Factbox: U.S. Fed's new plan to normalize monetary policy

(Reuters) - Federal Reserve policymakers on Wednesday issued a revised blueprint for eventually returning monetary policy to a more normal setting, after years of near-zero interest rates and trillions of dollars of stimulus. A lot has changed since they first agreed on a set of "exit strategy principles" in June 2011, including the addition of more than $1 trillion of bonds to the Fed's bloated balance sheet and the availability of new tools to control interest rates. The new plan makes clear that the Fed will rely on the federal funds rate as its key policy tool, and will use the interest it pays on excess reserves as its primary lever to adjust the federal funds rate. Below is an outline of the new path to normal, which the Fed now calls its "policy normalization principles and plans," with comparisons to the earlier principles. INTEREST RATES When the time comes to reduce accommodative monetary policy, Fed officials will begin by raising the target range for the federal funds rate. Its main tool for moving the key fed funds rate into the target range will be adjusting the interest it pays on excess reserve balances that banks keep at the Fed. The Fed will also use the overnight reverse repurchase rate, a new facility the New York Fed has developed to allow better control over short-term rates, "as needed to help control the federal funds rate." It will use this rate "only to the extent necessary" and will phase it out when it is no longer needed. In the 2011 version, the Fed said it would use the interest rate on excess reserves and adjustments to bank reserves to bring the fed funds rate toward its target. The reverse repo tool had not yet been tested. Over the winter, the Fed's testing of this tool had led market participants to expect it would play a major role when the Fed begins tightening policy, but the newly published plan makes clear it will be relegated to a supportive and temporary role. BALANCE SHEET REINVESTMENT The Fed currently reinvests the proceeds of maturing bonds back into its $4.4 trillion portfolio. The new plan calls for the Fed to end or phase out the reinvestments after it begins to raise rates. The timing of the phase-out will depend on economic and financial conditions. In 2011, ending reinvestments was envisioned as a first step toward normalization, to take place even before rates were to rise. ASSET SALES The Fed does not plan to reduce holdings of asset-backed securities through outright sales, "although limited sales might be warranted in the longer run to reduce or eliminate residual holdings," it said in the newly published plan. It will instead allow the portfolio to shrink as the securities mature or homeowners prepay their mortgages. Any planned sales would be communicated to the public in advance. In 2011, Fed officials envisioned starting to sell those securities once rate hikes began, and eliminating them from the Fed's balance sheet altogether over a three- to five-year period. BALANCE SHEET The Fed plans in the longer run to "Hold no more securities than necessary to implement monetary policy efficiently and effectively." It also plans to hold primarily Treasury securities, rather than the mix of Treasuries and housing-backed bonds it currently holds. (Reporting by Ann Saphir; Editing by Paul Simao and Chizu Nomiyama)