I think the committee participants who have spoken out on this topic {i.e., who objected to the calendar-based nature of teh "considerable time" guidance} recently want to make sure that we have the flexibility, that the committee has the flexibility to respond to unfolding developments. They want to make sure that if progress really does turn out to be faster than we would expect, that the committee will be in a position to start sooner tightening monetary policy.

They do not want to be locked into something that the markets see as a calendar-based and firm commitment, and so they want to emphasize data dependence of our policy and make sure that we have appropriate flexibility.

But I agree with that.  As I said earlier, I think we do have any mechanical interpretation  that applies to this.  It, of course, gives an impression about what we think will be appropirate, but there is no mechanical interpretatin.

I've said repeatedly -- and I want to say again -- that if events surprise us, and we're moving more quickly toward our objectives, and the committee sees a need to move sooner or later, depending on what the data is, that we do feel -- I do feel we have the flexibility to move. And it is important for markets to understand that there is uncertainty and that the statement is not some sort of firm promise about a particular amount of time.

In addition, given the uncertainties surrounding our forecasts of the pace of labor market improvement and the degree of remaining slack, monetary policy has to be determined largely by incoming data and the signals that data provide about the health of labor markets. If the economy disappoints we should be in no rush to raise short-term rates, but if the economy improves more quickly than anticipated we should raise short term rates earlier. Thus, we should be moving away from providing date-based forward guidance, and instead focus on what incoming data tell us about reaching full employment and 2 percent inflation within a reasonable time period.

...

In fact, I actually hold the view that as we approach levels of unemployment that many consider “full employment,” the Fed should no longer issue guidance on the approximate timing of any monetary policy changes.

I do not intend this to reduce transparency in monetary policymaking. Rather, I simply want to acknowledge that any reference to calendar dates has the potential to be inaccurate. The date of “liftoff” from near-zero short-term rates is highly dependent on how the economy actually evolves – in other words, is going to be tied to the current and expected path of inflation and employment. We are getting close enough to targets that, given the uncertainty around forecasts of these variables, incoming data that cause Federal Reserve policymakers to significantly change our outlook for the economy will shift any expected lift-off date forward or backward in time. So, again, reference to calendar dates as we approach targets has the potential to be inaccurate.

In addition to taking another step to taper asset purchases, in July, the FOMC maintained its forward guidance on interest rates.  This guidance indicated that given our assessment of realized and expected progress toward our dual-mandate objectives, it will likely be appropriate to maintain the current 0-to-¼ percentage point range for the federal funds rate for a considerable period after the asset purchase program ends.  With the end of the program nearing, I believe it is again time for the Committee to reformulate its forward guidance.  The forward guidance the FOMC has offered for the path of the policy interest rate has undergone several changes along the way as we’ve moved from the extraordinary times of financial crisis and deep recession to recovery and expansion.  The guidance has tied the eventual liftoff of the fed funds rate from zero to a calendar date, to a numerical threshold for the unemployment rate, and, more recently, to qualitative information rather than to quantitative measures.

While it might sound best to simply give a date about when liftoff is likely to occur, I believe using a calendar date at this point would be poor communication.  It could mislead the public into thinking that policy is on a pre-set course.  If the public doesn’t understand that policy is dynamic and based on the economic outlook, then a change in the guidance can create its own disruption.  Well-formulated forward guidance also has to recognize that economic conditions can evolve differently than anticipated.  For example, over the past year the improvement in the unemployment rate has been faster than the FOMC anticipated just a year ago.  My preference is for forward guidance to convey that changes in the stance of policy will be calibrated to the economy’s actual progress and anticipated progress toward our dual-mandate goals, and to the speed with which that progress is being achieved.  This latter piece recognizes the importance of policy to be forward looking: A faster pace of progress toward our goals would argue for a faster return to normal, while a more subdued pace would argue for a slower return.

ASMAN: Well, as you mentioned, you were -- you were not only a hedge fund guy, a Federal Reserve officer, etc. You have a lot of touts. Most people didn't realize you were also a poet. Earlier, you talked about these dot charts that the Fed has come out with to describe what various Fed officials believe and now you think maybe it's time to get rid of them. And you put that dissent in the form of a poem, which I'm going to read.

"We gave you form so you'd inform about the price of dough, but all you've done is make for fun, and this we didn't know. So out, damned dot! Out with the lot! It's clearly time to go."

You know, I've got to tell you, it sounds a little like Dr. Seuss, Richard.

FISHER: I was channeling Dr. Seuss, David.

Short-term interest-rate markets have for months priced in a slower tempo of increases than policy makers themselves forecast. Thats risky because the misalignment, a bet against a rate path that the central bank alone controls, could lead to volatility if traders have to adjust rapidly, Lacker said.

When there is that kind of gap, it gets your attention, Lacker, a consistent critic of the Feds record easing who votes on policy next year, said in an Aug. 1 interview at his Richmond office overlooking the James River. It wouldnt be good for it to be closed with great rapidity.

Investors may also be giving too much credence to a phrase in the Feds statement that even after employment and inflation are close to its goals, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.

They may be placing more weight on that than I think it deserves, said Lacker, who dissented against his colleagues at every meeting of the FOMC in 2012. They may think we have more conviction about that than we do.

To get a sense of the views that members of our committee hold, included in the monetary policy report is a summary of economic projections that all participants in the FOMC provided at the beginning of our June meeting. So these projections are just that. They depend on each participant's own personal economic outlook, and they are not a policy statement of the FOMC, but they provide some sense of concretely what participants expected at the beginning of that meeting.

In light of the considerable efforts under way to implement a macroprudential approach to enhance financial stability and the increased focus of policymakers on monitoring emerging financial stability risks, I see three key principles that should guide the interaction of monetary policy and macroprudential policy in the United States.

First, it is critical for regulators to complete their efforts at implementing a macroprudential approach to enhance resilience within the financial system, which will minimize the likelihood that monetary policy will need to focus on financial stability issues rather than on price stability and full employment

Second, policymakers must carefully monitor evolving risks to the financial system and be realistic about the ability of macroprudential tools to influence these developments. The limitations of macroprudential policies reflect the potential for risks to emerge outside sectors subject to regulation, the potential for supervision and regulation to miss emerging risks, the uncertain efficacy of new macroprudential tools such as a countercyclical capital buffer, and the potential for such policy steps to be delayed or to lack public support.14 Given such limitations, adjustments in monetary policy may, at times, be needed to curb risks to financial stability.

These first two principles will be more effective in helping to address financial stability risks when the public understands how monetary policymakers are weighing such risks in the setting of monetary policy. Because these issues are both new and complex, there is no simple rule that can prescribe, even in a general sense, how monetary policy should adjust in response to shifts in the outlook for financial stability. As a result, policymakers should clearly and consistently communicate their views on the stability of the financial system and how those views are influencing the stance of monetary policy.

Some market participants and commentators have focused on the so-called dot charts and the movement of the implied median funds rate for 201416. I would remind everyone that the dots are not a forecast of what policymakers think the Committee will actually do, but they are a reflection of the policymakers' views of appropriate policy.

Some have noted that the median path steepened ever so slightly. This should not come as a particular surprise as it likely just reveals greater confidence that the economy is improving. The rebound after the bad winter seems to be progressing, the outlook for unemployment is a bit better, and the inflation rate appears to be firming. The changes in the dots thus simply tell us something about individual policymakers reaction to the change in economic conditions. The FOMC statement notes that the Committee will adjust future funds rate decisions based on the progress toward our objectives. So, it is entirely reasonable that the expected path of "appropriate policy" should adjust as we close in on those objectives. Indeed, it would be surprising if they did not behave in such a manner.

I believe that we are closing in on our goals perhaps faster than some people might think. So, while I supported the recent policy statement, I have growing concerns that we may have to adjust our communications in the not-too-distant future. Specifically, I believe the forward guidance in the statement may be too passive, given underlying economic conditions.

The guidance that I want to give you is that there is no mechanical formula whatsoever for what a “considerable time” means. The answer to what it means is, “it depends”. It depends on how the economy progresses.

The science of monetary policy has not progressed to the point where we can specify the optimal rule for setting monetary policy. The reason is that optimal rules, that is, those that maximize economic welfare, are highly dependent on the particular model from which they are derived, and there is no broad-based consensus for the right model. More relevant is the finding that the optimal rule for one model can produce very bad outcomes in another model. In addition, optimal rules can often be quite complex, thus making them difficult to implement and to communicate to the public. In other words, they may not be very transparent.

However, these limitations to implementing optimal policy rules should not deter us from efforts to adopt a more systematic rule-like approach to the conduct of policy. There has been a great deal of progress made in identifying simple rules that appear to perform well in a variety of models and environments. Such robust rules can form a basis for developing more systematic, rule-like policymaking.

One important and desirable characteristic of a systematic and rule-like approach to policy relates to communication. In particular, it is an approach that is easily communicated to the public and thus greatly improves the transparency and predictability of monetary policy, which reduces surprises. The public and markets are more informed about the course of monetary policy because they understand how policymakers are likely to react to changing economic circumstances. Equally important in my view is that greater clarity about the policymakers' reaction function strengthens accountability and thus can serve to preserve the central bank's independence.

Given model uncertainty and data measurement problems, there are, of course, limitations to the use of a simple rule. The rule is basically intended to work well on average, but central banks look at many variables in determining policy. There inevitably will be times when economic developments fall outside the scope of our models and warrant unusual monetary policy action. Events such as 9/11, the Asian financial crisis, the collapse of Lehman Brothers, and the 1987 stock market crash may require departures from a simple rule. Having articulated a rule guiding policymaking in normal times, however, policymakers will be expected to explain the departures from the rule in these unusual circumstances. With a rule as a baseline, departures can be quantified and inform us how excessively tight or easy policy might be relative to normal. If the events are temporary, policymakers will have to explain how and when policy is likely to return to normal. Thus, a simple rule provides a valuable benchmark for assessing the appropriate stance of policy. That makes it a useful tool to enhance effective communication and transparency.

One of the most important ways to support credibility and thus the effectiveness of forward guidance is to practice it as part of a systematic policy framework. I believe that indicating how the evolution of key economic variables systematically shapes current and future policy decisions is critical to such a policy framework. Indeed, a commitment to a policy framework that is systematic and rule-like provides the foundation for establishing expectations for the future path of policy and thus forward guidance...

Systematic policies that provide important information about the policymakers reaction function combined with other information, such as the policymakers economic forecasts, can sharpen forward guidance in ways that reduce policy uncertainty and enhance economic performance. Thus, well-designed communications are valuable, and behaving systematically has the added advantage of making those communications easier for the public to understand.

In any event, it will be important that the signals conveyed by balance sheet policies are consistent with the forward guidance about future interest rate policies. This has been a difficult communications challenge at times for the FOMC. And it will likely remain a communications challenge as the Committee coordinates the unwinding of the Feds balance sheet with the gradual increase in the policy rate.

It is important that in performing this exercise we illustrate the various dimensions of uncertainty that policymakers face. For example, there is model uncertainty, forecast uncertainty, and the variations implied by different rules. Many central banks use fan charts and other devices to highlight such uncertainty, and we, the Fed, would be wise to do the same. Even acknowledging the uncertainty, the exercise will provide a better sense of the likely direction of policy and the variables most related systematically to that policy.

One hypothesis is that going into the May-June period, there was a wide divergence of opinion among market participants as to the future of the asset purchase program. In particular, however reasonable the median expectation, there were a number of "QE-infinity" optimists who expected our purchases to go on for a very long time. And, crucially, in asset markets, it is often the beliefs of the most optimistic investors--rather than those of the moderates--that drive prices, as they are the ones most willing to take large positions based on their beliefs. Moreover, this same optimism can motivate them to leverage their positions aggressively.6

In this setting, a piece of monetary policy communication that merely "clarifies" things--that is, one that delivers the median market expectation but truncates some of the more extreme possibilities--can have powerful effects. Highly levered optimists are forced to unwind their positions, which then must be absorbed by other investors with lower valuations. This effect is likely to be amplified if the preannouncement period was one with unusually low volatility, as was the case in early May 2013, when the implied volatility on long-tenor swaptions was near historical lows. To the extent that some of the optimists are operating subject to value-at-risk constraints, low volatility is likely to induce them to take on more leverage. If volatility rises sharply in the wake of an announcement, this increase will tend to exacerbate the unwind effect.