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.

As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

The erosion in labor-market performance that we’ve seen in the United States over the past five years may be highly persistent, even under appropriate monetary policy.

Accelerating inflation is “a signal that our country’s current labor market performance is much closer to ‘maximum employment,’ given the tools available to the FOMC, than the post-World War II U.S. data alone would suggest,” Kocherlakota said today

Inflation was distinctly higher in 2011 than in 2010 and continues to run above the FOMC’s target of 2 percent.

Even core measures of inflation, which strip out energy goods and services, and food, went up notably. I see these changes as a signal that our country’s current labor market performance is much closer to “maximum employment” than the post-World War II U.S. data alone would suggest. As I’ve argued in the past, appropriate policy should be responsive to such signals.

We need more growth in order for more jobs to be created and for that unemployment rate to come down to the 6 percent rate which I view as maximum employment.

It is the magnitude of sectoral shifts that is impeding the effectiveness of our ability to find matches for unemployed workers.

Some commentators are urging the Fed to take additional action as long as the unemployment rate remains elevated. But if elevated unemployment reflects largely fundamental factors rather than insufficient spending, such stimulus might have little impact on unemployment and instead just raise the risk of pushing inflation up.

Unemployment “could well be above 7 percent, and I think we have to prepare for that,” Lacker said. “I think it’s a misconception to think we have to get unemployment all the way down to five or some number like that before we raise rates.”

DON LEE. What kind of job growth, on average, is consistent with the unemployment projections that you’ve made?

CHAIRMAN BERNANKE. Well, we need something—estimates differ. We need fewer jobs monthly to keep unemployment consistent or stable than in the past—I suppose more like 100,000 a month for stability. I don’t have an exact answer, but broadly speaking, 150 – 200,000 jobs or so. But that’s a very rough estimate, and, of course, individual participants may have different views.
Again, that’s not a forecast, I’ve made a hypothesis, which would imply slower improvement in unemployment. But the possibility, of course, exists that this recovery will generate a virtuous circle with greater hiring, which in turn generates more consumer spending, and greater hiring, and so on. That remains to be seen, and, of course, which way that goes is going to be a very important determinant of our response.

Finally, I do not interpret data suggesting an outward shift in the Beveridge curve as providing much evidence in favor of an increase in structural unemployment...  In my view, a portion of this apparent outward shift in the Beveridge curve reflects increases in the maximum duration of unemployment benefits, which have been important in buffering the effects of the weak labor market on workers and their families. The influence of these benefits will dissipate as they are phased out and the economy recovers. In addition, loop-like movements around the Beveridge curve are common during recoveries. 

Economists in the structural camp argue that the natural rate has risen substantially.

I’m not convinced. Research at the San Francisco and New York Feds suggests that job mismatches are limited in scope. Over the longer term, mismatches and other labor market inefficiencies may have raised the natural unemployment rate from about 5 percent to around 6 to 6½ percent.7 So, in my view, the nation remains far from the Fed’s goal of maximum sustainable employment.

Given this outlook for economic growth, it could take as long as four to five years to achieve maximum employment, which I estimate to be consistent with an unemployment rate of about 6 percent,

Some people think that our recent recession has impaired our labor markets, and that we must accept permanently higher unemployment rates -- that is, we have seen a rise in structural unemployment. I can understand why employment in homebuilding, for example, will not return to pre-recession levels for a very long time. And it is true that some skill sets of the unemployed no longer match well to those skills currently needed by employers. However, based on research from my staff, I think the most important reason for our high unemployment rates is that spending by consumers, businesses, and government still remains uninspiring. In other words, these higher rates of unemployment are predominantly cyclical in nature.