When the FOMC says its decisions are “data–dependent,” I view this as shorthand for this more comprehensive process of parsing economic and financial information to evaluate current economic conditions, and then determining what that information implies about the medium–run economic outlook and the risks around that outlook. The medium run is the relevant time horizon for monetary policy because it takes time for monetary policy to have an effect throughout the economy.

I don’t view this “data–dependent” approach to policymaking as something new. Instead, I view it as a step on the journey back from extraordinary to more ordinary monetary policymaking. You will recall that one of the policy tools the FOMC used during the recession and early part of the recovery was explicit forward guidance. That guidance changed over time:
• It began as qualitative guidance offered in December 2008 when the FOMC indicated that weak economic conditions were likely to warrant exceptionally low levels of the fed funds rate for “some time.”
• This changed to calendar–date guidance in August 2011 when the FOMC said that it anticipated an exceptionally low fed funds rate at least through mid–2013.
• Guidance based on economic thresholds was offered in December 2012 when the Committee said that it anticipated that the 0–to–1⁄4 percent target range for the fed funds rate would be appropriate at least as long as the unemployment rate remained above 6 1⁄2 percent, inflation between one and two years ahead was projected to be no more than a half percentage point above the Committee’s 2 percent longer–run goal, and longer–term inflation expectations continued to be well anchored.
• A year later, in December 2013, the FOMC blended state-contingent forward guidance with an element of calendar-date forward guidance, indicating the information it would consider in determining how long to maintain highly accommodative monetary policy as well as an assessment that it would likely be “well past the time that the unemployment rate declines below 6 1⁄2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer–run goal.”
In March 2014, the FOMC abandoned quantitative thresholds and moved toward the type of forward guidance we have today, which links the path of policy to the Committee’s assessment of both realized and expected progress toward its dual–mandate objectives. The guidance continued to provide a time element by indicating it was likely that liftoff would not occur for “a considerable time after the asset purchase program ends.”
After the purchase program ended, using it as a benchmark for guidance became less salient. In January 2015, the FOMC replaced this benchmark and simply said it judged it could be patient in beginning to normalize policy. In March, the FOMC fine–tuned this by stating the two criteria it would use to assess when it would be appropriate to make the first fed funds rate increase. These criteria were further improvement in the labor market and reasonable confidence that inflation would move back to its 2 percent objective over the medium term. Since December’s liftoff, the Committee has continued to indicate that the path of policy will depend on progress toward our goals, and that while the actual path policy takes will depend on the economic outlook as informed by incoming data, the Committee’s current assessment is that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.
This evolution in the FOMC’s forward rate guidance represents a return to more normal times. While explicit forward guidance was used as a policy tool during the recession and early in the recovery, in more normal times, away from the zero lower bound, I believe forward guidance should be viewed more as a communications device.

In his remarks, Bullard said communicating the policy path this way "could be viewed as an inadvertent calendar-based commitment to increase rates."

“Maybe we should get away from how many hikes we should do in a year,” he told reporters after his presentation. “You would like to move on good news about the U.S. economy, reasonably good economic growth, further improvement in labor market, confidence that inflation is coming back to path.”

We don’t know precisely how the economy will evolve; this argues against deciding to end reinvestments after some particular period of time has elapsed. Instead, because some policy accommodation is provided via the balance sheet, it would seem better to base the decision about reinvestments on economic conditions and the outlook, just as we do with the funds rate path. Indeed, the economic conditions and outlook that would support reducing the degree of monetary accommodation by gradually raising the fed funds rate would also tend to support slowly reducing the size of the balance sheet, which would result when reinvestments end. Thus, in my view, the level of the fed funds rate might be used as a guide to when to end reinvestments – in this case, both our fed funds rate path and our balance-sheet policy would be data dependent. I would be comfortable ending reinvestments after we have a few more funds rate increases under our belt, perhaps when the funds rate has reached 1 percent or so. This is my interpretation of “well underway,” but as Chair Yellen indicated in her December press briefing, the FOMC has not given further guidance on this.

We dropped the reference to balance on the risks -- that was deliberate -- which should send a signal that we are assessing non-U.S. economic conditions, global financial conditions and the impact of both of those on underlying U.S. economic conditions

Ryssdal: Now that this first hike is behind you, how hopeful are you to get the Fed out of the spotlight, so that every discussion about the economy isn't, "Oh my God, what's the Fed gonna do?"

Powell: Let me say that I'll be glad to stop talking about the first rate increase. But it's the case that there's been too much focus, and it's understandable I guess, on just this one rate increase. Really what's important to people is, are employers hiring? Are their kids getting good job opportunities? Are their wages increasing? Are they feeling confident about the future, are they able to afford a home, things like that. And that's what we've tried to focus on, and that's what the public needs to be focused on. It would be just great to see the Fed get out of the headlines and let people get to more normal considerations.

So why do I lack confidence in our ability to achieve our 2 percent inflation target over the medium term? One reason is that there exist a number of important downside risks to the inflation outlook. Now I recognize that “medium term” is somewhat vague. To a central banker it can mean two to three years or three to four years. It is more a term of art than science.

So what are these inflation risks? With prospects of slower growth in China and other emerging market economies, low energy and import prices could exert downward pressure on inflation longer than most anticipate. That’s a risk. In addition, while many survey-based measures of long-term inflation expectations have been relatively stable in recent years, we shouldn’t take them as confirmation that our 2 percent target is assured. In fact, some survey measures of inflation expectations have ticked down in the past year and a half. Furthermore, measures of inflation compensation derived from financial markets have moved down to quite low levels in recent months. These measures could reflect either lower expectations of inflation or a heightened concern over the nature of the economic conditions that will be associated with low inflation. Adding to my unease is anecdotal evidence: I talk to a wide range of business contacts, and virtually none of them are mentioning rising inflationary or cost pressures. No one is planning for higher inflation. My contacts just don’t expect it.

Once the Federal Reserve lifts rates off near-zero levels, it will have to reconsider its communication on tracking inflation, Mr. Lockhart said. “I think it [the communication] will have to shift to a new phase of describing how we’re going to be monitoring inflation” once the Fed begins tightening, he said in a question-and-answer session with reporters here.

Dudley said that liftoff won’t come as any surprise to investors when it happens, though he did not rule out some market response when the Fed decides to move.

"The good news is that this is probably the most well advertised, discussed, thought about, mused-over prospect of beginning a normalization of monetary policy in history," he said. "I’m not looking for a big reaction."

As a Fed policymaker, I strive to be clear in my communications. But I can’t tell you today precisely what I’d favor doing in the future, because that future remains uncertain.

The Federal Reserve's accountability structure has been largely stable since the 1970s reforms. At the same time, the Federal Reserve has greatly augmented its public communications about its economic outlook and its policy strategy.
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This increased transparency has been a key complement to the Fed's independence and accountability by regularly demonstrating that the Fed has been appropriately pursuing its mandated goals. Transparency can also make monetary policy more effective by helping to guide the public's expectations and clarify the Committee's policy intentions.

What is important for attaining the Federal Reserve’s mandated objectives is not that monetary policy is described in terms of a formal prescriptive rule, but rather that the FOMC’s intentions and strategy are well understood by the public. This argues for clear communication through the FOMC meeting statements and minutes, the FOMC’s statement concerning its longer-term goals and monetary policy strategy, the Chair’s FOMC press conferences and testimonies before Congress, and speeches by the Chair and other FOMC participants. But it also is important that the strategy be the “right” reaction function. This means a policy approach that responds appropriately to important factors beyond the two parameters of the Taylor Rule—the output gap estimate and the rate of inflation.

There is an important caveat, though, to my comment downplaying the importance of the exact date of lift-off. It is critically important to me that when we first raise rates the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases. If we do not, then markets might construe an early liftoff as a signal that the Committee is less inclined to provide the degree of accommodation than I think is appropriate for the timely achievement of our dual mandate objectives. I would view this as an important policy error.

We talk a lot about data dependence, but what does that really mean? To me, it involves the following: 1) evaluating how the new information alters the outlook and the assessment of risks around that outlook; and 2) adjusting my expected path for policy in a way that keeps us on course to achieve our dual mandate objectives in a timely manner. So, if in the coming months inflation rises more quickly than I currently anticipate and appears to be headed to undesirably high levels, then I would argue to tighten financial conditions sooner and more aggressively than I presently do. If instead inflation headwinds persist, I would advocate a more gradual approach to normalization than I currently envision.

Bullard said there should be a news conference by the Fed chief after every meeting, instead of the current every other meeting schedule. "You'd smooth it out, making every meeting the same. There's no additional importance given to any meeting," he said.