Washington Post: Let’s start with Friday’s [November] jobs numbers. Everyone is saying this is cementing the Fed’s liftoff in December. What do you think?

Bullard: I thought it was is a very strong report. I think the monthly average of 218,000 is very promising for the U.S. economy. I think it shows it was probably a mistake to delay from September, when people were concerned there was a slowdown in the fall. That hasn’t really materialized. I will argue for a move in December. I don’t want to prejudge what the committee might do, but that will be my position.

WP: An actual mistake not to move in September? What are the consequences, then? Is the Fed already behind the curve?

Bullard: The timing of the rate hike is probably not critical, and so we can certainly make up for the fact that we didn’t move earlier.

WP: You guys have been saying for a long time that it’s not just the first increase that matters: It’s the entire path. Let’s talk about what gradual means.

Bullard: There’s been so much pressure on this first move, and you can kind of understand it because we haven’t moved since December 2008. That’s seven years. We’ve been pinned down to zero. If we do move in December, it will certainly be momentous. It will be a great signal I think for the U.S. economy: It does signal confidence. It does signal that we can move away from emergency measures, finally.

But you’re right, the debate will immediately turn to how will normalization proceed? My main concern about that is we remain data dependent, and we do not get locked into a mechanical pace of rate increases the way that we did in 2004 to 2006.

In that sequence, for those that remember it, we raised the funds rate a quarter percent at every meeting for 17 meetings in a row. I’m virtually certain that was not optimal policy.

At the time, we were congratulating ourselves that this was a very organized way to go about the normalization process. But in the end, we really got burned with the huge crisis and a housing bubble that ran far out of control. And when it collapsed, it caused a major global macroeconomic disaster. So I don’t think we want to be in the position of trying to telegraph a mechanical rate hike path the way we did in that situation.

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.

“You should retain your options to say this looks a lot stronger, the economy looks a lot stronger than we thought, therefore we’re going to go faster,” Mr. Bullard said on Thursday.

If the labor market tightens more than anticipated, or economic growth or inflation surges, that could make it necessary for officials to consider speeding up the pace of rate increases, he said.

Mr. Lacker said the Fed needs to avoid getting “stuck in a rut” that would impose a predetermined path on rate increases. He said he wanted to avoid the experience of 2004-06, when the Fed raised interest rates a quarter of a percentage point at regular intervals.

There is a good bit of uncertainty right now, as you know, there's the debate between whether we've got an extended cyclical effect or whether there is some secular things going on in the economy that are changing growth potential and changing optimal policy. I don't think the FOMC is going to be able to disentangle that when -- before we have to make decisions. I do think under these circumstances it's probably wise not to be counting so much on past correlations, things like the Philips curve which haven't been operating effectively for ten years now. And instead to really look for some tangible evidence of, for example, hiccups in wages or inflation that allow us to make informed decisions based on the evidence.

Steve Liesman: Would you put yourself in the camp of one expecting a rate hike this year?

Dan Tarullo: I would -- you know, I do want to orient towards how I think about the economy. Based on what I just said and based also on what one might call a risk management approach of being concerned that a premature rise might be harder to deal with than waiting a little bit longer, right now my expectation is given where I think the economy would go I wouldn't expect it would be appropriate to raise rates. But I want to hasten to add that is an outlook that changes based on developments in the economy and our being forward looking about it. i do think there's been too much focus on a particular meeting and a particular date and not enough on the overall conditions of the economy.

“I can’t anticipate whether in the committee’s judgment there is enough data in October” for a move at that gathering of the FOMC, he said. “I think October is a live meeting. Clearly, there is the potential that the data coming in advance of the October meeting will be sufficient. And as I said in my remarks, and I repeated, we will have a lot more in December.”

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.

I was also willing to wait for confirmation that the factors holding down real growth and inflation late last year and early this year were transitory. It is now clear that those factors, which included harsh winter weather, the strengthening dollar, and the steep decline in energy prices, have dissipated. It was not unreasonable to seek more definitive evidence that these impediments to growth and price stability had passed, but that question has now been settled.

Mr. Lockhart reiterated there is no preordained date for liftoff, and the timing will be data dependent. But normal gyrations in the monthly data won’t be a decisive factor in his decision-making.

”I am not expecting the data signals to point uniformly in the same direction,” he said. “I don’t need this. I’m prepared to see mixed data.”

The path of future interest rate increases is likely to be gradual, echoing remarks from other Fed officials, adding that pace is likely to be appropriate “for some time.”

Asked what he meant by gradual, he told reporters it means “something less frequent than every meeting.”

“A large part of the current inflation is temporary,” Fischer said in an interview Monday with Tom Keene on Bloomberg Television. After the effects of cheaper oil and other raw materials dissipate, “these things will stabilize at some point, so we’re not going to be as low as we are forever.”

Fischer’s remarks indicate that while he’s pleased with progress on employment, he may be waiting for signs inflation will start moving up toward the central bank’s target. The Federal Open Market Committee meets Sept. 16-17 for a gathering at which many investors and economists expect it will raise interest rates for the first time in almost 10 years.

“Employment has been rising pretty fast relative to previous performance, and yet inflation is very low,” he said. “And the concern about this situation is not to move before we see inflation, as well as employment, returning to more normal levels.”

WSJ: Lets talk about how the cycle is likely to play out after liftoff. It sounds like youre saying your inclination is to act and then observe and then consider acting later on.

MESTER: It is not on a preset course.

WSJ: Could there be pauses in the process?

MESTER: Yes, but I cant say now whether there will or wont be pauses. We need to see how the economy reacts and evolves over time. It is hard to sit here today and say that is how were going to behave.

The Fed has rightly made clear that its decisions will be data dependent. The further key point is that it should allow the flow of information on inflation rather than on real economic activity to determine its timing in adjusting interest rates. And it should not raise rates until there is clear evidence that inflation, and inflation expectations, are in danger of exceeding its 2 per cent target.
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None of this is to say that rates should never be raised or that inflation indicators might not justify a rate increase before long. It is to say that the Fed could inject much needed confidence in the economy today and minimise future risks by announcing and following a strategy of not raising rates until it sees the whites of inflations eyes.

Q: O.K., now for the way that the Fed communicates. How should the Fed describe its plans?

A: I would like us to focus more on describing how monetary policy reacts to data. We need to talk about, This happens and were going to do this, that happens and were going to do that." And in doing so you begin to communicate more to the public about, How does the F.O.M.C. think?" And you try to provide some consistency and then the public and the markets learn from that how were likely to act in the future. To me thats better than forward guidance. Why do we want to make commitments about the future when we dont know what it holds?