“If we stay on the good path which we’re on, then if we were to raise two or three times this year it wouldn’t be that much of a surprise,” Mr. Williams said.

I support a gradual adjustment of short-term interest rates toward a more normal level, but I view the current level as too low for today’s economic conditions. The economy is at or near full employment and inflation is close to the FOMC’s target of 2 percent, yet short-term interest rates remain near historic lows. Just as raising rates too quickly can slow the economy and push inflation to undesirably low levels, keeping rates too low can also create risks. Interest-sensitive sectors can take on too much debt in response to low rates and grow quickly, then unwind in ways that are disruptive. We witnessed this during both the housing crisis and the current adjustments in the energy sector. Because monetary policy has a powerful effect on financial conditions, it can give rise to imbalances or capital misallocation that negatively affects longer-run growth. Accordingly, I favor taking additional steps in the normalization process.

If the incoming economic data continue to be consistent with gradual improvement in labor markets and inflation getting closer to target, the Fed should be ready to gradually normalize interest rates, perhaps at a pace not currently anticipated by the federal funds futures market.

In short, given the lack of notable price and wage pressures and the possibility of drawing more people back into the labor market, I believe the current accommodative policy stance is appropriate.

He believes the Fed is doing whatever it can to get the economy moving and called the current stance of monetary policy appropriate.

"We are coming up short on both inflation and I think there is still slack in the labor market," said Kashkari.

Bullard told reporters before the speech that for the time being there is "obviously a pretty big gap" between the markets’ prediction for future rate rises and the Fed’s own and it was difficult to conclude who is more accurate.

“If we [raised rates] aggressively, we would be setting the brakes on the economy,” he said. “You will see us move when the data allows.”

"It's not about tightening policy so much as pulling back a little bit" on monetary accommodation, Williams said.

While I believe that gradual federal funds rate increases are absolutely appropriate, I do not see that the risks are so elevated, nor the outlook so pessimistic, as to justify the exceptionally shallow interest rate path currently reflected in financial futures markets. The forecast for economic variables contained in the most recent Fed policymakers’ Summary of Economic Projections is consistent with my own estimate – GDP growth slightly above potential and a continued slow decline in the unemployment rate.

Furthermore, I would point out that the extremely shallow rate path reflected in the market for federal funds futures seems at odds with forecasts by private sector economists and by financial firms that serve as counterparties to the Federal Reserve (the so-called primary dealers), as well as my own forecast for the U.S. Economy. Most of these forecasts envision a much healthier U.S. economy than is implied by that unusually shallow path of the funds rate, and many of the major private forecasters expect short-term rates to rise more rapidly than implied by financial futures.

My concern is that given these conditions, an interest rate path at the pace embedded in the futures markets could risk an unemployment rate that falls well below the natural rate of unemployment. We are currently at an unemployment rate where such a large, rapid decline in unemployment could be risky, as an overheating economy would eventually produce inflation rising above our 2 percent goal, eventually necessitating a rapid removal of monetary policy accommodation. I would prefer that the Federal Reserve not risk making the mistake of significantly overshooting the full employment level, resulting in the need to rapidly raise interest rates – with potentially disruptive effects and an increased risk of a recession.

After years at the effective lower bound for short-term interest rates, economic conditions have finally warranted the start of U.S. monetary policy normalization. But these monetary policy adjustments are likely to be gradual and cautious, as we continue to face significant uncertainties and the headwinds to growth from the financial crisis have not fully abated.

One reason I am let's say supportive of a patient and cautious posture is because I don't think the (Fed) is behind the curve particularly as it relates to inflation.

Based on what I have seen, I am not going to be advocating a move in April -- I have changed my view.

Hays: Let's talk about the Fed's reaction function broadly, but also specifically to Dennis Lockhart. You also said not too long ago you were forecasting you said two rate hikes this year, the possibility of three.

So let's start with what do you have to see, Dennis Lockhart, to be on board for the next rate hike?

Lockhart: I am -- let me put it this way -- I am framing my decisions related to let's say April, June, and thereafter on four principal criteria.

• The first is the growth numbers, and how growth seems to be trending. Most importantly, are we sustaining momentum in terms of growth?
  
  
• The second would be the employment numbers. And I would be using a kind of threshold of 200,000 payroll jobs a month as a good indicator of a continuing, strong job picture, employment picture.
  
  I would say at the same time that as we move forward, if we continue to make progress in the economy, you would expect naturally that that jobs number would decline. But for the moment, I'm saying 200,000 a month as a kind of threshold number.
  
  
• The third aspect would be inflation. And I'm paying particular attention right now to core inflation and trimmed mean cuts of inflation to try to understand the underlying strengths of upward price pressure. So that's the third.
  
  
• And the fourth would be inflation expectations. And the direction that inflation expectations apparently are going or the explanation for break evens that seem to be declining.

Some overshoot for a limited period of time I think considering what other benefits that might have for the economy could be an acceptable situation. If we get above 2.5 percent, I would begin to start to get a little bit nervous.

And let me make another point that is important because the Committee has reiterated its position that our attitude towards inflation is symmetric. That is to say we think the cost to the economy of a shortfall inflation are equal to the costs to the economy or similar to the cost to the economy of an overshoot.

So we're not viewing two percent as a ceiling. And I think that suggests that some tolerance of overshooting two percent would be acceptable.