In February 2018, Jay Powell replaced Janet Yellen as chair of the Board of Governors of the US Federal Reserve (the Fed). Powell, a board member at the Fed since May 2012, knew that his job was to normalize US monetary policy, which had been exceptionally expansionary for a full decade. He also knew that short rates had been too low for too long?the federal funds rate had been near 0% for seven years and even now was at a historically low level of just 1.25%?perhaps sowing the seeds for future financial crises. Powell faced at least three pressing questions: How, after the Fed's balance sheet had expanded fourfold in a few short years, should the Fed guide the public through the eventual unwinding of its $4.4 trillion balance sheet? Relatedly, when should it begin to sell some of its $2.46 trillion in Treasury holdings? Could the US economy?and, indeed, the global economy?weather a substantial tightening phase, or would the US economy falter and force the Fed to reverse course?
The focus of this case is on factors affecting the current and prospective levels of US long-term interest rates. The case also presents a brief history of Fed policy and asks the reader to consider the best course of action for the Fed to take. This case was written as an updated version of "Janet Yellen: Navigating Uncharted Waters" (GEM-0134), and may be used in its place. It is used at Darden in the second-year elective, "Global Financial Markets." It would also be suitable for any macro or international macroeconomics course.