In such cases, policy may take out insurance against these adverse risks and move the policy rate more than the usual prescriptions of the Taylor Rule. If the downside spillovers do materialize, then policy may have to be recalibrated further.

Part of our job as a central bank is to properly price these insurance premiums against the achievement of maximum employment and price stability over the medium term. And if further policy adjustments become necessary, they need to take into account the insurance that is already in place. In addition, when risks subside, promptly moving policy to appropriate levels will reiterate and reinforce our commitment to our fundamental policy goals.

I agree that the Fed certainly cannot afford to take for granted that inflation expectations will remain well-anchored.

At the same time, there are downside inflationary pressures relating to the slowdown in the U.S. economy. ... [T]he U.S. economy is particularly exposed to downside risks from the unwinding of the housing bubble and disruptions in financial markets. There is some slack now in the U.S. labor market and, if these downside economic risks materialize, quite a bit more slack could emerge. Even with a flatter Phillips curve, such a development would place some downward pressure on inflation. It is this unpleasant combination of risks to both inflation and employment that the FOMC must balance as it assesses the appropriate path for monetary policy going forward.

Insurance against recession is not free. ... We have to have a balance (between) employment and financial risks with inflation risks

The current economic environment is exceptionally fluid, and the economy faces some substantial risks. The Federal Reserve is committed to addressing these risks as we remain focused on achieving our dual mandate of price stability and maximum employment.

The point is that, at present, we simply do not have the ability to adequately account for the impact globalization has on the gearing of our domestic economy. Absent that capacity, we cannot, in my opinion, confidently assume that slower U.S. economic growth will quell U.S. inflation and, more important, keep inflationary expectations anchored. Containing inflation is the purpose of the ship I crew for, and if a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient.

To some, this may appear a Hobson’s choice. I don’t see it that way. Our obligation is to prevent inflation in order to sustain long-term employment growth. I believe that the best way to cut through the treacherous economic waves that are upon us and keep our ship steaming forward is to stick to our purpose. 

We like these buzzwords recession and stagflation. I don't think that's the issue. The issue is how can we conduct monetary policy and use the tool kits that we have in order to provide the conditions for sustainable, non-inflationary growth. That's what our hearts are set on. That's what our minds are devoted to. That's what we're trying to achieve.

Our job at the Federal Reserve is to put in place those policies that will promote both price stability and growth over time.  We have the tools.  As Chairman Bernanke often emphasizes: We will do what is needed.

Kroszner demurred on whether the U.S. economy is in recession.

"There are some challenges in the economy right now," he said.

On signs of inflation, he said, "We have seen some numbers in recent reports that are higher than they were before," but he added that the Fed must be careful to honor its dual mandate that includes ensuring maximum employment along with price stability.

From Q&A as reported by Market News International

We have to be mindful of that fact that we have to create the conditions for employment growth, at the same time be careful that we don't stir the embers of inflation.

As reported by Reuters.

While the Federal Open Market Committee (FOMC)—the Federal Reserve’s main monetary policymaking body—has not adopted an explicit numeric inflation target, many individual FOMC participants have been quite forthright about their views on price stability or “comfort zones” for inflation. I am on record as favoring a target in terms of the personal consumption price index of 1.5 percent annual rate of increase plus or minus 0.5 percent.

Controlling Inflation
The issue today is less about the desirability of controlling inflation, or about the appropriate inflation target range, than about the specification of a monetary policy to achieve the agreed objectives of low inflation and a high level of employment.

I think the Federal Reserve has taken appropriate policy steps to respond to a financial shock, a shock that may well produce parallels to the headwinds episode of the early 1990s. In this environment, we need to remain sensitive to evolving financial conditions and to incoming information on business activity in order to further determine the relevance of that earlier experience. And the aftermath of that episode may also prove relevant, in that it illustrates the underlying resilience of the American economy and the value of policy adherence to the dual mandate.

I think it is important to remember that the Federal Reserve has a dual mandate — working to foster financial conditions that help the economy obtain maximum sustainable employment and price stability. As the Committee noted in the policy statement following the January FOMC meeting, though downside risks to growth remain, we think the policy actions taken in January, in combination with earlier moves, should help promote moderate growth over time and mitigate the risks to economic activity. We also expect that inflation will moderate over time. Looking ahead, my policy views will depend on the evolution of these risks, as well as how developments influence the price stability component of our dual mandate over the medium term.

A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability and, in particular, whether the policy actions taken thus far are having their intended effects. Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast.

As a policymaker, I feel acutely the tension between the need to promote growth and guard against the specter of higher prices. Implicit in my view is the forecast that inflation will moderate, allowing policy to focus on the very apparent near-term risks to the broad domestic economy.

In my view, the degree of substantive action to support economic growth and insure against downside risk will be conditioned by what we see coming down the inflation pike. To deliver on its dual mandate, the Fed must keep one ear cocked toward signs that inflationary expectations are drifting upward as we execute additional monetary measures. 

...

The challenge to monetary policy, as I see it, is to achieve the growth part of our mandate in the short term and get “ahead of the curve” without shaking faith in the currency over the long term.