I expect that the explicit link between future policy actions and specific numerical thresholds, as in the recent FOMC statements, will not be a regular aspect of forward guidance, at least when the federal funds rate is not constrained by the zero lower bound. This guidance has proven to be a powerful tool in current circumstances, when conventional policy stimulus has been limited by the zero lower bound. But such communication is difficult to get right and comes with the risk of oversimplifying and confusing rather than adding clarity. Therefore, in normal times, a more nuanced approach to policy communication will likely be warranted. I see forward guidance typically being of a more qualitative nature, highlighting the key economic factors that affect future policy actions. Of course, if we again find ourselves in a situation where conventional policy has been fully utilized, then we will have the ability to return to more explicit forward policy guidance to provide additional monetary stimulus.

We should, however, only resort to asset purchases as a policy tool in special circumstances, such as when the federal funds rate is near zero and we have fully utilized forward policy guidance. Despite all that we’ve learned, the effects of asset purchases are much less well understood and are much more uncertain and harder to predict than for conventional monetary policy. Indeed, the recent outsize movements in bond rates in response to Fed communications about our current asset purchase program illustrate the difficulty in gauging the effects of asset purchases. Moreover, given our limited experience, we can’t be sure of all their consequences, which may play out over many years. When the federal funds rate was at zero and we were still facing a severe recession, it was the right call to turn to asset purchases. But, once the federal funds rate is back to a more normal level, we should relegate asset purchases to a backup role, employing it only when conventional policy and forward guidance fall short.

Delaying action not only allows potential costs to grow, it also has the potential to threaten the credibility and the predictability of future monetary policy actions. Policy moves that surprise the market often result in additional volatility. And by deciding that it needs to await further data, the Committee is suggesting its desire to be “data dependent” involves putting more emphasis on the most recent data points, which can be volatile and subject to revision, rather than on its own medium-term view of the economy. Another risk is that markets might misconstrue the postponement of action as reflecting a Committee assessment that the broader economic outlook is substantially weaker, when that is not the case.

Beyond the communication challenges associated with asset purchases, explaining the Committee’s interest rate policy and how long rates will remain near zero will be a crucial next step. To further mitigate risks when the time comes to start raising interest rates, it may be important to signal that increases in the federal funds rate, after liftoff, are likely to be gradual in order to gauge the economy’s response.

Credibility requires consistency, over time, between a central bank's statements and its actual subsequent actions. A central bank's statements will have greater immediate effect on the public's expectations the more they are seen as limiting the central bank's future choices. Yet there are likely to be circumstances, ex post, in which the central bank feels constrained by past statements. Yielding to the temptation to implicitly renege by reworking decision criteria or citing unforeseen economic developments may have short-term appeal, but widely perceived discrepancies between actual and foreshadowed behavior will inevitably erode the faith people place in future central bank statements. So central banks face an ex ante trade-off, as well, between the short-run value of exercising discretion and the ability to communicate effectively and credibly in the future.

While the decision not to pull back on the Federal Reserve‘s easy-money policies last week was a “close call,” a veteran central banker on Monday suggested it will be hard for the Fed to find cause to trim its bond buying program at its upcoming October meeting.

In an interview with the Wall Street Journal, Federal Reserve Bank of Atlanta President Dennis Lockhart said the economy is currently beset with uncertainty resulting from economic data that’s proved “ambiguous.” At the same time, a showdown between the White House and the Congress over the budget and borrowing powers has the potential to cause economic trouble if it’s resolved as poorly as past episodes, the official said.

“In the short time between now and the October meeting, I don’t think there will be an accumulation of enough evidence to dramatically change the picture” about where the economy now stands, Mr. Lockhart said.

…

Mr. Lockhart said the October FOMC “is a live meeting” and if the Fed wants to act, it can and will. Still, he added, “I don’t have expectations that the fog will clear dramatically between now and October.”

Committee participants generally believe that because the headwinds to recovery will abate only gradually, achieving and maintaining maximum employment and price stability will require a patient policy approach that involves keeping the target for the federal funds rate below its longer-run normal value for some time.

Committee participants generally believe that because the headwinds to recovery will abate only gradually, achieving and maintaining maximum employment and price stability will require a patient policy approach that involves keeping the target for the federal funds rate below its longer-run normal value for some time.

The committee has regularly reviewed the forward guidance. And there are a number of ways in which the forward guidance could be strengthened.

For example, Mr. Ip mentioned an inflation floor. There are other steps that we could take. We could provide more information about what happens after we get to 6.5 percent and those sorts of things. And -- and to the extent that we could provide precise guidance, I think that would be desirable.

Now, it's very important that we not take any of these steps lightly, that we make sure we understand all the implications and that we are comfortable that it will be -- that the -- any modifications to the guidance will be credible to markets and to the public.

So we continue to think about options. There are a number of options that we have talked about. But today, we -- as of today, we didn't -- we didn't choose to make any changes to the -- to the guidance.

Well, some days I wish that questions like these {about tapering} could be answered with a firm date, a single number and a confident “yes,” accompanied by a fist pump. Unfortunately, the answer to the first question is not as simple as giving a calendar date. Instead, uncertainty over the pace of the recovery means all of this depends on the progress that the economy makes toward our goals of maximum employment and price stability. In my view, this means continuing our current QE3 asset purchase program until three conditions are met. First, the unemployment rate must be in the vicinity of 7 percent with expectations for it to continue falling in a self-sustaining fashion. Second, other important labor market indicators must show a commensurate improvement. And third, we must have considerable confidence that inflation is moving back toward our target of 2 percent. Currently, my best assessment is that by the time these conditions have been met, our QE3 asset purchases since January of this year will total at least $1.25 trillion. By comparison, that would be twice the size of our QE2 purchases made in 2010 and 2011. This would mean that our System Open Market Account (SOMA) balance sheet will reach approximately $4 trillion.

“The decision when and if to taper later this year will depend on the data, and specifically are we still seeing signs of positive momentum,” Williams said. “I’m not going to speak about what meeting or not, but I do think that if the data continue to progress as we’ve seen, then I do agree that we should edge down or taper our purchases later this year.”

“I don’t think we have to be in any hurry,” Bullard said today in a CNBC interview from Jackson Hole, Wyoming. “Inflation is running low and we have got mixed data on the economy.”

“So I’d be cautious,” said Bullard, who votes on monetary policy this year. “We want to take our time and assess what’s going on before we make a move.”

“We can afford to be very deliberate in our decision making,” Bullard said.

“I would be supportive in September as long as the data between now and then basically confirm the path we’re on,” Lockhart, who doesn’t vote on monetary policy this year, said today in a CNBC interview from Jackson Hole, Wyoming. “I am confident in a continuation of this sort of moderate growth path.”

“The committee would not normally remove policy accommodation in an environment where inflation is below target and is projected to remain there,” said Bullard, who votes on policy this year, in Louisville, Kentucky.

As of September, the FOMC will have in hand one more employment report, two reports on inflation, a revision to the second-quarter GDP data, and preliminary incoming signals about growth in the third quarter. I don't expect to have enough data to be sure of my outlook. For that reason, I don't think a decision that commits the Fed to a full phase-out of asset purchases and lays out a precise, beginning-to-end path for doing so would be advisable.

In my mind, the first adjustments to asset purchases, when they occur, should be the beginning of a process with steps that will be determined as later information arrives and certainty about the direction of the economy accumulates. As I see it, a decision to proceed—whether it is in September, October, or December—ought to be thought of as a cautious first step.

Policymaking is quite appropriately forward-looking because monetary policy actions affect the economy with a lag. The rolling outlook from here is what really matters in making future decisions on asset purchases. I will need to get comfortable that the employment progress we've enjoyed is not stalling and that disinflation pressures are not building.

All that said, in considering a decision to reduce purchases, I think it is important to acknowledge the progress that's been made since the launch of QE3. The most recent program of asset purchases has been in force for just short of a year. In August a year ago, the unemployment rate stood at 8.1 percent. A year later, the unemployment rate has fallen to 7.4 percent and monthly job gains, looking back over the year, are averaging just below 200,000. Consumer activity has grown, house prices and housing activity have picked up, and equity markets have shown strength.

We have continued to see steady progress in economic fundamentals, in my opinion. Progress is evident, and we should not lose sight of that.

Minneapolis Fed President Narayana Kocherlakota has been urging his colleagues to adopt a lower unemployment threshold, to 5.5 percent. Evans today said his thinking is “not largely inconsistent with President Kocherlakota’s proposal” because, if inflation remained low, he would support keeping rates near zero even after joblessness fell below 6.5 percent.

“Unemployment might get down to 6 before we see the need” to tighten, he said. “If the committee viewed it as additionally useful to adjust that threshold” down, “I would certainly pay attention to that. I don’t anticipate I would have a problem with that.”

While some commentators have speculated that the Fed may set a lower bound on inflation, “I don’t really appreciate how that helps in providing the appropriate amount of accommodation,” he said.

BACHUS: Chairman Bernanke, you mentioned last year in Jackson Hole that you viewed unemployment as cyclical. Do you still believe it's cyclical and not structural?

BERNANKE: Well, just like my answer a moment ago, I think that probably about 2 percentage points or so -- say the difference between 7.6 and 5.6 -- is cyclical and the rest of it is what economists would call frictional or structural.

BACHUS: So you -- OK -- so it's -- have you done -- so your study (ph) you think maybe 5 percent structural and 2 percent cyclical?

BERNANKE: Well, most importantly, I -- so far we don't see much evidence that the structural component of unemployment has increased very much during this period. It's something we've been worried about, because with people unemployed for a year or two years or three years, they lose their skills, they lose their attachment to the labor market, and the concern is they'll become unemployable.

So far it still appears to us that we can attain an unemployment rate -- we, the country can attain an unemployment rate somewhere in the 5s.

BACHUS: The most recent FOMC minutes didn't specifically address the 7 percent unemployment target, but you -- you mentioned it in your press conference after (ph). Was that 7 percent target discussed and agreed on in the meeting?

BERNANKE: Yes, it was. Seven percent is not a target. It was intended to be indicative of the amount of improvement we want to see in the labor market. So I described a series of conditions that would need to be met for us to proceed with our moderation of purchases.

We have -- we have a go-around where everybody in the committee, including those who are not voting, get to express their general views. And there was -- there was good support for both the broad plan, which I described, and for the use of 7 percent as indicative of the kind of improvement we're trying to get.