I happen to believe that the Federal Reserve is exhausting the limits of prudent monetary policy. The programs popularly known as QE2 and Operation Twist are, to my way of thinking, of doubtful efficacy, which is why I have not been able to support them. I suspect that, at least in the case of Operation Twist, they have so far been of greater benefit to traders and large monied interests than to job-creating businesses. But even if you believe, as the majority of my learned colleagues do, that the benefits of QE2 and Operation Twist outweigh their costs, you would be hard-pressed to now say that still more liquidity, or more fuel, is called for given the $1.5 trillion in excess bank reserves and the substantial liquid holdings businesses are hoarding above their normal working-capital needs.

SCHWEIKERT:  Would you be willing to share -- because, for every positive side, there's often some negatives -- what you would say would be the dampening or some of the costs into the economy of the fairly rapid monetary expansion?

BERNANKE: Well, I think -- I think the main one is that there has been some contribution to commodity prices, which we anticipated. Again, I think that supply and demand factors globally were by far the more important. But that increase in commodity prices offset some of the benefits that, you know, that lower interest rates and more accommodative financial conditions have for -- for growth and for addressing the risks of deflation, which we saw in -- last August.

SCHWEIKERT: The inflationary pressures you saw on many commodity classes -- were they within the range you expected?

BERNANKE: No, they were much larger, but because -- because the -- again, the bulk of those movements are -- can be attributed, and quite directly -- and I recently gave a speech that went through some detail on this issue, to global supply and demand conditions.

Given the extraordinary economic environment and the extraordinary actions taken, we find ourselves operating outside the usual and comfortable policy framework, with less consensus among economists about the right actions to take to promote sustainable growth and price stability. As a result, it is not surprising that debates about policy have been robust, with bright and talented people on every side. Thus, it should not be surprising — indeed, it should be reassuring — that debates within the FOMC are similar to many that are carried out in more public forums.

I stumbled upon a quote by the not-so-well-known French essayist Joseph Joubert from two centuries ago, but since I liked the quote, I thought I’d share it with you even if he isn’t a household name: “It is better to debate a question without settling it than to settle a question without debating it.”

Debate serves to enhance the Fed’s credibility and transparency as an institution. We should acknowledge the debate as a healthy process that analyzes the costs and benefits of various policy choices and ultimately leads to more informed and well-thought-out decisions. Communicating the thoroughness of those discussions is a vital part of the accountability we owe the public.

Last November, after considerable deliberation, the FOMC decided to purchase an additional $600 billion of longer-term Treasury securities. This asset purchase program has been commonly referred to as QE2. Based on my reading of the economic outlook and challenges that the economy faces, I have expressed some doubts that the benefits outweigh the costs of this policy. However, I supported continuation of the policy in January because it is generally a good practice for a central bank to do what it says it is going to do unless circumstances significantly change. To do otherwise would undermine the institution’s credibility.

When the asset purchase program was adopted, the Committee also said that it would review its planned purchase program on a regular basis, and I take that promise to review seriously. Policy, after all, must also be dependent on the evolution of the economy so when the outlook for the economy changes in an appreciable way, so should policy.

Should economic prospects continue to strengthen, I would not rule out changing the policy stance to bring QE2 to an early close. Thus, I will continue to look at the data and consider revising my forecast and preferred policy path as we gain more information on economic developments in the coming months. If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator.

...

 The question is not can we do it, but will we do it at the right time and at the right pace. Since monetary policy operates with a lag, the Fed will need to begin removing policy accommodation before unemployment has returned to acceptable levels. Will we have the fortitude to exit as aggressively as needed to prevent a spike in inflation and its undesirable consequences down the road?

"Since I am less concerned about deflation risks than some of my colleagues...then I am less inclined to want to follow a policy that is highly concentrated on raising inflation," Plosser told reporters after giving a speech at the Union League of Philadelphia.  

Plosser, a longtime proponent of inflation targeting, added that his view might change if his inflation forecast did.
"There are risks to this strategy," Plosser said of the bond purchase idea.  "I am dubious that the benefits outweigh costs."

"The unemployment problem is a terrible problem," he said, "but it's less obvious to me that it's amenable to monetary policy solutions at this point."

From various press reports

Under what conditions would the FOMC make further use of these or related policy tools? At this juncture, the Committee has not agreed on specific criteria or triggers for further action, but I can make two general observations.

First, the FOMC will strongly resist deviations from price stability in the downward direction. Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation. It is worthwhile to note that, if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable.

Second, regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery. Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally. Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability.

The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.

In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny. I would want to be convinced that the incremental macroeconomic benefits outweighed any costs owing to erosion of market functioning, perceptions of monetizing indebtedness, crowding-out of private buyers, or loss of central bank credibility.