Kaplan said he’d be looking for continued progress on the Fed’s dual mandate for price stability and full employment to support hiking next month. “I just want to see continued progress,” he told Kathleen Hays in an interview on Bloomberg Radio. “What I don’t want to see is deterioration in either of those measures. That would give me pause.”

"We've been missing our 2 percent inflation goal for three and a half years or so, global disinflationary factors are still holding inflation down...The data to me isn't so much about the labor market continuing to improve, I'm very positive on that, it's more about inflation moving back to 2 percent in the context of very strong headwinds," he explained, citing the strong dollar and low commodity prices.

I’d also like to stress the “above or below” part. Many people think that Fed policymakers’ concern lies disproportionately with inflation that’s too high. They think we view inflation lower than 2 percent as sort of “not great,” but see inflation above 2 percent as catastrophic. That’s not the case. In my view, inflation somewhat above 2 percent is just as bad as the same amount below.

Of course, I am aware of, and closely monitoring, potential risks. But I want to be clear what that means. It’s often said that the economy isn’t the stock market and the stock market isn’t the economy. That’s very true. Short-term fluctuations or even daily dives aren’t accurate reflections of the state of the vast, intricate, multilayered U.S. economy. And they shouldn’t be viewed as the four horsemen of the apocalypse. Remember, the expansion of the 1980s wasn’t derailed by the crash of ’87, and we sailed through the Asian financial crisis a decade later. I say “remember”—some of you here will actually remember and others will remember it from your high school history class.

From a policymaker’s perspective, my concern isn’t as simple as whether markets are up or down. Watching a stock ticker isn’t the way to gauge America’s economic health. As Paul Samuelson famously said, the stock market has predicted nine out of the past five recessions. What’s important is how it impacts jobs and inflation in the U.S.

At the risk of puncturing some of the more colorful theories about what drives the Fed, I lay before you the cold, hard truth: Fed policymakers are even more boring than you think. Because all we see is our mandate. How does this affect American jobs and growth? What does this mean for households’ buying power?

It would be hard to formulate a quantitative metric of long-run financial stability. It would be hard for policymakers to know how to treat deviations from that metric. Finally, the lags associated with the influence of monetary policy on this metric are highly uncertain. These challenges mean that adding a financial stability mandate would likely generate more public uncertainty about policy choices and economic outcomes. In considering whether to add a third mandate, these potentially large costs would have to be weighed against whatever benefits might be identified.

There has been a lot of conversation recently about the desirability of initiating a gradual increase in the fed funds rate sometime in 2015. In my view, we should judge the desirability of such a policy decision through the lens of the FOMC’s objectives. Personal consumption expenditures (PCE) inflation has been running well below 2 percent for more than three years and is currently at 0.3 percent. My current outlook is that it will continue to do so for several years. Based on this outlook, raising the fed funds rate in this calendar year would be inappropriate, because such an action would serve to further delay the return of inflation to target.

These considerations refer only to the price stability objective. In terms of the maximum employment objective, I believe that the FOMC can best fulfill this congressional mandate by doing what it can to facilitate further labor market improvement. Again, this consideration argues against raising the fed funds rate in 2015.

Thus, under my current economic outlook, the FOMC can best achieve its objectives by keeping the fed funds rate target at its current level during this calendar year.

The minutes for the January 2014 meeting note that FOMC participants saw the coming year as an appropriate time to consider whether the statement could be improved in any way. I concur: The time is right to consider sharpening the FOMCs statement of its objectives in several ways.

One has to bear in mind that monetary policy has to lead economic developments. Monetary policy is a bit like duck hunting. If you want to bag a mallard, you dont aim where the bird is at present, you aim ahead of its flight pattern. To me, the flight pattern of the economy is clearly toward increasing employment and inflation that will sooner than expected pierce through the tolerance level of 2 percent.

Some economists have argued that we should accept overshooting our 2 percent inflation target if it results in a lower unemployment rate. Or a more fulsome one as measured by participation in the employment pool or the duration of unemployment. They submit that we can always tighten policy ex post to bring down inflation once this has occurred.

I would remind them that Junes unemployment rate of 6.1 percent was not a result of a fall in the participation rate and that the median duration of unemployment has been declining. I would remind them, also, that monetary policy is unable to erase structural unemployment caused by skills mismatches or educational shortfalls. More critically, I would remind them of the asymmetry of the economic risks around full employment. The notion that we can always tighten if it turns out that the economy is stronger than we thought it would be or that weve overshot full employment is dangerous. Tightening monetary policy once we have pushed past sustainable capacity limits has almost always resulted in recession, the last thing we need in the aftermath of the crisis we have just suffered.

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 FOMC has said that, under its current monetary policy stance, it expects the unemployment rate to decline gradually to desirable levels. It has said too that it expects inflation to move back toward 2 percent over the medium term. By easing monetary policy relative to its current stance, the FOMC could facilitate a more rapid fall in unemployment and more rapid return to 2 percent inflation. Hence, the Committee could do better with respect to both of its congressionally mandated objectives by adopting a more accommodative monetary policy stance.

Recognizing the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates. Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets. Moreover, renewed economic weakness would pose its own risks to financial stability.

Because only a healthy economy can deliver sustainably high real rates of return to savers and investors, the best way to achieve higher returns in the medium term and beyond is for the Federal Reserve--consistent with its congressional mandate--to provide policy accommodation as needed to foster maximum employment and price stability. Of course, we will do so with due regard for the efficacy and costs of our policy actions and in a way that is responsive to the evolution of the economic outlook

“It’s very important to protect the target both from above, which gets so much attention, but from below as well,” Kocherlakota said.

He said he’s already “in favor of more accommodation” and further declines in the inflation rate would make him “even more” supportive of additional stimulus.

Kocherlakota, speaking today in a panel discussion at the Boston Fed, reiterated a January 2012 policy statement in which the Federal Open Market Committee said its inflation and employment “objectives are generally complementary.”

“However, under circumstances in which the committee judges that the objectives are not complementary, it follows a balanced approach in promoting them,” Kocherlakota said.

The Fed’s dual mandate from Congress is to pursue maximum employment and price stability. We are missing on both of these goals.

It is sometimes argued that … policymakers should follow what might be called a decoupling approach. That is, monetary policy should restrict its attention to the dual mandate goals of price stability and maximum employment, while the full battery of supervisory and regulatory tools should be used to safeguard financial stability. There are several arguments in favor of this approach. First, monetary policy can be a blunt tool for dealing with financial stability concerns…

A related concern is that monetary policy already has its hands full with the dual mandate, and that if it is also made partially responsible for financial stability, it will have more objectives than instruments at its disposal and won't do as well with any of its tasks…

Nevertheless, as we move forward, I believe it will be important to keep an open mind and avoid adhering to the decoupling philosophy too rigidly. In spite of the caveats I just described, I can imagine situations where it might make sense to enlist monetary policy tools in the pursuit of financial stability. Let me offer three observations in support of this perspective. First, despite much recent progress, supervisory and regulatory tools remain imperfect in their ability to promptly address many sorts of financial stability concerns...

Second, while monetary policy may not be quite the right tool for the job, it has one important advantage relative to supervision and regulation--namely that it gets in all of the cracks. The one thing that a commercial bank, a broker-dealer, an offshore hedge fund, and a special purpose ABCP vehicle have in common is that they all face the same set of market interest rates. To the extent that market rates exert an influence on risk appetite, or on the incentives to engage in maturity transformation, changes in rates may reach into corners of the market that supervision and regulation cannot.

Third, in response to concerns about numbers of instruments, we have seen in recent years that the monetary policy toolkit consists of more than just a single instrument…

One of the most difficult jobs that central banks face is in dealing with episodes of credit market overheating that pose a potential threat to financial stability. We ought to be open-minded in thinking about how to best use the full array of instruments at our disposal. Indeed, in some cases, it may be that the only way to achieve a meaningfully macroprudential approach to financial stability is by allowing for some greater overlap in the goals of monetary policy and regulation.