The important point to recognize, however, is that actual real interest rates — at about negative 1 ¾ percent — are now substantially below estimates of the current natural rate, which as I noted are around zero. Moreover, while the natural interest rate is lower than usual right now, over time one might expect it to rise as it reverts toward its longer-run mean. So despite the relatively low natural real interest rate, there are still strong reasons to expect real short-term interest rates to rise in the near term.

The broad takeaway, I’d suggest, is that even though interest rates are likely to be lower than usual for the next few years, monetary policy is still highly accommodative right now. Interest rate increases within the range envisioned by FOMC participants would be relatively slow by historic standards, and would still leave policy in an accommodative stance.

I believe that continuing along the path of monetary policy normalization is important. There are various costs to maintaining excessive accommodation for too long—particularly in terms of potential distortions in investment, inventory and hiring decisions, which may need to be (painfully) unwound when policy normalizes. My experience is that these imbalances are sometimes easier to recognize in hindsight.

In thinking about these questions, we’re sensitive to the fact that monetary policy affects the economy with a lag. As consequence, if we delay further normalization until we actually see evidence of excessive accommodation, there is a risk that we will have waited too long.

“In short, inflation has been held down by two factors, the falling price of oil and the rising value of the dollar,” he said. “But neither factor is likely to depress inflation indefinitely. After the price of oil bottoms out, I would expect to see headline inflation move significantly higher. And after the value of the dollar ultimately tops out, core inflation should move back toward 2 percent.”

If oil prices and the dollar stabilize, but inflation doesn’t quickly respond, “a shallower path for interest rates would make sense,” Lacker said. “If inflation moves rapidly back toward 2 percent, however, a more aggressive path would be in order.”

Liesman: As a central banker do you feel difference being too far ahead of the pack here? Is there a limit to how much the fed can and will do this year because of the weakness overseas?

Williams: So you know, we talk about divergence between the U.S. and the rest of the economy. There's a divergence within the U.S. economy too reflecting that. And that specifically, our domestic demand – consumer spending, investment spending – is actually on a very good trajectory. Where we are getting hit hardest is in terms of our net exports. That's a big drag on our economy. So, you know, the way I see it over the next couple of years, we're going to need significant monetary accommodation, a very gradual pace of rate increases to keep our economy on this 2, 2.25% growth path given the headwinds we're facing, especially from abroad.

Liesman: So let's talk about the path for fed rate hikes this year. The median seems to suggest four this year. Is that also your forecast?

Williams: Well, I think that given the forecast they have for where the economy's going, what's happening with inflation – and inflation is the one thing that we're still struggling to get back to our 2% goal. That to me is the main focus. You know, I think something in that 3 to 5 rate hike range makes sense, at least at this time. But we're data dependent. We continue to be data dependent so the data's suggesting that gradual pace of rate hikes makes sense. But we'll have to re-evaluate that, reassess that, based on where we see inflation and other indicators that kind of are factors in inflation and how we see economic growth over the next year.

But the underlying health of the U.S. economy, I consider to be quite sound. I think it's a myth that expansions die of old age. I do not think that they die of old age. So, the fact that this has been quite a long expansion doesn't lead me to believe that its days are numbered.

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So when you say that central banks often kill {expansions}, I think the usual reason when that has been true is that central banks have begun too late to tighten policy and they've allowed inflation to get out of control. And at that point, they've had to tighten policy very abruptly and very substantially, and it's caused a downturn, and the downturn has served to lower inflation.

Washington Post: Let’s start with Friday’s [November] jobs numbers. Everyone is saying this is cementing the Fed’s liftoff in December. What do you think?

Bullard: I thought it was is a very strong report. I think the monthly average of 218,000 is very promising for the U.S. economy. I think it shows it was probably a mistake to delay from September, when people were concerned there was a slowdown in the fall. That hasn’t really materialized. I will argue for a move in December. I don’t want to prejudge what the committee might do, but that will be my position.

WP: An actual mistake not to move in September? What are the consequences, then? Is the Fed already behind the curve?

Bullard: The timing of the rate hike is probably not critical, and so we can certainly make up for the fact that we didn’t move earlier.

WP: You guys have been saying for a long time that it’s not just the first increase that matters: It’s the entire path. Let’s talk about what gradual means.

Bullard: There’s been so much pressure on this first move, and you can kind of understand it because we haven’t moved since December 2008. That’s seven years. We’ve been pinned down to zero. If we do move in December, it will certainly be momentous. It will be a great signal I think for the U.S. economy: It does signal confidence. It does signal that we can move away from emergency measures, finally.

But you’re right, the debate will immediately turn to how will normalization proceed? My main concern about that is we remain data dependent, and we do not get locked into a mechanical pace of rate increases the way that we did in 2004 to 2006.

In that sequence, for those that remember it, we raised the funds rate a quarter percent at every meeting for 17 meetings in a row. I’m virtually certain that was not optimal policy.

At the time, we were congratulating ourselves that this was a very organized way to go about the normalization process. But in the end, we really got burned with the huge crisis and a housing bubble that ran far out of control. And when it collapsed, it caused a major global macroeconomic disaster. So I don’t think we want to be in the position of trying to telegraph a mechanical rate hike path the way we did in that situation.

I would like to see rates raised sooner rather than later. With an early start, we can better ensure that monetary accommodation is removed gradually and that inflation returns to the Fed’s 2 percent target smoothly. My fear is that the Federal Reserve risks losing its credibility and only adds uncertainty to the economic landscape the longer the Committee waits to begin normalizing policy.

Therefore, raising rates this year will, in my view, serve to reduce monetary policy uncertainty and to keep the economy on track for sustained growth with price stability.

When the Committee begins to normalize the stance of policy, doing so will be a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession. In that sense, it is a day that I expect we all are looking forward to.

My preference is sooner rather than later for a few reasons.

First, Milton Friedman famously taught us that monetary policy has long and variable lags.Research shows it takes at least a year or two for it to have its full effect.So the decisions we make today must take aim at where we’re going, not where we are. The economy is a moving target, and waiting until we see the whites of inflation’s eyes risks overshooting the mark.

Second, experience shows that an economy that runs too hot for too long can generate imbalances, ultimately leading to either excessive inflation or an economic correction and recession. In the 1960s and 1970s, it was runaway inflation. In the late 1990s, the expansion became increasingly fueled by euphoria over the “new economy,” the dot-com bubble, and massive overinvestment in tech-related industries. And in the first half of the 2000s, irrational exuberance over housing sent prices spiraling far beyond fundamentals and led to massive overbuilding. If we wait too long to remove monetary accommodation, we hazard allowing these imbalances to grow, at great cost to our economy.

Finally, an earlier start to raising rates would allow a smoother, more gradual process of normalization. This gives us space to fine-tune our responses to any surprise changes in economic conditions. If we wait too long to raise rates, the need to play catch-up wouldn’t leave much room for maneuver. Not to mention, it could roil financial markets and slow the economy in unintended ways.

My preference for a more gradual process also reflects that the economy, for all its progress, still needs some accommodation. We don’t need the extraordinarily accommodative policy that has characterized the past several years, but the headwinds we’re facing—the risks from abroad, for instance, and their impact on the dollar—call for a continued push. Not with a bulldozer, but a steady nudge.

[W]e must also take into account the well-documented lags in the effects of monetary policy. Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.
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As you know, there has been considerable focus on the first increase in the federal funds rate after nearly seven years in which that rate was at its effective lower bound. We have tried to be as clear as possible about the considerations that will affect that decision. Of course, even after the initial increase in the federal funds rate, monetary policy will remain accommodative. And it bears emphasizing that what matters for the economic outlook are expectations concerning the path of the federal funds rate over time: It is those expectations that affect financial conditions and thereby influence spending and investment decisions. In this regard, the Committee anticipates that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

How does [my current] asymmetric assessment of risks to achieving the dual mandate goals influence my view of the most appropriate path for monetary policy over the next three years? It leads me to prefer a later liftoff than many would like, followed by a very gradual normalization of our monetary policy. I think such a policy setting will best position the economy for the potential challenges ahead.

Now, I take seriously the view that I should go into every FOMC meeting with an open mind regarding the policy decision. And I will do so in our meeting two weeks from now. Should we raise rates or not? I admit to some nervousness about our upcoming decision. Before raising rates, I would prefer to have more confidence than I do today that inflation is indeed beginning to head higher. Given the current low level of core inflation, some evidence of true upward momentum in actual inflation would bolster my confidence. I am concerned, however, that it could be well into next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation.

"In the relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates,” Fischer on Thursday told the Asia Economic Policy Conference at the Federal Reserve Bank of San Francisco. "We have done everything we can to avoid surprising the markets and governments when we move, to the extent that several emerging market (and other) central bankers have, for some time, been telling the Fed to ’just do it.’”

It will likely be appropriate that U.S. monetary policy remain accommodative for some time. Moreover, a lower-than-usual federal funds rate may well be needed to achieve any given desired level of accommodation. Accordingly, it is probable that the return to “normal” interest rates will be gradual. As a business manager or as an investor, I think these are key messages I would be taking from our FOMC statements.

I am now reasonably satisfied the situation has settled down... So I am comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions.