"Should there a be point at which these type of costs exceed the benefits that the low-interest rate environment is providing generally to the economy, then I would argue it needs to be reevaluated,” Ms. Raskin said. The future course of Fed policymakers’ decision making is “highly data dependent,” and will vary based on how the economy performs.

As reported by The Wall Street Journal.

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.

I conclude that costs specific to balance sheet expansion have turned out to be no greater than I had anticipated and, because we have less uncertainty about those costs, they are lower than I would have expected in a risk-adjusted sense. Let me start with three commonly cited potential costs—impairment of market functioning, the unanchoring of inflation expectations, and threats to financial stability.

… Although the costs specific to the asset purchase program appear well-contained, it is also true that the costs increase as the program gets larger. In part, this is due to fact that as the balance sheet increases in size, the risk of a period of low or zero remittances to Treasury also increases. As we acquire more longer-dated assets funded with reserves, the Fed takes on more interest rate risk. This is how the policy works. A byproduct is that our net income and remittances will be unusually elevated for a while, then are likely to fall substantially for a period, before returning to more normal levels. This is because our interest expense will increase substantially when we begin normalizing rates…

There are several important points to make here. First, the potential impact of the purchase program on future Fed remittances was known at the onset of the program—we have no new information here. The outcome depends on how the economy evolves, how we respond, and whether we decide to sell long-dated assets in the portfolio or not.

Second, it is important not to put excessive weight on the possibility of a period of zero remittances. Our mandate is economic not fiscal—our job is to return the economy to full employment and price stability. Moreover, in considering the fiscal consequences of our actions, what matters is not what happens to our remittances—that is far too narrow a perspective — but how our actions affect the federal debt-to-GDP ratio over time. This is the metric we should be focusing on in assessing the potential fiscal consequences of our actions.

The lack of thresholds [for the Fed’s open-ended asset purchases] comes from the complexity of the problem. On the one hand, we have benefits which are associated with improvements in the economy, but there are also costs associated with unconventional policy, such as the potential effects on financial stability, which are hard to quantify and which people have different views about.

So to this point, we've not been able to give quantitative thresholds for the asset purchases in the same way that we have for the federal funds rate target. We're going to continue to try to provide information as we go forward.

In particular, as I mentioned today, as we make progress towards our objective, we may adjust the flow rate of purchases month to month to appropriately calibrate the amount of accommodation we're providing, given the outlook for the labor market.

In terms of further color, again, given the complexity of the issue, we've not given quantitative analysis or quantitative thresholds. I would say that we'll be looking for sustained improvement in a range of key labor market indicators, including, obviously, payrolls, unemployment rate, but also others, like the hiring rate, claims for unemployment insurance, quit rates, wage rates, and so on, be looking for sustained improvement across a range of indicators and in a way that's taking place throughout the economy.

And since we're looking at the outlook, we're looking at the prospects rather than the current state of the labor market, we'll also be looking at things like growth to try to understand whether there's sufficient momentum in the economy to provide demand for labor going forwards. So that will allow to us look through, perhaps, some temporary fluctuations associated with short-term shocks or problems.

Over time, the benefits of our asset purchases may be diminishing. For example, given how low interest rates currently are, it is possible that future asset purchases will not ease financial conditions by as much as they have in the past. And it is also possible that easier financial conditions, to the extent they do occur, may not provide the same boost to the economy as they have in the past.

In addition to the possibility that our policies may have diminishing benefits, they also may have some risks associated with them. I will mention four: credit risk, interest rate risk, the risk of adverse market functioning, and inflation risk. These and other risks are not easy to see or measure, but they need to be taken into account when setting monetary policy…

It is critical that we take these risks into consideration as we make our asset purchase decisions. To minimize some of these risks, we could aim for a smaller sized balance sheet than would otherwise occur if we were to maintain the current pace of asset purchases through the end of this year, as some financial market participants are expecting. This course of action would be all the more attractive if the economic outlook continues to improve, as I expect it will.

To explain this more clearly, if you could picture two lines, one sloping downward, representing the diminishing benefits of our policy actions, and one line sloping upward, representing the rising costs of those actions, we need to think carefully about where those lines will intersect. Those lines will cross at the point where the costs and benefits are equal, and where further policy actions might cause more harm than good. Reasonable people will differ on where that point of intersection may lie, especially given that many of the policy tools we are using are unconventional…

I will conclude by saying that the FOMC’s actions in the current economic cycle have been needed, understood, and generally supported. Going forward, we must take care to balance the costs and benefits of our monetary policy actions, so that we don’t introduce more uncertainty and create problems that hamper our ability to provide a balancing weight to our economy if needed down the road.

Federal Reserve Bank of Boston President Eric Rosengren said the central bank could still enlarge its $85 billion monthly purchases of bonds if policy makers are not making progress toward their twin goals of stable prices and full employment. “I think there is the capacity to enlarge it if that were to become necessary,” Rosengren, 55, said in a telephone interview with Bloomberg News... “We’re partly calibrating this on trying to get the appropriate amount of stimulus without creating market functioning problems,” he said. “Given the risks of market functioning problems I think we’ve appropriately calibrated it at this time, but if it became necessary to do more I think we have some capacity to do that.”

"We need some substantial improvement" in the jobless rate to consider a major shift in the Fed's purchases of Treasury and mortgage debt, Federal Reserve Bank of Boston President Eric Rosengren said in an interview with Dow Jones Newswires.

Compared to the current 7.8% unemployment rate, the official said once a 7 1/4% rate is achieved, central bankers would need to have a "full discussion" about the utility of pressing forward with bond buying.

…

Mr. Rosengren also said in the interview he doesn't believe the Fed's very aggressive policy is creating new financial market imbalances.

"I am not seeing strong evidence there is collateral damage" from Fed actions, and "I'm not seeing anything more generally that would pose a macroeconomic concern at this time." For those who believe historic low yields in the bond market represent a bubble, Mr. Rosengren said "the lower interest rates are exactly what we intended on doing," adding "these rates won't stay in place" forever.

A long period of unusually low interest rates is changing investors’ behavior and is reshaping the products and the asset mix of financial institutions. Investors of all profiles are driven to reach for yield, which can create financial distortions if risk is masked or imperfectly measured, and can encourage risks to concentrate in unexpected corners of the economy and financial system. Companies and financial institutions, such as insurance companies and pension funds, and individual savers who traditionally invest in long-term safe assets, are facing challenges earning reasonable returns, and so they may reach for yield by taking on more risk and reallocating resources to earn higher returns. The push toward increased risk-taking is the intention of such policy, but the longer-term consequences are not well understood.

Of course, identifying financial imbalances, asset bubbles or looming crises is inherently difficult, as policymakers were painfully reminded during the financial crisis in 2008. Public transcripts of the FOMC’s discussions from as early as 2006 show participants were clearly focused on issues in the housing market and yet did not fully appreciate the risk to the economy from the financial sector’s exposure to risky mortgages.

Accordingly, I approach policy decisions with a healthy dose of humility when considering the long-run effects of monetary policy. We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances. Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels. A sharp correction in asset prices could be destabilizing and cause employment to swing away from its full-employment level and inflation to decline to uncomfortably low levels.

Simply stated, financial stability is an essential component in achieving our longer-run goals for employment and stable growth in the economy and warrants our most serious attention.

I am convinced that scope remains for the FOMC to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions. In taking these decisions, however, we would need to balance two considerations.

On the one hand, our unconventional tools have some limitations and costs. For example, the effects of forward guidance are likely to be weaker the longer the horizon of the guidance, implying that it may be difficult to provide much more stimulus through this channel. As for our balance sheet operations, although we have now acquired some experience with this tool, there is still considerable uncertainty about its likely economic effects. Moreover, some have expressed concern that a substantial further expansion of the balance sheet could interfere with the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. I disagree with this view: The FOMC has tested a variety of tools to ensure that we will be able to raise short-term interest rates when needed while gradually returning the portfolio to a more normal size and composition. But even if unjustified, such concerns could in theory reduce confidence in the Federal Reserve and so lead to an undesired increase in inflation expectations.

On the other hand, risk management considerations arising from today's unusual circumstances strengthen the case for additional accommodation beyond that called for by simple policy rules and optimal control under the modal outlook. In particular, as I have noted, there are a number of significant downside risks to the economic outlook, and hence it may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.

As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs.

I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information. In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates.

More broadly, these considerations help illustrate why it would be imprudent to adhere mechanistically to the prescriptions of any single policy rule. Such rules can serve as useful benchmarks for facilitating monetary policy deliberations and communications, but a dose of good judgment will always be essential as well.

I am at the moment in a position that I’ve called essentially patient vigilance–meaning that I want to see how the economy evolves before drawing conclusions that more stimulus is needed and could actually have the effect where the benefits would outweigh the costs. I don’t rule it out.

There’s “only so much headroom to do further Treasuries” beyond the short term, Williams said. He said that he’s in a “close-call space” in seeking a third round of quantitative easing, which will depend on “risks to the forecasts.”

“Right now, my baseline forecast” for the economy “is not a satisfactory forecast,” he said. “Just based on the forecast, you’d want to boost the economy.” Still, it’s not a slam dunk” and “you’d want to weigh the costs and benefits,” he said.

[B]ecause the outlook for unemployment is unacceptably high relative to our dual mandate and the outlook for inflation is moderate, I believe it is also appropriate to continue to evaluate whether we could provide additional accommodation in a manner that produces more benefits than costs, regardless of whether action in housing is undertaken or not.

The financial crisis of 2007 and 2008 was a watershed event for the Federal Reserve and other central banks. The extraordinary actions they took have been described, alternatively, as a natural extension of monetary policy to extreme circumstances, or as a problematic exercise in credit allocation. I have expressed my view elsewhere that much of the Fed's response to the crisis falls in the latter category rather than the former.

...

Like the Fed, the European Central Bank and other central banks have pursued credit allocation in response to the crisis.

The impulse to reallocate credit certainly reflects an earnest desire to fix perceived credit market problems that seem within the central bank's power to fix. My sense is that Federal Reserve credit policy was motivated by a sincere belief that central banks have a civic duty to alleviate significant ex post inefficiencies in credit markets. But credit allocation can redirect resources from taxpayers to financial market investors and, over time, can expand moral hazard and distort the allocation of capital. This implies a difficult and contentious cost-benefit calculation. But no matter how the net benefits are assessed, central bank intervention in credit markets will have distributional consequences.

... 

This tension is a classic time consistency problem. Central bank rescues serve the short-term goal of protecting investors from the pain of unanticipated credit market losses, but dilute market discipline and distort future risk-taking incentives. Over time, small "one-off" interventions set precedents that encourage greater risk taking and increase the odds of future distress. Policymakers then feel boxed in and obligated to intervene in ever larger ways, perpetuating a vicious cycle of government safety net expansion.

The conundrum facing central banks, then, is that the balance sheet independence that proved crucial in the fight to tame inflation is itself a handicap in the pursuit of financial market stability. The latitude the typical central bank has to intervene in credit markets weakens its ability to discourage expectations of future rescues and thereby enhance market discipline.