My overall view of the economy is fairly optimistic. After a first quarter buffeted by winter storms, I believe we are poised to grow at a rate somewhat above trend for the remainder of this year and next before reverting back to trend, which I see as about 2.4 percent. Steady employment growth and healthier household balance sheets will support consumption activity. The current data suggest economic strength is fairly broad based, as evidenced by recent indicators and the optimism expressed by firms in both the manufacturing and service sectors

My own submission for economic growth was generally in line with my colleagues. But my forecast for unemployment was a bit lower in the near term. Specifically, I think the unemployment rate may reach 5.8 percent by the end of this year and 5.6 percent by the end of 2015. My view of inflation is that it will stabilize at about 2 percent in 2015.

We are making progress on the full employment goalby some measures, like the rate of civilian unemployment, a lot of progress. The rate of unemployment fell to 6.3 percent last month and is closing in on levels that many believe to be consistent with a practical definition of full employment. But a number of other measures of labor market performance tell me that the economy is still operating well short of full employment. Notably, there remains an unusually high percentage of prime working-age people who are marginally attached to the labor force, who are working part-time jobs when they would prefer to be working full-time, and who are leaving the workforce. These indicators and others suggest to me that fulfillment of our employment mandate is still a ways off.

As I said, employment has been growing at a good clip. In fact, the number of private-sector jobs is back above its pre-recession peak. Overall employment, which includes the public sector, will probably reach its previous peak in another month or so. But thats the number of jobs. In the interim, the population has been growing, bringing more potential workers into the fold. At the same time, the first round of baby boomers is headed into retirement, which means people being taken out of the labor pool.

Its hard to know precisely what the natural rate is, but I put it around 5 to 5 percent. To put things in perspective, the current unemployment rate of 6.3 percent is still well above the natural rate. My forecast is for the unemployment rate to gradually decline over the next two years, reaching the natural rate sometime in 2016.

One indication that unemployment is still higher than its natural rate is that growth in workers pay has been pretty modest. In fact, wage growth has averaged only about 2 percent over the past few years, and there are few signs of any acceleration in wages. That said, I expect that once the unemployment rate gets even closer to its natural rate, wage growth should pick up.

Personally, I expect that, over the long run, the unemployment rate will converge to just over 5 percent. Basically, an unemployment rate of 6.3 percent means that the U.S. labor market is not healthy

One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of "partly unemployed" workers is a sign that labor conditions are worse than indicated by the unemployment rate. Statistics on job turnover also point to considerable slack in the labor market. Although firms are now laying off fewer workers, they have been reluctant to increase the pace of hiring. Likewise, the number of people who voluntarily quit their jobs is noticeably below levels before the recession; that is an indicator that people are reluctant to risk leaving their jobs because they worry that it will be hard to find another. It is also a sign that firms may not be recruiting very aggressively to hire workers away from their competitors.

A second form of evidence for slack is that the decline in unemployment has not helped raise wages for workers as in past recoveries. Workers in a slack market have little leverage to demand raises. Labor compensation has increased an average of only a little more than 2 percent per year since the recession, which is very low by historical standards.

A third form of evidence related to slack concerns the characteristics of the extraordinarily large share of the unemployed who have been out of work for six months or more. These workers find it exceptionally hard to find steady, regular work, and they appear to be at a severe competitive disadvantage when trying to find a job. The concern is that the long-term unemployed may remain on the sidelines, ultimately dropping out of the workforce. But the data suggest that the long-term unemployed look basically the same as other unemployed people in terms of their occupations, educational attainment, and other characteristics. And, although they find jobs with lower frequency than the short-term jobless do, the rate at which job seekers are finding jobs has only marginally improved for both groups. That is, we have not yet seen clear indications that the short-term unemployed are finding it increasingly easier to find work relative to the long-term unemployed. This fact gives me hope that a significant share of the long-term unemployed will ultimately benefit from a stronger labor market.

A final piece of evidence of slack in the labor market has been the behavior of the participation rate--the proportion of working-age adults that hold or are seeking jobs. Participation falls in a slack job market when people who want a job give up trying to find one. When the recession began, 66 percent of the working-age population was part of the labor force. Participation dropped, as it normally does in a recession, but then kept dropping in the recovery. It now stands at 63 percent, the same level as in 1978, when a much smaller share of women were in the workforce. Lower participation could mean that the 6.7 percent unemployment rate is overstating the progress in the labor market.

One factor lowering participation is the aging of the population, which means that an increasing share of the population is retired. If demographics were the only or overwhelming reason for falling participation, then declining participation would not be a sign of labor market slack. But some "retirements" are not voluntary, and some of these workers may rejoin the labor force in a stronger economy. Participation rates have been falling broadly for workers of different ages, including many in the prime of their working lives. Based on the evidence, my own view is that a significant amount of the decline in participation during the recovery is due to slack, another sign that help from the Fed can still be effective.

YLAN MUI: Today was the first reduction in asset purchases, and you just said that future reductions will likely occur in measured steps, but are not on a predetermined course. Can you tell us any more about the framework that you all plan to use to determine the -- the timing of those reductions? And previously you had said that you expect the program to end altogether by the middle of next year. Is that still a likely scenario? CHAIRMAN BERNANKE: Well, as I said, the steps that we take will be data-dependent. If we're making progress in terms of inflation and continued job gains, then I imagine we'll continue to do probably at each meeting a measured reduction. That would take us to late in the year, not -- necessarily not by the middle of the year. If the economy slows for some reason or we are disappointed in the outcomes, we could -- we could skip a meeting or two. On the other side, if things really pick up, then of course we could go a bit faster. But my expectation is for similar moderate steps going forward throughout most of 2014. STEVE LIESMAN: Mr. Chairman, thank you. When you say similar moderate steps going forward, is $10 billion an increment that people should anticipate? And is equal amounts of mortgage-backed securities and Treasuries also what one should anticipate? Finally, when you say well past the unemployment rate of 6.5 percent, why not pick a number? Why say "well past"? Thank you. CHAIRMAN BERNANKE: Sure. On the first issue of $10 billion, again, we say we're going to take further modest steps subsequently, so that would be the general range. But, again, I want to emphasize that we are going to be data-dependent. We could stop purchases if the economy disappoints; we could pick them up somewhat if the economy is stronger. In terms of MBS versus Treasuries, we discussed that issue. I think that the general sense of the committee was that equal reductions or approximately equal reductions was the simpler way to do this. It obviously doesn't make a great deal of difference in the end to how much we hold, so that was going to be our -- our strategy. On the issue of another number, the unemployment rate, let's talk first about the -- about the labor market condition. The unemployment rate is -- is a good indicator of the labor market. It's probably the best single indicator that we have. And so we were comfortable setting a 6.5 percent unemployment rate as the point at which we would begin to look at a more broad set of labor market indicators. However, precisely because we don't want to look just at the unemployment rate, we want to -- once we get to 6.5 percent, we want to look at hiring, quits, vacancies, participation, long-term unemployment, et cetera, wages, we couldn't put it in terms of another unemployment rate level, specifically.

Philadelphia Fed President Charles Plosser told CNBC on Friday that it's probably time to "gracefully exit" the central bank's quantitative easing bond purchases because the November jobs report was more evidence of a strengthening economy.
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"It's pretty positive clearly. We continue to make solid progress," he said, but warned that investors should not to make too much of one month's report.
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Acknowledging that he's no fan of the current QE buying, Plosser said "it would be wise if we began to get rid of this program." He continued, "I don't think it's doing very much good for us. It has a lot of unintended consequences and risk for the economy down the road."
When Plosser was on "Squawk Box" last month, he said the Fed "clearly missed" a chance to begin tapering in September when central bank had primed the financial markets for action.
Plosser had also said the Fed should put specific dollar limits on the size of the central bank balance sheet—an assertion he stood by on Friday.
But he added: "I think we need to go back to where we were in the earlier rounds of QE where we set a total amount, ... bought that purchase and then we stopped. Then we re-evaluated to whether or not we should go on."

So I think that there has been progress, and it's obscured to some extent by the downward trend in participation. But I also would agree with you that the unemployment rate is -- while perhaps the best single indicator of the state of the labor market, is not by itself a fully representative indicator.

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The criterion for ending the asset purchases program is a substantial improvement in the outlook for the labor market. Last time, I gave 7 percent as an indicative number -- to give you some sense of, you know, where that might be -- but as my first answer suggested, the unemployment rate is not necessarily a great measure in all circumstances of -- of the state of the labor market overall.

Clearly, the unemployment rate plays an important role in our thinking and communication about future policy. Therefore, an important issue is whether it is giving an accurate read on where things stand relative to our maximum employment mandate. The unemployment rate measures the percent of the labor force that is out of work and looking for a job. It has a number of advantages as a measure for summarizing the state of the labor market. For one thing, over time it has proven to be a reasonably stable and predictable barometer of whether labor market conditions are too hot, too cold, or just right in terms of creating inflationary pressures. Although structural changes in the labor market affect the unemployment rate, most of the variation in unemployment over time reflects cyclical factors, that is, whether the economy is too hot or too cold. And, second, the rate closely tracks other indicators of how much slack there is in the labor market, such as data from surveys on the share of households that finds jobs hard to get and the share of businesses that say it’s hard to fill openings. This adds to our confidence in its reliability.

All the same, there are reasons to worry that the unemployment rate could now be understating just how weak the labor market is. In particular, during the recovery, the share of the working-age population that is employed has increased very little, even as the unemployment rate has fallen. Taken at face value, the very low ratio of employment to population suggests that the labor market has improved far less than what’s implied by the decline in the unemployment rate.

So should we stop using the unemployment rate as our primary yardstick of the state of the labor market in favor of the employment-to-population ratio? My answer is no. Although the unemployment rate is by no means a perfect measure of labor market conditions, the employment-to-population ratio blurs structural and cyclical influences. That makes it a problematic gauge of the state of the labor market for monetary policy purposes…

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What does that mean for monetary policy? First, the unemployment rate and a number of other labor market indicators, such as payroll job gains, point to continued progress in the labor market. Clearly, we are getting closer to meeting our test of substantial improvement in the labor market.

Second, any changes in policy will depend not only on labor market conditions, but also on inflation. In our July statement, the FOMC noted that inflation persistently below 2 percent could pose risks to economic performance. That means we will also take into consideration whether inflation is moving closer to our target. Third, any adjustments to our purchases are likely to be part of a multistep gradual process, reflecting the pace of improvement in the economy.

As I noted earlier, Chairman Bernanke has laid out a timetable for our securities purchases, which includes reducing them later this year and ending them around the middle of next year, assuming our forecasts for the economy hold true. I haven’t significantly changed my forecast since then, and I view Chairman Bernanke’s timetable to still be the best course forward. However, I can’t emphasize enough that when and how we adjust our purchases will depend crucially on what the incoming data tell us about the outlooks for the pace of improvement in the labor market and movement towards our inflation goal.

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.

There is indeed little doubt that the economy is on the mend. The clearest evidence can be found in housing, by far the sector hit hardest during the recession. Mortgage rates have fallen to levels rarely, if ever, seen before. Typical fixed-rate mortgages are around 3.5 percent, putting them in reach of millions of households. Affordable mortgages fuel demand for homes, and that pushes up sales and prices. Year-over-year, house prices are rising at around a double-digit rate.

The recovery in home prices has all sorts of beneficial effects. Increasing numbers of underwater homeowners are finding themselves on dry land again. Their properties are now worth more than their mortgages, making them less likely to default. Meanwhile, other homeowners find their mortgages have dropped below the critical 80-percent-of-home-value barrier. That makes it easier to refinance at today’s low rates, freeing money to spend on other things.

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I expect the unemployment rate to decline gradually over the next few years. My forecast is that it will be just below 7½ percent at the end of this year, and a shade below 7 percent at the end of 2014. I don’t see it falling below 6½ percent until mid-2015. This forecast of a gradual downward trend in the unemployment rate reflects the combined effects of expected solid job gains and a return of discouraged workers to the labor force.

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It’s clear that the labor market has improved since September. But have we yet seen convincing evidence of substantial improvement in the outlook for the labor market, our standard for discontinuing our securities purchases? In considering this question, I look not only at the unemployment rate, but also a wide range of economic indicators that signal the direction the labor market is likely to take...  [M]ost of these indicators look healthier than they did in September. What’s more, nearly all of them are signaling that the labor market will continue to improve over the next six months. This is good news. But it will take further gains to convince me that the “substantial improvement” test for ending our asset purchases has been met. However, assuming my economic forecast holds true and various labor market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime late this year. Of course, my forecast could be wrong, and we will adjust our purchases as appropriate depending on how the economy performs.

Federal Reserve research concludes that the unemployment rate is probably the best single indicator of current labor market conditions. In addition, it is a good predictor of future labor market developments. Since 1978, periods during which the unemployment rate declined 1/2 percentage point or more over two quarters were followed by further declines over the subsequent two quarters about 75 percent of the time.…

To judge whether there has been a substantial improvement in the outlook for the labor market, I therefore expect to consider additional labor market indicators along with the overall outlook for economic growth. For example, the pace of payroll employment growth is highly correlated with a diverse set of labor market indicators…

In addition, I am likely to supplement the data on employment and unemployment with measures of gross job flows, such as job loss and hiring, which describe the underlying dynamics of the labor market. For instance, layoffs and discharges as a share of total employment have already returned to their pre-recession level, while the hiring rate remains depressed. Therefore, going forward, I would look for an increase in the rate of hiring. Similarly, a pickup in the quit rate, which also remains at a low level, would signal that workers perceive that their chances to be rehired are good--in other words, that labor demand has strengthened.

I also intend to consider my forecast of the overall pace of spending and growth in the economy. A decline in unemployment, when it is not accompanied by sufficiently strong growth, may not indicate a substantial improvement in the labor market outlook. Similarly, a convincing pickup in growth that is expected to be sustained could prompt a determination that the outlook for the labor market had substantially improved even absent any substantial decline at that point in the unemployment rate.

Consistent with these findings, my estimate of the current natural rate of unemployment is about 6 percent, roughly 2 percentage points below the current unemployment rate. This 6 percent figure is consistent with many other estimates, including the most recent median estimate of the Survey of Professional Forecasters.

Fortunately, many of the influences that have elevated the natural rate of unemployment since the crisis and recession should fade over time. In fact, this process is already under way. The extended unemployment insurance programs have been scaled back and are affecting fewer and fewer people. Eventually these programs will be phased out. In addition, measures of mismatch between workers and available jobs are receding. And, at least so far, we are not seeing permanent scarring effects of long-term unemployment. I expect that, in coming years, the natural rate will return to a more historically typical level of about 5½ percent.

After a lengthy recession that imposed great hardships on American workers, the weak recovery has made the past five years the toughest that many of today's workers have ever experienced. These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families.  Long-term unemployment is also a great concern because it has the potential to itself become a headwind restraining the economy.

This possibility and the unprecedented level and persistence of long-term unemployment in this recovery have prompted some to ask whether a significant share of unemployment since the recession is due to structural problems in labor markets and not simply a cyclical shortfall in aggregate demand. For the Federal Reserve, the answer to this question has important implications for monetary policy.

This question is frequently discussed by the FOMC. I cannot speak for the Committee or my colleagues, some of whom have publicly related their own conclusions on this topic. However, I see the evidence as consistent with the view that the increase in unemployment since the onset of the Great Recession has been largely cyclical and not structural.

Measuring the overall health of the labor market involves many dimensions and is a complicated matter. The state of the labor market cannot be adequately summarized in one number, whether it's the unemployment rate, payroll employment growth, the labor force participation rate or some other measure. Therefore, evaluating the overall labor market by simply looking at a single indicator would not be appropriate for monetary policy.

A possible alternative is to build an index of labor-market health that gives weight to all of these different dimensions and provides some idea of the health of the labor market in an overall sense. Even in this case, however, the Committee would likely weight the dimensions differently; so, agreement on a specific index would be problematic. What is clear is that, evaluating in a comprehensive way whether the outlook for the labor market has improved substantially and, thus, when to bring the latest balance-sheet policy to an end, will require the FOMC to consider numerous factors.