Let me offer a comparison that may highlight that difference. Suppose, instead of monetary policy, we were talking about an example of transportation policy--widening a road to ease traffic congestion. Whether this road project is announced at a televised press conference or in a low-key press release--or even if there is no announcement--the project is more or less the same. The benefit to drivers will come after the road is widened and won't be affected by whether drivers knew about the project years in advance.

At the heart of everything I'll be explaining today is the fact that monetary policy is different. The effects of monetary policy depend critically on the public getting the message about what policy will do months or years in the future.

I consider these [outcome based] thresholds for possible action a major improvement in forward guidance. They provide much more information than before about the conditions that are likely to prevail when the FOMC decides to raise the federal funds rate.

In its current forward guidance, the FOMC has stated that it expects the fed funds rate to remain extraordinarily low at least until the unemployment rate falls below 6.5 percent. The FOMC could provide additional needed stimulus by lowering the threshold unemployment rate from 6.5 percent to 5.5 percent—that is, by changing one number in the existing statement.

To see why I say so, consider two possible scenarios. In the first, the public believes that the FOMC will begin raising the fed funds rate once the unemployment rate hits 6.5 percent. (To be clear: This belief is consistent with, but not necessarily implied by, the FOMC’s current forward guidance.) In the second, the public believes that the FOMC will defer the initial increase in the fed funds rate until the unemployment rate hits 5.5 percent. The higher unemployment rate in the first scenario means that monetary policy will be tightened sooner, which, in turn, will lead to the unemployment rate being higher for longer. Foreseeing that, people will save more in the first scenario than in the second, to protect themselves against these higher unemployment risks. Because they save more, they spend less, and there is less economic activity.

Thus, lowering the unemployment rate threshold to 5.5 percent would increase the demand for goods and thereby push upward on both employment and prices. Would this extra monetary stimulus result in an undue amount of inflation at some point in the future? ... To me, this historical evidence suggests that, as long as the unemployment rate remains above 5.5 percent, the medium-term inflation outlook will stay close to 2 percent.

If quantitative thresholds are good for interest rate guidance, why not also have such thresholds for the asset purchase program? There are two reasons. There is somewhat more uncertainty about the efficacy and costs associated with asset purchases than rate guidance and we are likely to learn more about the efficacy and costs as the program unfolds.

So what is this likely to mean in practice? In my view, we should calibrate the total amount of purchases to that needed to deliver a substantial improvement in labor market conditions, by allowing the flow rate of purchases to respond to material changes in the labor market outlook. This makes sense because the benefits of additional accommodation will gradually diminish as we get closer to our full employment and price stability objectives and become more confident that we will reach them in a timely manner. At some point, I expect that I will see sufficient evidence of economic momentum to cause me to favor gradually dialing back the pace of asset purchases.

Of course, any subsequent bad news could lead me to favor dialing them back up again.

The lack of thresholds [for the Fed’s open-ended asset purchases] comes from the complexity of the problem. On the one hand, we have benefits which are associated with improvements in the economy, but there are also costs associated with unconventional policy, such as the potential effects on financial stability, which are hard to quantify and which people have different views about.

So to this point, we've not been able to give quantitative thresholds for the asset purchases in the same way that we have for the federal funds rate target. We're going to continue to try to provide information as we go forward.

In particular, as I mentioned today, as we make progress towards our objective, we may adjust the flow rate of purchases month to month to appropriately calibrate the amount of accommodation we're providing, given the outlook for the labor market.

In terms of further color, again, given the complexity of the issue, we've not given quantitative analysis or quantitative thresholds. I would say that we'll be looking for sustained improvement in a range of key labor market indicators, including, obviously, payrolls, unemployment rate, but also others, like the hiring rate, claims for unemployment insurance, quit rates, wage rates, and so on, be looking for sustained improvement across a range of indicators and in a way that's taking place throughout the economy.

And since we're looking at the outlook, we're looking at the prospects rather than the current state of the labor market, we'll also be looking at things like growth to try to understand whether there's sufficient momentum in the economy to provide demand for labor going forwards. So that will allow to us look through, perhaps, some temporary fluctuations associated with short-term shocks or problems.

We think it makes more sense to have our policy variable, which is the rate of flow of purchases respond in a more continuous or sensitive way to changes in the outlook. So as we make progress towards our ultimate objective of substantial improvement, we may adjust the rate of flow of purchases accordingly.

Now, we won't do that every meeting, won't do that frequently. But when we see that the conditions -- or the situation has changed in a meaningful way, then we may well adjust the pace of purchases in order to keep the level of accommodation consistent with the outlook and, secondly, to help provide the markets with some sense of progress – how much progress is being made so that it can make better judgments.

… Well, again, we've not been able to come to an agreement about what guidance we should give. And part of the concern is, is that we go forward, we -- you know, we'll have to factor in the efficacy, which is another issue. I mean, there's a wide range of views about how effective asset purchases are in terms of moving the economy.

So as we move forward in time, we'll be learning about how effective the policy is and what costs and risks there may be associated with it. And as we do that, perhaps we'll be able to give more explicit guidance. And I -- I agree with you 100 percent that that would be more effective, if we could give a numerical guidance.

In my view, the language now incorporated into the statement affirmatively conveys the Committee's determination to keep monetary policy highly accommodative until well into the recovery. And the specific numbers that were selected as thresholds for a possible change in the federal funds rate target should confirm that the FOMC expects to hold that target lower for longer than would be typical during a normal economic recovery...

I view the Committee's current rate guidance as embodying exactly such a "lower for longer" commitment. In normal times, the FOMC would be expected to tighten monetary policy before unemployment fell as low as 6-1/2 percent. Under the new thresholds guidance, the public is informed that tightening is unlikely as long as unemployment remains above 6-1/2 percent and inflation one to two years out is projected to be no more than a half percentage point above the FOMC's 2 percent longer-run goal.

The liftoff plan is to sustain low interest rates—that is, we’ll keep the fed funds rate extraordinarily low—at least until unemployment falls below 5 1/2 percent, as long as the medium-term outlook for inflation remains within a quarter of a percentage point of 2 percent, the long-run target. “Medium term” meaning—I’m very precise on this in the speech—but it basically means a two-years-ahead outlook for inflation.

…

I set {the inflation threshold} at a quarter percentage point because, actually, given how high unemployment is, I think it’s unlikely we could ever get the medium-term inflation outlook to be as high as 2 1/4 percent, frankly.

…

Given the Committee’s thinking, typically, about how it views its longer-run objectives, the 2 1/4 percent/5 1/2 percent numbers were consistent with how I thought the Committee would behave in the future, basically. And you don’t want to lay out something that seems implausible for the Committee to deliver on.

Upon hearing those two different plans for interest rates, people should have different expectations for what the paths of economic activity and unemployment are going to be. And, in particular, between the 7 percent plan and the 5 1/2 percent plan, the second suggests that times are going to be better for them in general, going forward. It means that individuals don’t need to save as much for bad times ahead. That’s the basic point of providing such forward guidance, to convey the expectation that because times will be better in the future, individuals don’t need to save as much and therefore can spend more now.

Forward guidance works by influencing the public’s expected path of short-term interest rates. Expectations of low yields on short-term assets for a prolonged period make investors more willing to purchase and hold longer-term securities. That, of course, increases their prices and reduces their yields. To give you a sense of the impact of this tool, the unexpected extension of our forward guidance in August 2011 lowered yields on longer-term Treasury securities by about 0.2 percentage point. That’s comparable to a cut in the funds rate of ¾ to 1 percentage point. When we cut the funds rate that much, financial markets sit up and take notice.

Although my FOMC colleagues are not ready to choose a particular policy rule or reaction function to govern policy, we continue to explore the efficacy of monetary policy rules as guides to policy, as indicated in the minutes of the July 31-August 1, 2012 FOMC meeting. I believe we should continue to identify simple rules that work across a variety of economic models and try to communicate more information about the Fed’s policy reaction function. We could improve policy transparency and communications by identifying the key economic variables on which we base our policy decisions and then frame the rationale for any change in policy around changes in these key variables. If the Fed is systematic about how it sets policy in normal times, the public will form more accurate judgments about the likely course of policy. This will not only improve the efficacy of monetary policy in normal times by reducing uncertainty and promoting stability, it will also increase the efficacy of forward guidance in extraordinary times, like the ones we find ourselves in today.

[O]ptimal forward guidance requires policymakers to commit to making policy in a way that is different from what policymakers would want to do when the time comes. Economists would say that policymakers are trying to commit to a policy that is not time-consistent. Put another way, former Fed Chairman William McChesney Martin used to say that monetary policy’s job “is to take away the punch bowl just when the party is getting good.” Yet, these models tell us that at the zero lower bound, forward guidance should convey the opposite. That is, it should promise that monetary policy will not remove the punch bowl but allow the party to continue until very late in the evening to ensure that everyone has a good time. But what will make the public believe that policymakers in the future will deviate from past practices in this way? And will policymakers or the public be willing to tolerate the future inflation when it comes and believe that it is only temporary?

More generally, the committee intends to be flexible in varying the pace of securities purchases in response to information bearing on the outlook or on the perceived benefits and costs of the program…

Because we expect to learn more over time about the efficacy and potential costs of asset purchases in the current economic context, we believe that a qualitative guidance is more appropriate at this time.

First, as the statement notes, the committee views its current low rate policy as likely to be appropriate at least until the specified thresholds are met. Reaching one of those thresholds, however, will not automatically trigger immediate reduction in policy accommodation...  Ultimately, in deciding when and how quickly to reduce policy accommodation, the committee will follow a balanced approach in seeking to mitigate deviations of inflation from its longer-run 2 percent goal and deviations of employment from its estimated maximum level.

Second, the committee recognizes that no single indicator provides a complete assessment of the state of the labor market and, therefore, will consider changes in the unemployment rate within the broader context of labor market conditions. For example, in evaluating a given decline in the unemployment rate, the committee will also take into account the extent to which that decline was associated with increases in employment and hours worked as opposed to, say, increases in the number of discouraged workers and falling labor force participation. The committee will also consider whether the improvement in the unemployment rate appears sustainable.

Third, the committee chose to express the inflation threshold in terms of projected inflation between one and two years ahead, rather than in terms of current inflation. The committee took this approach to make clear that it intends to look through purely transitory fluctuations in inflation, such as those induced by short-term variations in the prices of internationally traded commodities and to focus instead on the underlying inflation trend.

In making its collective judgment about the underlying inflation trend, the committee will consider a variety of indicators, including measures such as median, true mean, and core inflation, the views of outside forecasters, and the predictions of econometric and statistical models of inflation. Also, the committee will pay close attention to measures of inflation expectations to ensure that those expectations remain well anchored.

Finally, the committee will continue to monitor a wide range of information on economic and financial developments to ensure that policies conducted in a manner consistent with our dual mandate.

The asset purchases and the rate increases have different objectives. The asset purchases are about creating some near-term momentum in the economy, trying to strengthen growth and -- and job creation in the near term. And the increases in the federal funds rate target, when they ultimately occur, are about reducing accommodations. Two very different objectives.

Secondly, the asset purchases are a less-well-understood tool. We have -- we'll be learning over time about how efficacious they are, about what costs they might carry with them, in terms of unintended consequences that they might create, and we'll be seeing how what else happens in the economy that can affect, you know, the level of unemployment, for example, that we hope to achieve.

And so for that reason, as I discussed in my opening remarks, we -- we decided to make the criteria for asset purchases qualitative at this time, because we have a number of different things that we need to look at as we go forward.

Rate increases, by contrast, are well understood, and we understand the relationship between those and rate increases and the -- and the state of the economy. And so we've been able to give somewhat more quantitative, more specific guide in that respect.