I would've liked to have seen us slowly raise rates. I was in favor of an early and slow approach.
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"To me, (a later date for the initial rate hike) means run the risk of doing what the Fed has always done. You get to full employment, you raise rates too rapidly and every time we've done that, we've driven the economy to a recession."
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Heres the point: I believe that rates will be raised in 2015. The question is the timing, and that will be decided by other people in the committee. I wanted to start in March, but I lost that argument.

However, as I have repeatedly reminded my FOMC colleagues, every single time the Fed has waited for full employment to be achieved before starting to withdraw accommodation, it has ended up driving the economy into recession. When policymakers get too clever by half, the public pays a steep price.

I liken monetary policy to piloting a ship, as I learned to do at the Naval Academy. When you are at the connat the wheel of a large shipyou begin to slow down miles before you reach your intended destination. There are no brakes you can slam on to make a sudden stop. Ship velocity, like monetary policy, operates with a lag. If we wait to see the whites of the eyes of full employment and then have to raise rates sharply, I believe it will shock the economy and invite an adverse reaction. So, taking a page from Pope Francis, I hope we dont forget the past and will remember that the wisest policy option has proven to be early and gentle interest rate increases as we approach full employment.

Right now, we are trying to understand the dynamics of inflation The headline personal consumption expenditures (PCE) price index fell 0.2 percent in December. Its 12-month increase was 0.75 percent, down from 1.6 percent in June. Should this low, and still falling, rate of price inflation retard the date of the liftoff from the zero-interest-rate policy we have been operating for more than six years?

I think not. We all know that headline inflation is being held down by the big decline in energy prices that began in the second half of 2014. We know that once energy prices stabilize, headline inflation is likely to bounce right back up. Policy needs to take past inflation into account, but it needs to take future inflation into account, too. Thats just another way of saying that, for policy purposes, its inflations medium-term trend that matterswhich is why analysts and policymakers pay so much attention to core inflation measures. The widely heralded FRB/US model that has been used by the Board of Governors staff since 1996 is an example: It is built around PCE inflation excluding food and energywhich is the traditional measure of core inflation. Ex-food-and-energy PCE inflation was essentially zero in December, month over month, while the 12-month rate slipped to 1.3 percent from 1.5 percent in June.
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A good core inflation measure strips the noise out of headline inflation and leaves the signal. By that standard, recent analysis shows that the ex-food-and-energy PCE inflation rate that drives the FRB/US inflation forecast is a second-rate core inflation measure, at best. An alternative measure developed at the Dallas Fedthe Trimmed Mean PCEis superior in three respects.

First, trimmed mean inflation is better insulated from transitory energy-price swings. Since 1994 (the start of the current 2 percent-inflation era), conventional core inflations correlation with changes in the real price of oil is 0.26, while trimmed mean inflations correlation is just 0.05.

Second, as judged by root-mean-square error, it is more closely aligned with intuitive, direct measures of trend headline inflationlike the 36-month centered average, or headline inflations average over the coming 24-month periodthat we are only able to observe after the fact.

Third, trimmed mean inflation has shown substantially less systematic bias. Over the past 10 years, looking only at data that would have been available to policymakers in real time, conventional core PCE inflation has averaged 1.65 percentnearly 30 basis points below headline inflations 1.94 percent average. Meanwhile, trimmed mean inflation has come in at 1.83 percentjust 10 basis points below headline. Setting policy using conventional core as your guide is like navigating using a compass: It has a systematic bias and is influenced by local anomalies in the Earths magnetic field. Using the trimmed mean to set policy is more akin to navigating by GPS.

I wanted {liftoff} to happen in March, and I lost the argument.

"At this point, raising rates in June looks like the attractive option for me," Federal Reserve Bank of Richmond President Jeffrey Lacker told reporters on Tuesday after giving a speech in Raleigh, North Carolina. "Data between now and then may change my mind, but it would have to be surprising data."

"What I want is data that gives me some confidence that inflation is moving back up" toward the Feds 2 percent goal, Powell said in a Monday interview in Washington with Peter Cook on Bloomberg Television.
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"Most of all, wages have been low," he said. "Wages do not suggest any tightness in the labor market yet. Those things tend to indicate that the natural rate of unemployment might be lower than its estimated to be."

Fisher repeated he expects the Fed to raise interest rates "some time this year."

Mr. Plosser repeated in his interview his long-held belief that the course of economic data suggests the Fed should be raising rates now, or very soon. Mr. Plosser also said the Feds new commitment to be patient when it comes to the timing of rate increases was a bad idea that complicates the central banks other commitment to change rates in reaction to incoming data.

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.

"I think that sometime around the middle of the year we are going to be closer to a decision, at least I would think we would be closer to it being an appropriate timing to raise rates," San Francisco Fed President John Williams said at a meeting of the Bay Area Economic Institute.
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"It's going to be a very interesting year in terms of global events, so I'm going to watch the data, and decisions will be based on what actually happens, not just on what our forecasts are," Williams said.
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The Federal Reserve's decision on when to raise interest rates will be driven by economic data, a top Fed official said on Friday, shortly after expressing his own view that mid-year would be an appropriate time to consider a rate rise.

"Right now it's January. What we will do in June, September or whatever, later in the year, will really depend on what's happening in the economy, what's happening globally, in terms of our goals," San Francisco Fed President John Williams said at a Bay Area Council Economic Institute event. "I do not prejudge what that decision will be until we actually have those debates and discussions."

Federal Reserve Bank of St. Louis President James Bullard said Friday he still favored raising U.S. interest rates by the end of the first quarter, even with inflation well below the central banks 2% target.

Mr. Bullard said he was willing to adjust the pace of further rate increases to reflect wider economic trends, but that a lift off in inflation was not as important as moving short-term rates from near zero.

I still think we should get going with our rate rises, he told reporters after a speech in Chicago. The data lift off {date of liftoff?}is not so critical as the pace.

Mr. Bullard said the Fed risked falling behind the curve if it waited until June, when many investors and some policy makers expect the first rate increase. He added that if the central bank waits until summer to move, the rise could be followed by a faster pace of subsequent increases.

The level of inflation is not so low that it can alone justify a policy rate of zero, Mr. Bullard said earlier in a speech in Chicago.

Federal Reserve Bank of San Francisco President John Williams, who will vote on policy this year, said raising interest rates in June would be a close call amid strong momentum in the labor market and weaker wage gains.

I would expect by June that the argument pro and con for lifting off rates will be probably a close call assuming that inflation doesnt fall further, Williams said today in a telephone interview from his San Francisco office. Its a reasonable guess.
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I think the momentum evident in the second half of 2014 will carry over into 2015, and the ongoing outlook will remain solid.

If that is indeed the case, I believe the first action to raise interest rates will in all likelihood be justified by the middle of the year.

The phrase "middle of the year" is admittedly not very precise. That's purposeful on my part. Understandably, some financial market participants are fixated on what exact month the first move will occur. Perhaps it's easy for me to say, but I don't think the exact timing of liftoff is the most important concern. A couple of years hence, whether the first rate increase came at a particular meeting or anotherwhether a bit earlier or later than expectedisn't going to make a great deal of difference for the real, Main Street economy.

The key liftoff decision criteria ought to be closely linked to the FOMC's two principal policy objectivesmaximum employment and low and stable inflation. In my view, the biggest factor influencing the actual timing of a liftoff decision should be the Committee's confidence that these objectives will be achieved in an acceptable timeframe and, especially, that inflation will move at deliberate speed toward the target of 2 percent per annum.
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It's quite possible there will be considerable ambiguity in the picture presented by data in the first half of the year. Beyond the noise in inflation numbers, it's obvious there is simply a lot moving around at this timeoil prices, the dollar, even quarterly growth numbers, in all likelihood.

Noisy, jumpy data affect my confidence in the outlook. I'm likely to decide what policy decision to support based on where I think things are headed. When the numbers come in noisy, it's just harder.

If the early months of this year bring mixed news on the economy, the risk manager in me will lean to preferring a later date for the first policy move to an earlier one. That said, after six years of recovery and considering all that that has both transpired and been accomplished, I don't think we policymakers should get too rigid about liftoff a little earlier or later. My preferred timing may not be the Committee's consensus decision.
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At the recent meeting of the FOMC in December, the Committee made an adjustment of its forward guidance by introducing the theme of patience in beginning to normalize the stance of policy. I supported and expect to continue to support a patient approach, one that is relatively cautious and conservative as regards the pace of normalization of rates.

I am happy to be participating on todays panel, especially since the topic is monetary policy normalization. At the AEAs annual meetings since 2008, my sense is that monetary policy discussions have not had the word normal in the title. It is a pleasure to be seeing the types of economic conditions where such a discussion is not just theoretical where the economy has improved enough for the discussion to move from whether normalization will occur to when normalization will occur.

As I consider these questions for this cycle, I believe the continued very low core inflation and wage growth numbers provide ample justification for patience. A patient approach to policy is prudent until we can more confidently expect that inflation will return to the Feds 2 percent target over the next several years. Such patience also provides support to labor markets, boosting the prospects of the many Americans who were adversely impacted by the financial crisis, severe recession, and slow recovery

From November 2010 through July 201431 consecutive meetingsthe FOMC was in a position to state that longer-term inflation expectations remain stable. Because of the decline in market-based measures of longer-term inflation expectations in the past few months, the Committee has not been able to make this assertion in the past three FOMC statements.

Despite these facts, the FOMC communicated its intention after this weeks meeting to continue gradually removing monetary accommodation. In my assessment, the FOMCs failure to respond to weak inflation runs the risk of creating a harmful downward slide in inflation and longer-term inflation expectations of the kind that we have seen in Japan and Europe. I see this risk to the credibility of the inflation target as unacceptable, given how hard it would be for the FOMC to respond successfully if this eventuality did indeed materialize.