal funds rate from 5-1/4 to 5-1/2 percent to 4-1/4 to 4-1/2 percent while continuing to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities.

Selected Policy Rules: Descriptions

In many economic models, desirable economic outcomes can be achieved over time if monetary policy responds to changes in economic conditions in a manner that is predictable and adheres to some key design principles. In recognition of this idea, economists have analyzed many monetary policy rules, including the well-known Taylor (1993) rule, the "balanced approach" rule, the "adjusted Taylor (1993)" rule, and the "first difference" rule.¹ Table A shows these rules, along with a "balanced approach (shortfalls)" rule, which responds to the unemployment rate only when it is higher than its estimated longer-run level. All of the simple rules shown embody key design principles of good monetary policy, including the requirement that the policy rate should be adjusted by enough over time to ensure a return of inflation to the central bank's longer-run objective and to anchor longer-term inflation expectations at levels consistent with that objective.

Table A. Monetary policy rules

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Taylor (1993) rule	$R_t^{T93} = r_t^{LR} + \pi_t + 0.5 (\pi_t - \pi^{LR}) + (u_t^{LR} – u_t)$
Balanced-approach rule	$R_t^{BA} = r_t^{LR} + \pi_t + 0.5(\pi_t - \pi^{LR}) + 2(u_t^{LR} – u_t)$
Balanced-approach (shortfalls) rule	$R_t^{BAS} = r_t^{LR} + \pi_t + 0.5 (\pi_t - \pi^{LR}) + 2min \{ (u_t^{LR} – u_t), 0\}$
Adjusted Taylor (1993) rule	$R_t^{T93adj} = max \{ R_t^{T93} – Z_t , ELB \}$
First-difference rule	$R_t^{FD} = R_{t-1} + 0.5(\pi_t - \pi^{LR}) + (u_t^{LR} – u_t) – (u_{t-4}^{LR} – u_{t-4})$

Note: $R_t^{T93}$ , $R_t^{BA}$ , $R_t^{BAS}$ , $R_t^{T93adj}$ , and $R_t^{FD}$ represent the values of the nominal federal funds rate prescribed by the Taylor (1993), balanced-approach, balanced-approach (shortfalls), adjusted Taylor (1993), and first-difference rule, respectively.

$R_{t-1}$ denotes the average midpoint of the target range for the federal funds rate in quarter $t−1$ , $u_t$ is the average unemployment rate in quarter $t$ , and $\pi_t$ denotes the 4-quarter core personal consumption expenditures price inflation for quarter $t$ . In addition, $u_t^{LR}$ is the rate of unemployment expected in the longer run, and $r_t^{LR}$ is the level of the neutral real federal funds rate in the longer run that is expected to be consistent with sustaining maximum employment and keeping inflation at the Federal Open Market Committee’s 2 percent longer-run objective, represented by $\pi^{LR}$ . $Z_t$ is the cumulative sum of past deviations of the federal funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal funds rate below an effective lower bound (ELB) of 12.5 basis points. Box note 1 provides references for the policy rules.

All five rules feature the difference between inflation and the FOMC's longer-run objective of 2 percent.² The five rules use the unemployment rate gap, measured as the difference between an estimate of the rate of unemployment in the longer run ( $u_t^{LR}$ ) and the current unemployment rate; the first-difference rule includes the change in the unemployment rate gap rather than its level.³ All but the first-difference rule include an estimate of the neutral real interest rate in the longer run ( $r_t^{LR}$ ).⁴

Unlike the other simple rules featured here, the adjusted Taylor (1993) rule recognizes that the federal funds rate cannot be reduced materially below the effective lower bound (ELB). By contrast, the standard Taylor (1993) rule prescribed policy rates that, during the pandemic-induced recession, were far below zero. To make up for the cumulative shortfall in policy accommodation following a recession during which the federal funds rate is constrained by its ELB, the adjusted Taylor (1993) rule prescribes delaying the return of the policy rate to the (positive) levels prescribed by the standard Taylor (1993) rule.

Policy Rules: Limitations

As benchmarks for monetary policy, simple policy rules have important limitations. One of these limitations is that the simple policy rules mechanically respond to only a small set of economic variables and thus necessarily abstract from many of the factors that the FOMC considers when it assesses the appropriate setting of the policy rate. In addition, the structure of the economy and current economic conditions differ in important respects from those prevailing when the simple policy rules were originally devised and proposed. Relatedly, the prescriptions of the rules incorporate values of the unemployment rate in the longer run and the neutral real interest rate in the longer run, which are economic concepts that are not only difficult to measure, but can also change over time as the economy evolves. Finally, simple policy rules are not forward looking and do not allow for important risk-management considerations, associated with uncertainty about economic relationships and the evolution of the economy, that factor into FOMC decisions.

Selected Policy Rules: Prescriptions

Figure A shows historical prescriptions for the federal funds rate under the five simple rules considered. For each quarterly period, the figure reports the policy rates prescribed by the rules, taking as given the prevailing economic conditions and survey-based estimates of $u_t^{LR}$ and $r_t^{LR}$ at the time. All of the rules considered called for highly accommodative monetary policy in response to the pandemic-driven recession, followed by tighter policy as inflation picked up and labor market conditions strengthened. The policy rates prescribed by these rules have generally declined since 2023 because inflation moved closer to 2 percent and the unemployment rate increased somewhat. The current prescriptions from these rules are within the current target range for the federal funds rate of 4-1/4 to 4-1/2 percent except for the first-difference rule, which prescribes a somewhat higher policy rate. All the prescriptions remain higher than survey-based estimates of the longer-run value of the federal funds rate.

A. Historical federal funds rate prescriptions from simple policy rules

1. The Taylor (1993) rule was introduced in John B. Taylor (1993), "Discretion versus Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy, vol. 39 (December), pp. 195–214. The balanced-approach rule was analyzed in John B. Taylor (1999), "A Historical Analysis of Monetary Policy Rules," in John B. Taylor, ed., Monetary Policy Rules (Chicago: University of Chicago Press), pp. 319–41. The adjusted Taylor (1993) rule was studied in David Reifschneider and John C. Williams (2000), "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, vol. 32 (November), pp. 936–66. The first-difference rule is based on a rule suggested by Athanasios Orphanides (2003), "Historical Monetary Policy Analysis and the Taylor Rule," Journal of Monetary Economics, vol. 50 (July), pp. 983–1022. A review of policy rules is provided in John B. Taylor and John C. Williams (2011), "Simple and Robust Rules for Monetary Policy," in Benjamin M. Friedman and Michael Woodford, eds., Handbook of Monetary Economics, vol.3B (Amsterdam: North-Holland), pp. 829–59. The same volume of the Handbook of Monetary Economics also discusses approaches to deriving policy rate prescriptions other than through the use of simple rules. Return to text

2. The rules are implemented as responding to core personal consumption expenditures (PCE) price inflation rather than to headline PCE price inflation because current and near-term core inflation rates tend to outperform headline inflation rates as predictors of the medium-term behavior of headline inflation. Return to text

3. Implementations of simple rules often use the output gap as a measure of resource slack in the economy. In the rules described in table A, the output gap has been replaced with the unemployment rate gap (using a relationship known as Okun's law) because that gap better captures the FOMC's statutory goal to promote maximum employment. Movements in these alternative measures of resource utilization tend to be highly correlated. Return to text

4. The neutral real interest rate in the longer run ( $r_t^{LR}$ ) is the level of the real federal funds rate that is expected to be consistent, in the longer run, with maximum employment and stable inflation. Like $u_t^{LR}$ , $r_t^{LR}$ is determined largely by nonmonetary factors. The first-difference rule shown in table A does not require an estimate of $r_t^{LR}$ , a feature that is touted by proponents of such rules as providing an element of robustness. However, this rule has its own shortcomings. For example, research suggests that this sort of rule often results in greater volatility in employment and inflation than what would be obtained under the Taylor (1993) and balanced-approach rules. Return to text

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Last Update: February 25, 2025

Board of Governors of the Federal Reserve System

Monetary Policy Report – February 2025

Monetary Policy

Monetary Policy Report submitted to the Congress on February 7, 2025, pursuant to section 2B of the Federal Reserve Act

The Federal Open Market Committee lowered the target range for the federal funds rate

Figure 47. Selected interest rates

The FOMC has continued the process of significantly reducing its holdings of Treasury and agency securities

Figure 48. Federal Reserve assets and liabilities

Box 4. Developments in the Federal Reserve's Balance Sheet and Money Markets

Table A. Balance sheet comparison

Figure A. Federal Reserve assets

Figure B. Federal Reserve liabilities

The FOMC will continue to monitor the implications of incoming information for the economic outlook

Box 5. Periodic Review of Monetary Policy Strategy, Tools, and Communications

Box 6. Monetary Policy Rules in the Current Environment

Selected Policy Rules: Descriptions

Table A. Monetary policy rules

Policy Rules: Limitations

Selected Policy Rules: Prescriptions

Figure A. Historical federal funds rate prescriptions from simple policy rules