“The state of the U.S. economy as of the March 2016 FOMC meeting was arguably consistent with December 2015 SEP projections. Yet, the Committee did not increase the policy rate at the March meeting,” Bullard said. “This state of affairs might be viewed as ‘time inconsistent’ in the macroeconomics literature. Financial markets may have trouble interpreting Fed behavior in the future if this is the case.”

The state of the U.S. economy as of the March 2016 FOMC meeting was arguably consistent with December 2015 SEP projections. Yet, the Committee did not increase the policy rate at the March meeting. This state of affairs might be viewed as ‘time inconsistent’ in the macroeconomics literature. Financial markets may have trouble interpreting Fed behavior in the future if this is the case.

A data-driven Committee, making decisions meeting by meeting, is likely to surprise markets from time to time. The authors join many others in criticizing the "measured pace" period of 2004 through 2006, during which the Committee increased rates by 25 basis points at 17 consecutive FOMC meetings. A common criticism has been that this high level of predictability made investors complacent, encouraging a buildup of leverage and helping set the stage for the Global Financial Crisis. That criticism may well overstate the importance of the Committee's communications; nonetheless, a number of FOMC participants have said that the Committee intends to be "data driven" and not fall into an excessively predictable, data-insensitive path. Lower predictability implies more surprises.

Former Chairman Bernanke recounts in his recent book that he saw [open-ended, data-driven] QE3 as akin to Mario Draghi's statement that the European Central Bank would do "whatever it takes." He also notes that FOMC participants held divergent views on the potential costs and benefits of the program. Minutes of the relevant meetings described the complex discussions and differing views. Contemporaneous reports by Wall Street analysts show frustration and confusion about the Committee's intentions.
When various FOMC communications suggested that the time to begin reducing purchases was nearing, long-term rates rose sharply--the so-called taper tantrum. The contention of this paper is that time-based guidance was responsible. But as the paper acknowledges, the open-ended, data-contingent nature of the QE3 program created a strong sense that the Fed was "all in" and that the purchases might go on for a long time. That powerful commitment "would set things up for some fireworks" when the time came to provide more precise guidance as to the timing of tapering, whether that was done through time- or data-based guidance

I spend a lot of time talking about being data dependent. I literally made T-shirts that say, “Monetary policy: It’s data dependent.” But there’s some confusion, because a lot of people take this to mean that I’m just waiting for the next employment or inflation report. This is what happens when a Fed official tries to substitute economistese with real English. What I actually mean is that being driven by the data is about having a policymaking strategy. It’s about implementing consistent and predictable behavior that is driven by the economy’s performance relative to our goals.

Now, with our next FOMC meeting just three weeks away, I expect most of you are less interested in what we did at our previous meetings, and more interested in what we are going to do at the next one. I can't answer that question because, as I have emphasized in the past, we simply do not know. The world is an uncertain place--sometimes more uncertain than at other times--and all monetary policymakers can really be sure of is that what will happen is often different from what we currently expect. That is why the Committee has indicated that its policy decisions will be data dependent, which is to say that we will adjust policy appropriately in light of economic and financial events to best foster conditions consistent with the attainment of our employment and inflation objectives.

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.

It is important to note that “data dependent” policymaking does not mean that policy will react to every short-run change in the data. For example, volatility in financial markets or a change in a short-run data report is not a rationale for making a monetary policy decision. Instead, an assessment has to be made of what the incoming data and financial market developments are telling us about underlying economic conditions and the medium-run outlook. The relevant time horizon for monetary policy is the medium run because it takes time for monetary policy to have an effect throughout the economy.

"This is a time for patience and analysis, and really assessing data, because there has been some slowing," Robert Kaplan told reporters after speaking before the Real Estate Council in Dallas. "Certainly financial conditions have tightened, and we know that non-U.S. growth is weakening, and I have got to take that into account as a policymaker."

"Standard monetary policy strategy says a little less inflation, maybe a little less growth ... argue for just a smidgen slower process of normalizing rates," Williams said.

"We got a little stronger dollar, some mixed data on the economy, some weakness in (fourth-quarter U.S. GDP growth), all of those coming together kind of tell me that we probably need a little bit more monetary accommodation this year than I was thinking in the middle of December."

“There is no predetermined path, we are going to be agnostic about this, we are going to be data-dependent and I need to see more information,” Kaplan said Friday in an interview at Bloomberg headquarters in New York. “I wouldn’t even speculate on what the next move is.”

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

“Policy makers should take seriously the potential downside risks to their economic forecasts and manage those risks as we think about the appropriate path for monetary policy,” said Rosengren, a voting member of the FOMC this year.

“These downside risks reflect continued headwinds from weakness within countries that represent many of our major trading partners, and only limited data to support the projected path of inflation,” he said.

“In short, inflation has been held down by two factors, the falling price of oil and the rising value of the dollar,” he said. “But neither factor is likely to depress inflation indefinitely. After the price of oil bottoms out, I would expect to see headline inflation move significantly higher. And after the value of the dollar ultimately tops out, core inflation should move back toward 2 percent.”

If oil prices and the dollar stabilize, but inflation doesn’t quickly respond, “a shallower path for interest rates would make sense,” Lacker said. “If inflation moves rapidly back toward 2 percent, however, a more aggressive path would be in order.”

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 determine current economic conditions, and then assessing what that information implies about the economic outlook and the risks around that outlook. Thus, “data dependent” policymaking does not mean that policy will react to every short-run change in the data, but rather that policy will react to changes in the medium-run outlook with respect to the Committee’s monetary policy goals as informed by changes in economic conditions.

Ryssdal: Does that mean you guys are ready to go back to the zero lower bound if you have to?

Powell: If you have to, you have to. Yes. It's not impossible. Monetary policy's about forecasts. You have to have a forecast of where things are gonna go and you try to set monetary policy for what you see as the likely path of the economy.

Ryssdal: "Gradually" got a lot of attention in Chair Yellen's press conference the other day. She made great efforts to say, "It's not gonna be a mechanical thing." Without using her favorite phrase, which is, "It's gonna depend on the data," what are you gonna be looking at to think and to know when it's okay to start ratcheting things up again?

Powell: Well we do look at a wide range of things. For me, at the top of the list will be continued progress in the labor market and with it continued progress on inflation. Inflation is in below our target. As I mentioned, the labor market has strengthened quite a bit, but I wanna see continued strong job growth. We've had three years of very strong job growth. I want to see that continue. And as the labor market tightens, I'd like to see wages increasing, and as the economy tightens, we need to see inflation coming up. Underlying inflation, if you look through the changes in gas prices and import prices is probably running at around one and a half percent. Our goal is two percent, so we'd like to see underlying inflation come up to two percent.