In fact, changing the target range for the federal funds rate—as the Fed began doing late last year after holding off since the Great Recession—“is our primary means of adjusting the stance of monetary policy,” said Yellen. “Our balance sheet is not intended to be an active tool for monetary policy in normal times. We therefore do not plan on making adjustments to our balance sheet normalization program.” That being said, she added that the FOMC would be ready to the reinvestments “if a material deterioration in the economic outlook were to warrant a sizable reduction in the federal funds rate.”

At the FOMC's September meeting, the committee decided to maintain its current target for the federal funds rate. “We continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate,” said Yellen.

That expectation, she added, is “based on our view that the federal funds rate remains somewhat below its neutral level—that is, the level that is neither expansionary nor contractionary and keeps the economy operating on an even keel.” She said that the neutral rate currently appears to be
“quite low by historical standards,” which would suggest that short-term interest rates wouldn't have to rise much further to get to a neutral policy stance.

“But we expect the neutral level of the federal funds rate to rise somewhat over time, and, as a result, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion,” Yellen said. “Indeed, FOMC participants have built such a gradual path of rate hikes into their projections for the next couple of years.” She pointed out, though, that the Fed will be watching inflation data over the next several months