No central bank in the world follows a mechanical, mathematical rule, and I think it would be a terrible mistake to ask the Federal Reserve to specify a mathematical rule

If that's what you mean by your rule, a gold standard, a currency board, yes, that has happened, but given the goals that Congress has assigned to us with respect to inflation and employment, I'm not aware of any -- for example, an inflation- targeting country, of which there are many, that has a mathematical rule.

Nevertheless, it makes perfect sense to behave in a relatively systematic way, looking -- when you have objectives, asking the question, how far are you from achieving those objectives and how fast do you expect progress to be made in determining whether or not -- exactly how much accommodation is needed?

And a number of different factors come into play at different times. If we were following a specific mathematical rule, I really think performance in this recovery would have been dreadful. Most of the rules we would have used, first of all, we couldn't have followed in the depths of the downturn. They would have called for negative interest rates. And if we had tightened monetary policies, as some of those rules would have called for -- given the headwinds we face, the recovery would not be as far advanced as it is.

So there are special factors and structural changes that need to be taken into account that would make me very disinclined to follow a mathematical rule, but I think it is important that a central bank behave in a systematic and predictable way and to explain what it's doing and how it sees itself as likely to respond to future economic developments as they unfold. And that is precisely what we're trying to do with our forward guidance.

Of course, my forecast is only a forecast. I am extremely confident that the actual path of inflation over the next four years will turn out to be higher or lower than what I currently expect it to be! What you should take away, though, is that I currently see the probability of inflations averaging more than 2 percent over the next four years as being considerably lower than the probability of inflations averaging less than 2 percent over the next four years. And thats why I conclude my discussion of inflation by saying that the FOMC is undershooting its price stability goal.

The Federal Open Market Committee is on record as stating that its goal is for the price index for personal consumption expenditures to rise at an annual rate of 2 percent. Many observers expressed concern last year that inflation, at about 1 percent, was running well below the FOMC's target. Inflation has averaged 2 percent over the last three months, however. While the inflation numbers will often run hot or cold for several months at a time, the latest numbers suggest that inflation has bottomed out and is moving toward the Committee's target. I expect that firming trend to continue this year.

Since the end of the recession, real GDP has grown at an average annual rate of just 2.1 percent. In contrast, in the 60 years before the recession, real GDP grew at an average annual rate of 3.5 percent. Based in part on that long track record, many forecasters, myself included, were expecting growth to pick up to a more robust pace. More recently, however, I have come to the conclusion that a sustained acceleration of growth to something over 3 percent in the near future is unlikely. Given what we know, it strikes me as more likely that growth will continue to average somewhere between 2 and 2 1/2 percent. Let me briefly explain why.

It's helpful to start by thinking of the growth in real GDP as the sum of two components: growth in employment and growth in GDP per employee, a measure of productivity growth. When you calculate these two components, you find that both have slowed considerably since the Great Recession.

Taking these in turn, the rate of growth in employment has been about two-thirds of the rate we saw in the decades prior to the Great Recession. Part of that decline reflects structural developments such as slower growth in the working-age population, the aging of the baby boomers and the rise of enrollment in educational institutions. In addition, we've seen a gradual secular decline in the labor force participation rates for people in the prime working-age group aged 25 to 54. Some economists attribute this to workers becoming discouraged about their job market prospects and argue that the unemployment rate is understating the amount of "slack" in the labor market. Our research indicates, however, that there is always more slack than indicated by the standard unemployment rate, and by some measures there seems to be no more additional slack now than is typically associated with the current level of the unemployment rate.

Productivity growth, the other component of real GDP, grew fairly rapidly in the early postwar period, rising at a 2.7 percent annual rate from 1948 to 1969. Productivity growth then slowed, rising at a 1.4 percent annual rate from 1969 to 2007. And since the fourth quarter of 2007, productivity growth has averaged only 1.0 percent per year.

An active debate has sprung up concerning prospects for future productivity growth. Some economists have suggested that major, broad-based advances in technology are far less likely than in the past, and that we should prepare for a relatively stagnant productivity trend. I am not so gloomy, however, in large part because of the amazing historical record of technological innovations that solve current problems and simultaneously open up new possibilities for future innovations. Having said that, the difficulty of forecasting output per worker suggests that the middling productivity gains we've seen over the last few years are probably the best guide to near-term productivity trends. Thus, I am not expecting an imminent acceleration in productivity growth.

Productivity growth is critically important because it's what drives growth in real wages and real household income, which in turn ultimately drives consumer spending. Some proponents of the view that GDP growth will soon accelerate argue that a pickup in productivity growth will boost disposable income trends and thereby set off an acceleration in consumer spending. Data earlier in the year seemed to indicate that such an acceleration might be in train. More recent household spending figures suggest otherwise, however

The housing market has also perplexed forecasters over the course of this expansion Potential homebuyers now seem to be more conscious of the financial risks of homeownership than before, and housing demand has been shifting toward multifamily rental units. Moreover, the overhang of homes associated with foreclosures and seriously delinquent mortgages remains elevated, and this is dampening housing market activity. Thus, I am expecting residential investment to make only modest contributions to overall growth over the near term.

These three factors subdued productivity growth, moderate consumer spending growth and a more tempered expansion in housing construction are keys to my assessment that overall economic growth is likely to average between 2 and 2 percent over the near term, which is around the average rate we've seen for this expansion.

Let me wrap this all into a forecast for the next few years. I see real GDP growth averaging a bit above 3 percent in 2015 and 2016, which should be enough to generate relatively strong job growth. I expect the unemployment rate to gradually decline, hitting about 6 percent at the end of this year, falling below 5 percent by the end of next year, and reaching my estimate of the natural rate by the first half of 2016.

There is a ring of truth to the idea that low interest rates might be acting as life support for companies that are destined to fail. The flip side of that coin, however, is that low rates gave good companies the ability to get back on their feet before they went bankrupt. Its important to provide an economic environment that allows fundamentally sound firms to thrive. That may provide a temporary crutch to some companies that will eventually go bankrupt, but over the longer term, the right companies will survive. Nothing in life is perfect, and in terms of a trade-off, Im happy with a few bad companies staying in the game for a while if it means a lot of good ones have a chance to survive, too.

Jeffrey Lacker says projections that the central bank will raise the benchmark interest rate next year are "reasonable... Getting the timing right is going to be tricky."

Market expectations are that the Federal Reserve will start to raise short-term interest rates around the middle of 2015... That sounds to me like a reasonable forecast, but forecasts often go astray, so I wouldnt put too much weight on that particular set of forecasts.

The world is highly uncertain. In the current environment its still very, very appropriate to continue to follow very accommodative monetary policy.

My overall view of the economy is fairly optimistic. After a first quarter buffeted by winter storms, I believe we are poised to grow at a rate somewhat above trend for the remainder of this year and next before reverting back to trend, which I see as about 2.4 percent. Steady employment growth and healthier household balance sheets will support consumption activity. The current data suggest economic strength is fairly broad based, as evidenced by recent indicators and the optimism expressed by firms in both the manufacturing and service sectors

My own submission for economic growth was generally in line with my colleagues. But my forecast for unemployment was a bit lower in the near term. Specifically, I think the unemployment rate may reach 5.8 percent by the end of this year and 5.6 percent by the end of 2015. My view of inflation is that it will stabilize at about 2 percent in 2015.

Some market participants and commentators have focused on the so-called dot charts and the movement of the implied median funds rate for 201416. I would remind everyone that the dots are not a forecast of what policymakers think the Committee will actually do, but they are a reflection of the policymakers' views of appropriate policy.

Some have noted that the median path steepened ever so slightly. This should not come as a particular surprise as it likely just reveals greater confidence that the economy is improving. The rebound after the bad winter seems to be progressing, the outlook for unemployment is a bit better, and the inflation rate appears to be firming. The changes in the dots thus simply tell us something about individual policymakers reaction to the change in economic conditions. The FOMC statement notes that the Committee will adjust future funds rate decisions based on the progress toward our objectives. So, it is entirely reasonable that the expected path of "appropriate policy" should adjust as we close in on those objectives. Indeed, it would be surprising if they did not behave in such a manner.

I believe that we are closing in on our goals perhaps faster than some people might think. So, while I supported the recent policy statement, I have growing concerns that we may have to adjust our communications in the not-too-distant future. Specifically, I believe the forward guidance in the statement may be too passive, given underlying economic conditions.

Although FOMC participants provide a number of explanations for the federal funds rate target remaining below its longer-run normal level, many cite the residual effects of the financial crisis. These include restrained household spending, reduced credit availability, and diminished expectations for future growth in output and incomes, consistent with the view that the potential growth rate of the economy may be lower for some time.

Let me reiterate, however, that the Committee’s expectation for the path of the federal funds rate target is contingent on the economic outlook. If the economy proves to be stronger than anticipated by the Committee, resulting in a more rapid convergence of employment and inflation to the FOMC’s objectives, then increases in the federal funds rate target are likely to occur sooner and to be more rapid than currently envisaged. Conversely, if economic performance disappoints, resulting in larger and more persistent deviations from the Committee’s objectives, then increases in the federal funds rate target are likely to take place later and to be more gradual.

[R]ecent readings on, for example, the CPI index have been a bit on the high side, but I think the data that we're seeing is noisy. I think it's important to remember that, broadly speaking, inflation is evolving in line with the committee's expectations.

The committee has expected a gradual return in inflation toward its 2 percent objective. And I think the recent evidence we have seen, abstracting from the noise, suggests that we are moving back gradually over time toward our 2 percent objective and I see things roughly in line with where we expected inflation to be.

If you get 3% growth for the rest of this year, if you get unemployment coming down below 6%, if you continue to have jobs growth at 200,000, if you continue to see inflation moving back up toward target, I think if we get to the fall of the year and all of those things are transpiring as Im suggesting they will, that will change the conversation about monetary policy, and there will be more sentiment toward an earlier rate hike.

As a result of near-zero interest rates for five years, the profitability of traditional banking activities is strained and incentives to reach for yield are tempting. Net interest margins continue to trend lower and are at their lowest level in 30 years. Banks are responding as we should expect, which is to say they are engaging in riskier activities. For example, an all-time high of $600 billion of leveraged loans were issued in 2013. This lending is often characterized by weaker underwriting standards, including higher debt ratios and fewer covenant provisions.

The incentives to reach for yield extend to smaller financial institutions as well. Commercial banks with assets of less than $50 billion have increased exposure to interest rate risk, due in part to the guidance the FOMC has provided regarding future interest rates. Today, 53 percent of the securities and loans held by these banks have maturities of more than three years, compared to about 37 percent back in 2005. If longer-term interest rates were to suddenly move higher, these institutions could face heavy losses.

We are making progress on the full employment goalby some measures, like the rate of civilian unemployment, a lot of progress. The rate of unemployment fell to 6.3 percent last month and is closing in on levels that many believe to be consistent with a practical definition of full employment. But a number of other measures of labor market performance tell me that the economy is still operating well short of full employment. Notably, there remains an unusually high percentage of prime working-age people who are marginally attached to the labor force, who are working part-time jobs when they would prefer to be working full-time, and who are leaving the workforce. These indicators and others suggest to me that fulfillment of our employment mandate is still a ways off.