BERNANKE:  If we see continued improvement and we have confidence that that is going to be sustained, then we could in -- in the next few meetings, we could take a step down in our pace of purchases. Again, if we do that, it would not mean that we are automatically aiming toward -- toward a complete winddown. Rather, we would be looking to beyond that to see how the economy evolves, and we could either raise or lower our pace of purchases going forward. 

Again, that is dependent on the data. If the outlook for the labor market improves and we are convinced that that is sustainable, we will respond to that. If the recovery were to falter, if inflation were to fall further and we felt that the current level of monetary accommodation was still appropriate, then we would delay that process. 

BRADY: At the pace we're going, do you think it's likely these actions will begin before Labor Day? 

BERNANKE: I don't know. It's gonna depend on the data. 

The other important point to make here is when we're doing purchases, if we continue to do purchases, we're adding stimulus. And people act like if we dial the rate of purchases down somehow we're tightening monetary policy. What we're actually doing is adding less stimulus.

Because the outlook is uncertain, I cannot be sure which way—up or down—the next change will be. But at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook. At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases. Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment.

....

There is a risk is that market participants could overreact to any move in the process of normalization. Indeed, there is some risk that market participants could overreact even before normalization begins, when the pace of purchases is adjusted but the level of accommodation is still increasing month by month.11 Not only could such responses threaten financial stability, but also they might make it harder to calibrate monetary policy appropriately to the economic situation. We will need to think long and hard about how best to develop policy in a way that enables us to respond flexibly to a changing economic outlook, but in a way that is not disruptive to the economy.

Our view is that asset purchases work primarily through the asset side of the balance sheet by transferring duration risk from the private sector to the central bank’s balance sheet.  This pushes down risk premia, and prompts private sector investors to move into riskier assets.  As a result, financial market conditions ease, supporting wealth and aggregate demand.  The fact that such purchases increase the amount of reserves in the banking system and the size of the monetary base is a byproduct—not the goal—of these actions.

Based on the stated views of the Committee regarding the flexibility in pace of purchases, I believe that labor market conditions warrant scaling back the pace of purchases as soon as our next (June 18-19) meeting. Moreover, unless we see a significant reversal in current trends that jeopardizes my forecast of near 7 percent unemployment rate by the end of this year, then I anticipate that we could end the program before year-end.

The so-called quantitative easing that has swollen the Fed balance sheet to $3.32 trillion may lead to “complications” as the central bank begins to exit the policy, George said. Risks include a jump in longer-term inflation expectations and a “painful adjustment” for investors when the benchmark interest rate is eventually raised, she said.

“Continuing this current policy outside of the crisis, outside of a recession, poses risks to us in the long term,” George said.

Growth has resumed, however, and it appears as if it’s limited, in large part, by structural factors that monetary policy is not capable of offsetting. In this situation, the benefit-cost trade-off associated with further monetary stimulus does not look promising. The Fed seems to be unable to improve real growth, despite striving mightily over the last few years, and further increases in the size of our balance sheet raise the risks associated with the “exit process” when it’s time to withdraw stimulus. This is why I do not support the current asset purchase program.

“It’s very important to protect the target both from above, which gets so much attention, but from below as well,” Kocherlakota said.

He said he’s already “in favor of more accommodation” and further declines in the inflation rate would make him “even more” supportive of additional stimulus.

"I wouldn't have gone down this asset-purchase path. I'm in the camp that we should taper and stop right now," Lacker said in a "Squawk Box" interview from the 2013 Credit Markets Symposium in Charlotte, N.C. "You have to prepare markets, if it was up to me, if you made me dictator, that's what I would do."

"People have been focusing on unemployment a lot but maybe are a little bit blinded that the inflation numbers have come in very low," St. Louis Federal Reserve Bank James Bullard told reporters on the sidelines of the Minsky conference hosted by the Levy Institute in New York

...

"I'm getting concerned by that," Bullard said, adding that inflation running below the policy-setting Federal Open Market Committee's price stability target gives the group "room to maneuver."

Pressed by reporters to indicate exactly what "room to maneuver" means, Bullard - a voter on the FOMC this year - said, "I think if inflation continued to go down I'd be willing to increase the pace of (asset) purchases.

"As it stands right now inflation has drifted lower on a PCE basis. This is not what I expected and I think inflation should be closer to target than it is."

In my view, a case can be made that we have seen sufficient improvement to begin tapering our asset purchase program with the objective of bringing it to an end before year-end.

It is not yet clear that we will achieve a justifiable bang for the trillions of bucks the Fed has flooded the economy with. Only time will tell if the efficacy of quantitative easing we have undertaken was justifiable in regard to job creation and delivering on the second component of our dual mandate.

Bullard, one of the first officials to urge slowing the pace of bond buying in 2013 if economic conditions allowed, said today policy makers probably will “slowly ratchet down the pace of purchases” as the economy continues to improve.

“That’s a great policy, serves us very well,” Bullard said today. “And the notion that when a little bit weaker data comes in or a little bit stronger data comes in, well the Fed policy is going to adjust in response to that -- so I think that’s been a very good development.”

The analogy I like to use is that of Ritalin or Adderall.  You can condition and motivate the behavior by applying that kind of drug, but there are also dangers to overprescribing it.  It doesn't go on forever because you can kill the patient.

The economy is making progress in recovering from a deep recession. I have acknowledged the important role that low rates must play in supporting this recovery even as I have raised significant concerns about the current stance of zero interest rates for an extended period. Can efforts to speed up the pace of growth with untested monetary policy tools be effective? The FOMC is carefully considering such issues and believes the risks are worth taking. However, our limited understanding of the possible effects of unconventional policy tools causes me to give more weight to their risks and eventual consequences.

In raising these issues, it is not my goal to prematurely withdraw support. It is critical, however, to ensure we transition from a crisis-type policy stance of aggressive easing to one of accommodation that allows markets, households and businesses to begin to normalize their expectations for interest rates. In my view, therefore, we should not underestimate the risk of an extended period of zero interest rates and the accompanying incentives that may lead to future financial imbalances. Such imbalances could unwind in a disruptive manner and cause the labor market recovery to stumble. I am concerned that monetary policy at its current settings is overly accommodative relative to the long and variable lags with which it operates.

Central banks must focus on achieving sustainable growth in the long run and be patient in pursuing its longer-run goals. Attempting to speed up the recovery process creates risks that, if realized, could lead the economy down a more difficult road back to full employment and price stability.