By Brendan Derry, Contributing Writer

This past week, Janet Yellen gave a historic speech on behalf of the Federal Reserve System. Yellen currently serves as the Chairman of the Federal Open Market Committee and has the responsibility of explaining the System’s plans for the United States’ economic future. The most significant announcement was to end policies put in place in 2008 that ultimately saved the financial sector from a complete collapse.

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Interest rates and inflation policies were discussed as the government will attempt to balance their fluctuations while beginning the process of shrinking the balance sheet of the Federal Reserve. These drastic changes have the possibility of ending with positive growth or a potential market collapse.

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Yellen began her speech by announcing the committee’s decision to maintain the target range for target range for the Federal Funds Rate at 1:1.25% hoping to support the job market and control inflation. This rate directly affects the interest rates for consumers and businesses and the goal is to maintain the target range to spur economic growth through spending and an increase in lending from accredited financial institutions. By controlling this rate they hope to return inflation to the original goal of 2% inflation which has been above their target range for years now.

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It was stated that this year shows a moderate pace of expansion in economic activity and that spending and investments have picked up. This growth exemplifies improved economic conditions on an international scale. The committee expects growth to begin again within the next few quarters. Yellen goes on to explain that these coming quarters will vary in rates of growth but states that everything is set to grow with a short drop due to the economic effects of the hurricanes ravaging the south.

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Once these damages are assessed and taken care of, the trend of growth is set to return. She continued by explaining how services like wireless phone plans are keeping inflation low, while the recent increases in the price of gasoline due to natural disasters will increase inflation. These calculations still project a positive outcome by moving forward with the committee’s decision.

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As a part of their plan, the FOMC has decided to move forward with a normalization plan created in June to reduce the Fed’s $4.5 trillion balance sheet. This is an incredibly lofty goal that has many economists worried. For this plan to be successful, the policy put into place in 2008 known as quantitative easing must end. Quantitative easing is an unconventional policy typically used in crisis situations to aid the financial sector by allowing central banks to purchase government securities to keep interest rates low while increasing the supply of money.

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This is accomplished by aiding financial institutions with the hope of an increase in lending and liquidity. It has been seen as successful in some regards but it caused the Fed to go further into debt due to the increased allowances for purchasing assets. The plan now is to sell off assets to shrink the enormous balance sheet has been criticized for being too aggressive. A large shift such as this could put pressure on financial markets and cause the rapid increase of interest rates for these lending institutions. The solution to this was to follow through gradually, only shrinking the balance sheet by $10 billion per month initially. The committee felt that a slow and consistent approach will not upset the market balance and eventually a sense of normalcy will return to the Fed’s financial policies.

The Fed does expect that the current economic position will allow for gradual increases in strength combined with a stable job market. The outlook is positive but it will take time to see whether or not these policies will support the expected economic expansion. Yellen does state that the beginning of the balance sheet normalization program will lead to an uncertain future but the expectation of success is enough for now.