There are some downside risks to this forecast. We might see further declines in energy prices or greater appreciation of the dollar. In addition, undershooting our 2 percent inflation target for as long as we have invites the risk of the public beginning to expect persistently low inflation in the future. If this mindset becomes embedded in decisions regarding wages and prices, then getting inflation back to 2 percent will be that much more difficult. Here, I find it troubling that the compensation for prospective inflation built into a number of financial market asset prices has drifted down considerably over the past two years. More recently, some survey-based measures of inflation expectations, which had previously seemed unmovable, have also edged down. So to achieve our inflation target — and to provide a buffer against downside risks — it is appropriate that we follow a gradual path to policy normalization.

“Policy makers should take seriously the potential downside risks to their economic forecasts and manage those risks as we think about the appropriate path for monetary policy,” said Rosengren, a voting member of the FOMC this year.

“These downside risks reflect continued headwinds from weakness within countries that represent many of our major trading partners, and only limited data to support the projected path of inflation,” he said.

I'm forecasting inflation readings to start to converge to our 2 percent target in 2016. I supported the FOMC's decision in December to lift off. The Committee had laid out a criterion of having "reasonable confidence" that the inflation rate would move to target in the medium term. From my perspective, our satisfaction of the criterion of "reasonable confidence" was based on projections of the most likely outcome.

“In short, inflation has been held down by two factors, the falling price of oil and the rising value of the dollar,” he said. “But neither factor is likely to depress inflation indefinitely. After the price of oil bottoms out, I would expect to see headline inflation move significantly higher. And after the value of the dollar ultimately tops out, core inflation should move back toward 2 percent.”

If oil prices and the dollar stabilize, but inflation doesn’t quickly respond, “a shallower path for interest rates would make sense,” Lacker said. “If inflation moves rapidly back toward 2 percent, however, a more aggressive path would be in order.”

Liesman: Stan, just one quick question on inflation before we go. When we last met, in August, basically, inflation is almost unchanged in that period of time. Even the Fed has brought down its forecast for 2016 and 2017 inflation. Do you remain confident the Fed is going to be able to get inflation back to 2% and over what time horizon?

Fischer: Yeah, I remain confident because the analysis of what's going on now is that continuing declines in the price of oil are quite important in the overall price index. And our estimates of taking account of the exchange rate and the price of oil and food is that we'd be at about 1.4% now, which is a heck of a lot closer to 2 than is almost zero. So we think that as oil stabilizes, and it will stabilize one day, and it will even go up one day, that we'll see this trend beginning to turn. And my confidence is that those trends, those declines in oil and that depreciation of the dollar isn't going to go on forever or for even very long.

Ryssdal: Does that mean you guys are ready to go back to the zero lower bound if you have to?

Powell: If you have to, you have to. Yes. It's not impossible. Monetary policy's about forecasts. You have to have a forecast of where things are gonna go and you try to set monetary policy for what you see as the likely path of the economy.

Ryssdal: "Gradually" got a lot of attention in Chair Yellen's press conference the other day. She made great efforts to say, "It's not gonna be a mechanical thing." Without using her favorite phrase, which is, "It's gonna depend on the data," what are you gonna be looking at to think and to know when it's okay to start ratcheting things up again?

Powell: Well we do look at a wide range of things. For me, at the top of the list will be continued progress in the labor market and with it continued progress on inflation. Inflation is in below our target. As I mentioned, the labor market has strengthened quite a bit, but I wanna see continued strong job growth. We've had three years of very strong job growth. I want to see that continue. And as the labor market tightens, I'd like to see wages increasing, and as the economy tightens, we need to see inflation coming up. Underlying inflation, if you look through the changes in gas prices and import prices is probably running at around one and a half percent. Our goal is two percent, so we'd like to see underlying inflation come up to two percent.

We do monitor inflation expectations very carefully. If we saw in a meaningful way that inflation expectations were either moving up in a way that made them seen unanchored, or down, that would be of concern.  And we have called attention to some slight downward movements and survey measures. We are watching that. But I still judge that inflation expectations are reasonably well anchored.

One way to "see through" transitory factors is to use so-called trimmed-mean inflation estimations. These price statistics eliminate the largest monthly price swings—those that often produce noise in the numbers. Trimmed-mean measures have been running much closer to the 2 percent target. The Federal Reserve Bank of Dallas's trimmed-mean index, for example, is up 1.7 percent over the past year. Comparing this and like calculations to headline numbers suggests to me that much of what's suppressing inflation is transitory in nature. I have bought into that view.

So why do I lack confidence in our ability to achieve our 2 percent inflation target over the medium term? One reason is that there exist a number of important downside risks to the inflation outlook. Now I recognize that “medium term” is somewhat vague. To a central banker it can mean two to three years or three to four years. It is more a term of art than science.

So what are these inflation risks? With prospects of slower growth in China and other emerging market economies, low energy and import prices could exert downward pressure on inflation longer than most anticipate. That’s a risk. In addition, while many survey-based measures of long-term inflation expectations have been relatively stable in recent years, we shouldn’t take them as confirmation that our 2 percent target is assured. In fact, some survey measures of inflation expectations have ticked down in the past year and a half. Furthermore, measures of inflation compensation derived from financial markets have moved down to quite low levels in recent months. These measures could reflect either lower expectations of inflation or a heightened concern over the nature of the economic conditions that will be associated with low inflation. Adding to my unease is anecdotal evidence: I talk to a wide range of business contacts, and virtually none of them are mentioning rising inflationary or cost pressures. No one is planning for higher inflation. My contacts just don’t expect it.

Some Fed officials, led by Vice Chairman Stanley Fischer, have argued that inflation will move back up close to 2 percent as the transitory effects of a strengthened dollar and oil’s price plunge fade.

Tarullo said he wasn’t in that camp.

“Others, myself included, have thought it might be better to wait for some more tangible evidence that we’re going in that direction” on inflation, he said.
Tarullo pointed to market-based and survey-based measures of inflation expectations, saying both had fallen to “historic lows.”

"We hope that relatively soon we will become reasonably confident that inflation will return to our 2 percent objective," he said at Hofstra University. Dudley said it was "very logical" to expect that the Fed's inflation and employment conditions would be met "soon," allowing policymakers to "start thinking about raising the short-term interest rates."

Most FOMC participants expect inflation to rise steadily from these low levels, coming in just a shade under the Committee’s 2 percent target by the end of 2017. My own forecast is less sanguine. I expect core PCE inflation to undershoot 2 percent by a greater margin over the next two years than do my colleagues. I expect core PCE inflation to be just below 2 percent at the end of 2018.
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More specifically, before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher. Given the current low level of core inflation, some evidence of true upward momentum in actual inflation is critical to this assessment. I believe that it could be well into next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation. After liftoff, I think it would be appropriate to raise the target interest rate very gradually. This would give us sufficient time to assess how the economy is adjusting to higher rates and the progress we are making toward our policy goals.

Most FOMC participants expect inflation to rise steadily from these low levels, coming in just a shade under the Committee’s 2 percent target by the end of 2017. My own forecast is less sanguine. I expect core PCE inflation to undershoot 2 percent by a greater margin over the next two years than do my colleagues. I expect core PCE inflation will be just below 2 percent at the end of 2018.

Before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher. Given the current low level of core inflation, some evidence of true upward momentum in actual inflation is critical to this assessment. I believe that it could well be the middle of next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation. After liftoff, I think it would be appropriate to raise the target interest rate very gradually. This would give us sufficient time to assess how the economy is adjusting to higher rates and the progress we are making toward our policy goals.

Before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher. Given the current low level of core inflation, some evidence of true upward momentum in actual inflation is critical to this assessment. I believe that it could well be the middle of next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation. After liftoff, I think it would be appropriate to raise the target interest rate very gradually. This would give us sufficient time to assess how the economy is adjusting to higher rates and the progress we are making toward our policy goals