With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity--a sector that has been recovering since 2011--have remained disappointing so far this year and will bear watching.

Inflation has been quite low even as the economy has continued to expand. Some of the factors contributing to the softness in inflation over the past year, such as the declines seen in non-oil import prices, will probably be transitory. Importantly, measures of longer-run inflation expectations have remained stable. That said, the Federal Open Market Committee (FOMC) recognizes that inflation persistently below 2 percent--the rate that the Committee judges to be most consistent with its dual mandate--could pose risks to economic performance, and we are monitoring inflation developments closely.

I will mention two considerations that will be important in assessing whether inflation is likely to move back to 2 percent as the economy recovers. First, we anticipate that, as labor market slack diminishes, it will exert less of a drag on inflation. However, during the recovery, very high levels of slack have seemingly not generated strong downward pressure on inflation. We must therefore watch carefully to see whether diminishing slack is helping return inflation to our objective.10 Second, our baseline projection rests on the view that inflation expectations will remain well anchored near 2 percent and provide a natural pull back to that level. But the strength of that pull in the unprecedented conditions we continue to face is something we must continue to assess.
Finally, the FOMC is well aware that inflation could also threaten to rise substantially above 2 percent. At present, I rate the chances of this happening as significantly below the chances of inflation persisting below 2 percent, but we must always be prepared to respond to such unexpected outcomes…

So, inflation has been running too low over the past six-plus years to be consistent with price stability. The good news is that the FOMC does expect inflation to turn back toward 2 percent. However, I expect that return to 2 percent to take a long time—probably on the order of four years. And I’m not the only one forecasting a slow return to 2 percent inflation. Earlier this year, the Congressional Budget Office predicted that inflation will not reach 2 percent until 2019.

As I mentioned earlier, I think inflation will stabilize and begin to move back in the direction of the FOMC's 2 percent objective as the economy gathers momentum. So I'm interpreting the soft inflation numbers as a risk signal. Through the lens of prices, the economy could be weaker than we currently believe. I talk with a lot of business people across the Southeast. Very few claim to have much pricing power. At the same time, inflation expectationsmeasured by surveys and inflation-adjusted financial instrumentshave remained stable. There are no signs of disinflationary expectations being priced in. This gives me some confidence that inflation will firm.

ROBIN HARDING: Mr. Chairman, your inflation forecasts never get back to 2 percent in the time horizon that you cover here, out to 2016. Given that, why should we believe the Fed has a symmetric inflation target? And in particular, why should we believe you're following an optimal policy, optimal control policy, as you've said in the past, given that that would imply inflation going a bit above target at some point? BERNANKE: Well, again, these are individual estimates, big standard errors implicitly around them, and so on. We do think that inflation will gradually move back to 2 percent, and we allow for the possibility, as you know, in our guidance that it could go as high as 2.5 percent. Even though inflation has been quite low in 2013, let me give you the case for why inflation might rise. First, there are some special factors, such as health care costs and some other things, that have been unusually low and might -- and might be reversed. Secondly, if you look at the fundamentals for inflation, including inflation expectations, whether measured by financial markets or surveys, if you look at growth, which we now anticipate will be picking up both in the U.S. and internationally, if you look at wages, which have been growing at 2 percent and a little bit higher, according to many indicators, all of these things suggest that inflation will gradually pick up. But what I tried to emphasize in my opening remarks -- and which is clear in our statement -- is that we take this very seriously. It's not easy to -- inflation cannot be picked up and moved where you want it. It takes -- it requires, obviously, some luck and some good policy. But we are very committed to making sure that inflation does not stay too low, and we are continuing to monitor that very carefully and to take whatever action is necessary to achieve that. ROBIN HARDING: And on optimal control? BERNANKE: Well, even under optimal control, it would take a while for inflation -- inflation is quite -- can be quite inertial, can take quite a time to move. And the responsiveness of inflation to increasing economic activity is quite low, so -- and particularly given an environment where we have falling oil prices and other factors that are contributing downward forces on inflation, it's -- it's difficult to get inflation to move quickly to target. But we are, again, committed to doing what's necessary to get inflation back to target over the next couple of years.

As is well known, total inflation, as measured by the personal consumption expenditures (PCE) deflator, has slowed sharply over the past year and is now running below the FOMC’s expressed goal of 2 percent... A decomposition of core inflation reveals that some of the decline is due to slowing in the rate of increase in prices of non-food and non-energy goods. This probably is due in large part to the softening of global demand for goods and the modest appreciation of the dollar that has occurred since mid-2011.

In the service sector, the rate of increase in prices of medical services and “non-market” services—the latter includes some financial services—also has slowed notably recently. In contrast, the rate of increase in prices for other non-energy services has been relatively stable. Comparing this set of conditions to that in 2010, the recent slowing of inflation has been less widespread across core goods and core services, and inflation expectations so far have declined less appreciably than they did in 2010. Thus, my best guess is that core goods prices will begin to firm in the months ahead as global demand begins to strengthen and inventories get into better alignment with sales.

There appears to be widespread confidence that the Federal Reserve will keep inflation low and stable, consistent with our announced inflation goal of 2 percent. Indeed, most forecasters view the current readings on inflation to be a temporary phenomenon and expect inflation to run at or a little below 2 percent over the next few years. Household surveys and financial market measures also indicate that inflation is expected to remain near its longer-term average. My own view is that the transitory factors depressing inflation are likely to ebb, and we’ll see inflation edge back toward the Federal Open Market Committee’s target of 2 percent by next year.

... Looking ahead, the key question regarding the economic outlook is whether growth will remain relatively low. Many forecasters expect growth to pick up to over 3 percent next year. I have become increasingly persuaded, however, that low growth rates are likely to persist for several years.

...the slow growth in real GDP in this expansion is related to both lower productivity growth and lower employment growth. While economists understand the principles underlying productivity growth, it’s quite difficult to parse the causes of medium-term swings in productivity growth, particularly as they are happening. At this juncture, low productivity growth has persisted long enough that I think the best guess is that it will remain low for an extended period.

Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame.

I think we are approaching a period in which {asset purchase cutbacks} can be considered... Thats not to say June meeting, but we are approaching a period in which it can be seriously considered based upon sort of the momentum of the economy which is not great but nonetheless is moving forward.

I'm uncertain about what's going to happen to the economic outlook over the near term because I don't really understand really well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out over the next couple months. I think three or four months from now I think you're going to have a much better sense of is the economy healthy enough to overcome the fiscal drag or not.

…

It's something that I certainly have my eye on, but I'm not very nervous about the fact that inflation's come in a little low relative to our 2 percent target because inflation expectations are still well-anchored. If inflation expectations were coming down, then I'd be a lot more concerned. If inflation expectations are well-anchored, what that means is inflation expectations are higher than the current rate of inflation, and so that'll tend to pull inflation back upwards a little bit.

“I do not expect inflation to rise significantly in the next year or two,” Lacker said. “But I will say that given the policies we have adopted, I see upside risks.”

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.

My assessment is that the appropriate policy is likely to be tighter going forward than anticipated by the Committee at this point. Thus, I do see some risks to inflation in the longer run given the current stance of monetary policy.

"[Low inflation and the weak U.S. job market] gives us some flexibility to think about additional monetary-policy accommodation,” Rosengren said today at an Institute of International Finance conference in Copenhagen.

Rosengren said he expects U.S. gross domestic product to grow 2.3 percent this year. Inflation will probably be lower than the roughly 2 percent target the Fed aims to preserve, he said, citing forecasts for personal consumption expenditure measures.