Business owners and managers remain cautious and have not substantially increased their capital expenditures despite the solid fundamentals and brighter prospects for consumer spending. Businesses are holding large amounts of cash on their balance sheets, which may suggest that greater risk aversion is playing a role. Indeed, some economic analysis suggests that uncertainty about the strength of the recovery and about government economic policies could be contributing to the restraint in business investment.

“If we hit 2.5 per cent growth in the second quarter and it looks like the third quarter is shaping up for something similar, then I think you are on a firm enough track that you would imagine you would have made sufficient progress in our two tests [for a rate hike], certainly by the end of the year,” he said.
“It would not shock me if we decided to lift off in September, or it wouldn’t shock me if the data were a little softer and it caused us to wait.”

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The Fed has been guiding investors that its rate hikes will come at a “gradual” pace as it seeks to avoid a repeat of the 2013 “taper tantrum”, in which yields spiked sharply on the back of signals of reduced stimulus from former Fed chairman Ben Bernanke.
Mr Dudley suggested his definition of “gradual” was lifting rates at around half the pace in the Fed’s 2004-07 hiking cycle, when they rose a quarter point at every meeting — but he stressed that the statement was not a “commitment in any way” by the Fed. “Our expectations will evolve in light of the incoming economic information.”

The big declines in energy prices came toward the end of last year and the beginning of this year, and they're not going to wash out of the inflation data until late in this year. But the fact that energy prices have stabilized means that the pressure from that source is diminishing.

So, we -- our productivity growth has been -- is a factor that affects the pace of improvement in the labor market. Productivity growth has been extremely slow for the last couple of years. And I think in part, the pace of improvement in the labor market that we're projecting reflects the notion that there's likely to be some pick up in the pace of productivity growth.

Obviously, that's something that's quite uncertain, and it's conceivable that if productivity growth disappoints -- something I hope that we won't see, because that has very negative implications for living standards -- we could conceivably see faster improvement in the labor market.

"I see us getting to full employment basically by the end of this year or before then, and in fact having a pretty strong labor market," Williams said, explaining that he assesses normal levels of employment to be about 5.2 percent.

"For now I think we should set the TIPS inflation data aside until after oil prices stabilize,"

That basic framework pertains to how the Fed intends to move toward more normal levels of interest rates and asset holdings. I suspect some of you are just as avidly interested, if not more so, in when and how rapidly the Fed will raise rates. I hate to disappoint you, but the truth is nobody knows yet. There is no pre-set timetable for raising rates. The FOMCs actions genuinely will depend on the economic data available at the time. So I cannot tell you when and, more importantly, how rapidly our rate target will rise.

I will share an observation, however. The economic outlook can change rapidly, and judgments about appropriate policy need to respond accordingly. Its not hard to find historical examples: The outlook for real activity shifted dramatically from late 1998, when overseas turmoil was thought to jeopardize U.S. growth, to early 1999, when it became clear that the effects would be minimal and activity was accelerating. Similarly, the outlook for growth and inflation shifted significantly from mid-2003, when inflation seemed to be sinking below 1 percent, to early 2004, when growth and inflation were clearly rising. Arguably, the Fed fell at least somewhat behind the curve in each case. The lesson, I believe, is that policymakers should strive to look through clearly transitory phenomena to assess the underlying real economic developments that as long as inflation is anchored determine the appropriate path for interest rates. And they need to be prepared to respond promptly.

Market expectations that lift-off will occur around mid-2015 seem reasonable to me. Although that could change depending on how the economy evolves, my views on when do not differ appreciably from the most recent primary dealer and buy-side surveys undertaken by the New York Fed prior to the October FOMC meeting.

Will these forecasts once again turn out to be too optimistic? Subject to a few caveats that I discuss later, my view is that the likelihood of another disappointment has lessened. The consensus forecast seems like a reasonable expectation, in part, because several of the headwinds restraining U.S. economic activity in recent years have subsided. First, the housing sector is currently in much better balance

Second, consumers are in better financial shape. Households are carrying less debt, with total household liabilities roughly $500 billion below their cyclical peak in 2008.

Third, the fiscal restraint that has held back growth in recent years has ended, with the federal budget deficit now at a level consistent with a stable to slowly declining federal debt-to-GDP ratio.

Now that these headwinds have subsided, buoyant financial market conditions spurred, in part, by a very accommodative monetary policy should do more to support economic activity. In particular, compared to historical patterns, the current household net worth-to-income ratio is high relative to the personal saving rate.

Another positive development for both the U.S. and the global economy is the sharp decline in energy prices. Lets start with the U.S. perspective. Despite the impressive recent gains in natural gas and crude oil production, the U.S. still is a net importer of energy.

More broadly, the decline in energy prices also will be supportive to the global growth outlook in two other ways. First, by pulling down inflation in many countries it will spur more expansive monetary policy.

Inflation has been running below the Federal Reserves objective of a 2 percent annualized rate for the personal consumption expenditures (PCE) deflator... Nevertheless, I expect inflation will begin to move back towards our 2 percent objective in 2015. As the economy expands and the labor market continues to tighten, resource slack should decline and this should gradually exert some upward pressure on prices. Also, despite some softness in market-based measures of inflation compensation, inflation expectations still seem well-anchored and this should also work to pull inflation gradually higher.

[I]n our studies of the Bakken at the Minneapolis Fed, we have been struck by what might be called the localness of the Bakkens impact.

This localness phenomenon is depicted in terms of wages on this chart. It shows that wages have skyrocketed since 2004 within the Bakken counties. Wages have grown less strongly, but still robustly, in counties that are within 100 miles of the Bakken counties. Once we get outside that 100-mile circle, though, wage growth within a county is essentially unaffected by its distance from the Bakken.

"The market had the impact it was expecting; it rose from March 9th 2009 to its current levels. Indiscriminant investing took place, in my opinion. That is, all votes rose regardless of their underlying value and I think the market will search out. Now people will actually have to do work. They will actually have to understand analysis in order to make good investments. So, we did have some volatility last week; for me it was not unexpected. Ive warned my colleagues and also in public speeches you know. I said that I could see a correction taking place, but the underlying economy is doing well. We: Mexico, Canada, and North America, are the epicenter of global economic growth right now, so were in pretty good shape"

A wide array of economic indicators now suggest that growth in the U.S. has picked up and is widely expected to be around 3 percent during the second half of 2014 and in 2015 While I believe that the risks around this consensus forecast are reasonably well balanced, I also believe that the likelihood that growth will be substantially stronger than the point forecast is probably relatively low.

Accordingly, before the Fed raises rates we should have a great deal of confidence that we wont be forced to backtrack on our moves and face another painful period at the ZLB. We should be exceptionally patient in adjusting the stance of U.S. monetary policy even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives.

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I agree with Atlanta Fed President Lockhart in thinking that we ought to be whites of their eyes inflation fighters. The last thing we want to do is regress back into the ZLB. Indeed, such a relapse would be a sign there was something else going on that was preventing the economy from being as vibrant as we thought possible.

To summarize, I am very uncomfortable with calls to raise our policy rate sooner than later. I favor delaying liftoff until I am more certain that we have sufficient momentum in place toward our policy goals. And I think we should plan for our path of policy rate increases to be shallow in order to be sure that the economys momentum is sustainable in the presence of less accommodative financial conditions.

WINKLER: Five-year bond yields suggested for expected inflation have turned positive for the first time in more than three years. Is the Fed ready to accept this tightening of financial conditions?

DUDLEY: Well I think we evaluate what the economic outlook is and what's happening to financial conditions. And obviously we don't control financial conditions. It also depends on what's happening in the global economy. But we definitely take that on board. I think when I - the dollar it has appreciated a bit over the last few months, not by a significantly (inaudible), but obviously that does factor in terms of our economic forecast. If the dollar were to strengthen a lot it would have consequences for growth. We would have poorer trade performance, less exports, more imports. And if the dollar were to appreciate a lot it would tend to dampen inflation. So it would make it harder to achieve our two objectives. So obviously we would take that into account.

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I think that the dollar partly reflects the relative performance of the U.S. economy relative to performances in other countries, and in that case that you could sort of understand what we're seeing. I think from our perspective we don't care about the dollar per se. In other words that's not a goal, independent goal of policy. Our goal policy is maximum sustainable employment and two percent inflation. Obviously as the dollar moves that affects the appropriateness of a given monetary policy to achieve those objectives. And we certainly take it on board just like we take on board what's happening to the stock market, what's happening to the bond market, what's happening to credit spreads, what's happening to credit availability. All those factors sort of drive our assessment of what's happening to financial conditions. And then that influences our economic outlook. And then that in turn then influences the monetary policy response.