John Williams, president of the San Francisco Fed, said in an interview with Reuters that the first line of defense at the central bank, if needed, would be to telegraph that U.S. rates would stay near zero for longer than mid-2015, when he currently expects them to rise. If the outlook changes "significantly," with inflation showing little sign of returning to the central bank's 2-percent target, he said he would even be open to another round of asset purchases

"If we really get a sustained, disinflationary forecast ... then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider," Williams said.
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In the interview, Williams repeated he is comfortable with his call for a rate hike about nine months from now. But "if inflation isn't moving above 1.5 (percent) and we get stuck into that gear, that would argue for a later liftoff," he said. "If we don't see any improvement in wages, that would be a sign that we still have a lot of slack in the economy and we are not getting any inflationary pressure to move inflation back to 2 percent."

The Fed next meets on Oct. 28-29, when some policymakers are pushing to ditch a promise to wait a "considerable time" before raising rates, given a sharp drop in the U.S. unemployment rate to 5.9 percent. Williams wants to leave that phrase intact for now, but said the central bank could adjust it as the outlook evolves.

Looking back on the period, the run-up to the financial crisis, I don't think by any means measured pace and the very predictable pace of 25 basis points per meeting explains why we had a financial crisis, but it may have diminished volatility and been a small contributing factor. And the committee will have to think about how to do this. I think many people in the aftermath of that episode think that somewhat less of a mechanical pace would perhaps be better, but this is a matter that we will in due time have to discuss.

In addition, given the uncertainties surrounding our forecasts of the pace of labor market improvement and the degree of remaining slack, monetary policy has to be determined largely by incoming data and the signals that data provide about the health of labor markets. If the economy disappoints we should be in no rush to raise short-term rates, but if the economy improves more quickly than anticipated we should raise short term rates earlier. Thus, we should be moving away from providing date-based forward guidance, and instead focus on what incoming data tell us about reaching full employment and 2 percent inflation within a reasonable time period.

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In fact, I actually hold the view that as we approach levels of unemployment that many consider “full employment,” the Fed should no longer issue guidance on the approximate timing of any monetary policy changes.

I do not intend this to reduce transparency in monetary policymaking. Rather, I simply want to acknowledge that any reference to calendar dates has the potential to be inaccurate. The date of “liftoff” from near-zero short-term rates is highly dependent on how the economy actually evolves – in other words, is going to be tied to the current and expected path of inflation and employment. We are getting close enough to targets that, given the uncertainty around forecasts of these variables, incoming data that cause Federal Reserve policymakers to significantly change our outlook for the economy will shift any expected lift-off date forward or backward in time. So, again, reference to calendar dates as we approach targets has the potential to be inaccurate.

In addition to taking another step to taper asset purchases, in July, the FOMC maintained its forward guidance on interest rates.  This guidance indicated that given our assessment of realized and expected progress toward our dual-mandate objectives, it will likely be appropriate to maintain the current 0-to-¼ percentage point range for the federal funds rate for a considerable period after the asset purchase program ends.  With the end of the program nearing, I believe it is again time for the Committee to reformulate its forward guidance.  The forward guidance the FOMC has offered for the path of the policy interest rate has undergone several changes along the way as we’ve moved from the extraordinary times of financial crisis and deep recession to recovery and expansion.  The guidance has tied the eventual liftoff of the fed funds rate from zero to a calendar date, to a numerical threshold for the unemployment rate, and, more recently, to qualitative information rather than to quantitative measures.

While it might sound best to simply give a date about when liftoff is likely to occur, I believe using a calendar date at this point would be poor communication.  It could mislead the public into thinking that policy is on a pre-set course.  If the public doesn’t understand that policy is dynamic and based on the economic outlook, then a change in the guidance can create its own disruption.  Well-formulated forward guidance also has to recognize that economic conditions can evolve differently than anticipated.  For example, over the past year the improvement in the unemployment rate has been faster than the FOMC anticipated just a year ago.  My preference is for forward guidance to convey that changes in the stance of policy will be calibrated to the economy’s actual progress and anticipated progress toward our dual-mandate goals, and to the speed with which that progress is being achieved.  This latter piece recognizes the importance of policy to be forward looking: A faster pace of progress toward our goals would argue for a faster return to normal, while a more subdued pace would argue for a slower return.

ASMAN: Well, as you mentioned, you were -- you were not only a hedge fund guy, a Federal Reserve officer, etc. You have a lot of touts. Most people didn't realize you were also a poet. Earlier, you talked about these dot charts that the Fed has come out with to describe what various Fed officials believe and now you think maybe it's time to get rid of them. And you put that dissent in the form of a poem, which I'm going to read.

"We gave you form so you'd inform about the price of dough, but all you've done is make for fun, and this we didn't know. So out, damned dot! Out with the lot! It's clearly time to go."

You know, I've got to tell you, it sounds a little like Dr. Seuss, Richard.

FISHER: I was channeling Dr. Seuss, David.

Short-term interest-rate markets have for months priced in a slower tempo of increases than policy makers themselves forecast. Thats risky because the misalignment, a bet against a rate path that the central bank alone controls, could lead to volatility if traders have to adjust rapidly, Lacker said.

When there is that kind of gap, it gets your attention, Lacker, a consistent critic of the Feds record easing who votes on policy next year, said in an Aug. 1 interview at his Richmond office overlooking the James River. It wouldnt be good for it to be closed with great rapidity.

Investors may also be giving too much credence to a phrase in the Feds statement that even after employment and inflation are close to its goals, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.

They may be placing more weight on that than I think it deserves, said Lacker, who dissented against his colleagues at every meeting of the FOMC in 2012. They may think we have more conviction about that than we do.

The guidance that I want to give you is that there is no mechanical formula whatsoever for what a “considerable time” means. The answer to what it means is, “it depends”. It depends on how the economy progresses.

My concern is that keeping rates very low into late 2016 will continue to incentivize financial markets and investors to reach for yield in an economy operating at full capacity, posing risks to achieving sustainable growth over the longer run.

In this spirit, I think the FOMC may face a similar communications challenge as the nature of the forward guidance for the path of short-term interest rates evolves over the next couple of years. The 6.5 percent unemployment threshold that we had until recently was not only quantitative in nature, but it also represented a relatively firm commitment on the part of the Committee. While this kind of commitment was entirely appropriate at the zero lower bound, as policy eventually normalizes, guidance will necessarily take a different form; it will be both more qualitative as well as less deterministic. So, for example, when I fill in my "dot" for 2016 in the Survey of Economic Projections, I think of myself as writing down not a commitment for where the federal funds rate will be at that time, but only my best forecast, and one that is highly uncertain at that.

Chair Yellen made a similar point in her March press conference:

More generally, you know, the end of 2016 is a long way out. Monetary policy will be geared to evolving conditions in the economy, and the public does need to understand that as those views evolve, the Committee's views on policy will likely evolve with them. And that's a kind of uncertainty that the Committee wouldn't want to eliminate completely from its guidance because we want the policy we put in place to be appropriate to the economic conditions that will prevail years down the road.

Fed officials will need to rely more on their public speeches to get their messages across rather than cram all their ideas into a single FOMC statement, said Williams, 51. He said that he “liked what we did” with the new guidance announced last month, which he described as “very good.”
“As you get closer to your goals, there are so many factors” behind “when to raise rates and how fast to raise rates,” he said. “It’s impossible to describe it in a page without losing that ability to do policy in the best possible way.”

Recent incoming data continue to be consistent with a slowly improving economy. This improvement is allowing the Federal Reserve to slowly pare back asset purchases and to gradually become less precise in our forward guidance. However, I believe there are several reasons to be cautious and patient before returning monetary policy to a more normal, less accommodative stance.
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Admittedly, this rather qualitative forward guidance is somewhat less specific than the previous forward guidance involving the 6.5 percent threshold. My personal view is that, ideally, forward guidance should, for the time being, remain qualitative but increasingly be linked to progress in achieving our dual mandate based on incoming economic data. In particular, I believe the FOMC’s forward guidance should be consistent with keeping interest rates at their very low level until we are within one year of reaching full employment and our 2 percent inflation target – and the guidance could explicitly state that intention.

“One of the big risks is that we withdraw our accommodative policies prematurely… I think it’s just human nature to start thinking we’ve been doing this for a long time.”

The Fed’s benchmark short-term interest rate has been pinned near zero since late 2008, which could prompt some policy-makers to think “that must have been long enough. Maybe it’s time to start the process of renormalizing,” Mr. Evans said.

“Well, let me just remind everybody inflation is 0.9% in the U.S.” in February... Mr. Evans also stressed that inflation around the world is low. “I think that’s a sign of weakness; I think that’s a sign of risk,” he said.

He said it would be fine for inflation to exceed the Fed’s target. “Overshooting would not be a problem as long as it’s done in a reasonable fashion,” he said.

A noted hawk on the Fed's largely dovish board, Plosser said he believes interest rates should hit 3 percent by the end of 2015 and 4 percent in 2016.

"It's a little bit puzzling that the market would react the way it did," Plosser said on CNBC's "Squawk Box." "I don't think the Fed changed its position. In fact, it tried to say very explicitly in its statement that we believe forward guidance or the expectations have not changed as far as we're concerned."

Yellen later clarified her comments on interest rates, which she said may rise six months after the Fed ends its bond-buying stimulus programs, Plosser said…

Still, Plosser told CNBC it's more productive to talk about economic conditions rather than timing. He said Yellen's comments were in line with data and surveys that the Federal Open Market Committee used to measure the economy.

"There was a lot of evidence and a lot of surveys that suggest six months wasn't a wildly unexpected timeframe," Plosser said. "But it is better to get away from talking about timeframes. Talking about economic conditions is a much better way to think about it."

Plosser added: "I was surprised the market reacted as much as it did ... I don't count months. It's silly for us to contemplate raising rates until we stop purchases."

In my view, we haven’t changed fundamentally. The statement had to evolve because the unemployment rate came down to 6.5 percent. Sure, you do see in the projections that the committee members forecast a little bit higher average interest rate in 2016, but to me that’s consistent with the fact that unemployment has come down a little bit. As we get toward the end of 2016, sure, we’re maybe normalizing monetary policy out there a little bit more than people thought in December. But that’s not a shift in monetary policy. That’s just a reflection that the economy has gotten a little bit better and interest rates might be just a little higher than people thought before.

In the big picture, the policy hasn’t changed. Any kind of standard way of thinking about monetary policy is, with unemployment lower, then down the road interest rates will normalize a little bit faster. We’re talking again about 2016. There’s no, to my mind, near-term change for monetary policy.

What does a "considerable period" [after ending asset purchases] mean? It’s not specific about a time frame. That was a conscious decision. My view is if the economy evolves the way I expect, I expect us to end the asset purchase program late this year -- when exactly that occurs will depend. I don’t expect us to start raising interest rates until the second half of 2015.

Any interest rates increases we do have in 2015 will be relatively gradual. Similarly for 2016, the central tendency of the group is to have interest rates 2 percent or a little bit above, which again is very low by any standard. In the FOMC statement, we specifically made note of that.
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Eventually we’re going to raise interest rates. Understand that any interest rate increases we do are going to be in the context of a shallow glide path, or a gradual process over what looks like several years before we get back to a normal level.

The view is that we’re going to raise rates relatively gradually, so that at the end of 2016 my own view is that interest rates will be well below 4 percent. Even if 4 percent is the right number -- which, you know, who knows? -- it will take quite a long time before we get to that 4. Of course along the way we’ll be evaluating this and even actually reevaluating whether 4 percent is the right long-run number.

Federal Reserve Bank of St. Louis President James Bullard defended Janet Yellen’s comments on interest-rate increases, saying her outlook is in line with private surveys on when the central bank might start tightening policy.

Treasury yields jumped March 19 after Yellen said in her first press conference as Fed chair that rates could rise “around six months” after asset purchases end, most likely in the fall.

Bullard, speaking in Washington today, said “the surveys that I had seen from the private sector had that kind of number penciled in as far as I knew.”

“That wasn’t very different from what we had heard from financial markets, so I think she’s just repeating that as that time period,” Bullard said at a roundtable at the Brookings Institution. Bullard doesn’t vote on policy this year