“No matter which explanation seems to be at work, we can continue to push accommodative policy” until joblessness falls.

 The Fed could sharpen its forward guidance in two directions by implementing a state-contingent policy. The first part of such a policy would be to communicate that we will keep the funds rate at exceptionally low levels as long as unemployment is somewhat above its natural rate. The second part of the policy is to have an essential safeguard — that is, a commitment to pull back on accommodation if inflation rises above a particular threshold. This inflation safeguard would insure us against the risks that the supply constraints central to the structural impediments scenario are stronger than I think. Rates would remain low as long as the conditions were unmet.

 Furthermore, I believe the inflation-safeguard threshold needs to be above our current 2 percent inflation objective — perhaps something like 3 percent...

We could do more in both [balance-sheet expansion and communication] directions. For instance, we could elaborate on our forward commitment to keep short-term rates low. Indeed, I believe it would be desirable if the committee were able to provide additional guidance as to the economic conditions that the committee would expect to see before raising interest rates.

It is time for the Fed to explicitly adopt the flexible inflation targeting framework and in doing so take three steps to strengthen its approach to policymaking. First, clarify and make explicit that our long-run inflation objective is 2 percent year-over-year PCE inflation. Second, publish information about the individual FOMC participants’ assessments of the appropriate monetary policy that underlie their economic projections in the FOMC’s Summary of Economic Projections. Third, provide information on the FOMC’s reaction function. That is, communicate policy decisions in terms of changes in the economic conditions that the FOMC is using to formulate policy.

The Committee should provide a public contingency plan—that is, provide clear guidance on how it will respond to a variety of relevant scenarios.

I believe that this kind of public contingency planning will have many benefits. Let me mention two. First, in recent statements and speeches, I have described why the FOMC actions in August and September seemed inconsistent with the evolution of the macroeconomic data in 2011. This kind of inconsistency is much less likely to occur once the FOMC has formulated an explicit public contingency plan. Second, I’ve heard from businesses that policy uncertainty is curbing their incentive to hire or invest. Similarly, I’ve heard from consumers that policy uncertainty is curbing their incentive to spend. A public FOMC contingency plan can help reduce the level of policy uncertainty being created by the Fed.

No contingency plan can ever be definitive. Inevitably, the FOMC will learn things that it did not expect to learn, and events will occur that it did not expect to occur. And so there may be conditions that force the FOMC to deviate from a chosen plan. However, having a public plan, and couching its decisions against the backdrop of that plan, will enhance Federal Reserve transparency, credibility, accountability and consistency.

MBS purchases and treasury securities purchases are one set of tools that we have. The other set of tools that we have are communication tools which essentially tie interest rate decisions to economic conditions or to time.

Those are, with interest rates close to zero, those are basically the two tools that we have, and we need to continue to work on how best to use them and in what combination to use them to achieve our objectives.

As I noted in my opening remarks, no decisions have been made. So I want to be very clear that no final outcome here in this discussion.

But clearly there's a range of things that we can do. We can provide more information about our objectives, for example. We could provide information about where we want inflation to be in the long term, for example.  We could also provide information about the future path of interest rates, which we've done to some extent via our mid-2013 language in the statement.

An alternative approach, which Charlie Evans (ph) and others have suggested, is to tie that to economic conditions and to provide more information about under what circumstances we would raise rates. That is certainly something that we have discussed and I think is an interesting alternative.

There's a lot of interest in using the survey of economic projections in constructive ways as we have up till now to provide information to the public about our plans.  And in particular, using the SEP as a way of giving information about our future policy decisions is something that's on the table. There's no decision made about that, but that's one direction that we might find productive.

At our August meeting, the Committee decided to provide more-specific information about the likely time horizon by substituting the phrase "at least through mid-2013" for the phrase "for an extended period." This clarification appears to have reduced market uncertainty about the Committee's current policy expectations.

The Committee's guidance refers to a specific calendar date, which could be periodically revised by the Committee if appropriate. However, it is explicitly framed as contingent on economic conditions, including "low rates of resource utilization and a subdued outlook for inflation over the medium run." Importantly, it is not stated as an unconditional commitment to a specific course for the federal funds rate. Market participants are naturally interested in gaining greater insight into how shifts in the economic outlook would affect the likely timing and pace of policy firming. As noted in the minutes of the August and September FOMC meetings, the Committee has discussed possible approaches to enhance its forward guidance along these lines--that is, to provide greater insight concerning its "reaction function."

One potentially promising way to clarify the dependence of policy on economic conditions would be for the FOMC to frame the forward guidance in terms of specific numerical thresholds for unemployment and inflation. Such an approach was discussed by my colleague Charles Evans, president of the Federal Reserve Bank of Chicago, in a recent speech.

The approach of numerically specifying the values of unemployment and inflation that could prompt policy tightening is not without potential pitfalls, however. For example, such thresholds could potentially be misunderstood as conveying the Committee's longer-run objectives rather than the conditions surrounding the likely onset of policy firming. Thus, in addition to giving careful consideration to this particular approach, it seems sensible to explore other potential enhancements to FOMC communications--a topic to which I will return shortly.

You should make policy according to the state of the economy, not according to the calendar.  It’s very awkward for the committee to be trying to move that date around.

Simply promising to keep the policy rate near-zero for longer and longer periods of time may encourage a Japanese-style outcome in which the policy rate simply remains near zero and markets come to expect a mild rate of deflation.  This possibility has clear support in the theoretical literature but is too often ignored in policy discussions.

Now, with further slowing in the economy, some call for further monetary accommodation. Let me stress that no decision has been made on this difficult question. However, should such a decision be made, I think it is time for the Committee to discard one-time policy changes with fixed end dates. The Committee in the past never contemplated announcing several hundred basis point moves to be completed at a date certain. Yet that is how the Committee behaves today.

At our August meeting, the FOMC took a step in that direction, issuing a statement that we are likely to keep the federal funds rate at exceptionally low levels at least through mid-2013. In one respect, this wasn’t such big news. Even before the announcement, financial market participants generally didn’t expect the Fed to raise rates much earlier than mid-2013. But it was news in the sense that it removed uncertainty and helped financial markets better understand our intentions. In response to the FOMC statement, financial market expectations of future interest rates and U.S. Treasury yields fell. Note also that we are not tying our hands by making this announcement. We haven’t made a guarantee. We will alter our policy as appropriate if circumstances change.

Asked if he would push at the Sept. 20-21 policy meeting for clarity on how long the Fed will leave interest rates unchanged, he said that “would be a welcome addition to our current conditional forward guidance.”

“At the moment we added mid-2013 to the statement and there’s some conditionality associated with that,” he said. “I would prefer to be extraordinarily clear in the conditioning to that. That would be truly clarifying.”

“We may find, as economic circumstances evolve, that policy adjustments are required,” Lockhart said to the Greater Lafayette Chamber of Commerce. “In more adverse scenarios, further policy accommodation might be called for. But as of today, I am comfortable with the current stance of policy, especially considering the tensions policy must navigate between the short term” and longer structural adjustments.

Lockhart said in response to audience questions that the central bank should have a significant impact through its pledge to hold interest rates low through at least mid-2013, while the commitment may change should the economy gain strength.

The central bank’s pledge “should have a big influence on the market,” Lockhart said. “Even that is conditional to an extent” and “could be revisited,” he said. “For the most part, we can count on it.”

“I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future -- and this ability has certainly proved very useful in the past three years,” Kocherlakota said today, according to prepared remarks for a speech in Bismarck, North Dakota. “I plan to abide by the August 2011 commitment in thinking about my own future decisions. Of course, the case for any additional easing would have to be made on its own merits.”

Kocherlakota changed his mind by October.