In January 2016, Janet Yellen, finishing her second year as chair of the Board of Governors of the U.S. Federal Reserve, was navigating uncharted waters along a number of dimensions. She had inherited an unruly FOMC. Over the past year, some members had publicly called for more expansionary Fed policy; others called for an end to the expansionary Fed policy; and still others worried aloud that Fed policy might be creating bubbles and risks to financial stability. And Yellen 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 that balance sheet? Relatedly, when should it begin to sell some of its $2.46 trillion in Treasury holdings? And was the December 2015 increase of the federal funds rate—the start of the first tightening phase in more than a decade—the right decision, or would the U.S. economy falter and force the Fed to reverse course? This 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 "Yellen, Guidance, and the Exit Strategy," (GEM-0121) and may be used in its place.
