A data-driven Committee, making decisions meeting by meeting, is likely to surprise markets from time to time. The authors join many others in criticizing the "measured pace" period of 2004 through 2006, during which the Committee increased rates by 25 basis points at 17 consecutive FOMC meetings. A common criticism has been that this high level of predictability made investors complacent, encouraging a buildup of leverage and helping set the stage for the Global Financial Crisis. That criticism may well overstate the importance of the Committee's communications; nonetheless, a number of FOMC participants have said that the Committee intends to be "data driven" and not fall into an excessively predictable, data-insensitive path. Lower predictability implies more surprises.

"Markets got the idea that, well, once the Fed gets going there is no stopping us, like a train leaving the station," Mr. Bullard said Thursday in an appearance on CNBC. Of the tightening cycle of 2004-2006, Mr. Bullard said, "That doesn't sound data dependent."
So when the Fed moved rates 25 basis points higher in December, while insisting more hikes would be data dependent, "markets didn't see 25 basis points, which should have been a small move and should not have been important," Mr. Bullard said. "Instead they saw 125 basis points pulling up."
The Fed, beginning in December, based on its actions in 2004-2006, "didn't have credibility on the idea that we're data dependent," he said. Mr. Bullard said he now believes the Fed should get away from predicting how many rate increases might come in a given year.
“I worry that we somehow signal that we are on a freight train path.”

First, the actual pace is going to be dependent on the path of the economy. The chair has been clear, and I certainly agree, that it is not our intention, is not my intention, to fall into a pace of mechanical increases at predictable intervals.

That happened for, I guess, 17 consecutive meetings of 25 basis point increases in the last tightening cycle. It’s not our intention to repeat that, but rather to be more responsive to incoming data.

...

[I]t depends on the data and I would say, you know, my own forecast calls for liftoff in September and for an additional increase in December.

I would want to stress that, as I said, I think September liftoff for me is close to a coin flip. It depends on the data. It will depend on how labor market data, growth data, inflation data, global events unfold. And December is even more, you know, even more uncertain given where we are.

...

So, markets have been doing that {pricing in a more gradualist path than implied by the dot plot} for a while. The market has been pricing at a lower path and continues to do so, although I think we’re getting into closer alignment. I assume that we will get into pretty close alignment by the time of lift-off. We’re trying to be as transparent as possible about how we’re thinking about interest rates and the economy in all the factors we consider.

There’s so much attention paid to this I think it’s unlikely the FOMC would reach a point of seriously considering a rate increase, and that that wouldn’t be widely understood in the markets. And certainly, it is our design is to be as transparent as possible. That’s the part of it that we control. We have to make these decisions, and, you know, we control our communication and our transparency, and I think we’re in a pretty good place on that right now.

Mr. Fischer became the latest to express frustration with the excess attention to liftoff and the relative lack of attention to what happens the next day. Fed officials say there is little difference for the economy whether the Fed acts in June or September.

Mr. Fischer also cautioned that investors should not assume the central bank will raise rates in regular increments, as when the Fed raised interest rates by 0.25 percentage points at 17 consecutive meetings from 2004 to 2006.

I know of no plans to behave by following one of those deterministic paths for the next two or three years, he said. I hope that doesnt happen. I dont believe it will happen.

There certainly has been no, you know, decision on the part of the committee to move at a measured pace or to use a language like that.

I think quite a few people looking back on the use of that language -- I can't remember if it was 12 or 16 meetings where there were 25 basis point moves -- would probably not like to repeat a sequence in which there was a measured pace and 25 basis-point moves at every meeting. So I certainly don't want to encourage you to think that there will be a repeat of that.

Many members of the committee -- participants have said that they think policy should be based on the actual evolution of economic activity and inflation, which tends to be variable over time, and that's why I say I anticipate it will be data-dependent.

 I think the committee participants who have spoken out on this topic {i.e., who objected to the calendar-based nature of teh "considerable time" guidance} recently want to make sure that we have the flexibility, that the committee has the flexibility to respond to unfolding developments. They want to make sure that if progress really does turn out to be faster than we would expect, that the committee will be in a position to start sooner tightening monetary policy.

They do not want to be locked into something that the markets see as a calendar-based and firm commitment, and so they want to emphasize data dependence of our policy and make sure that we have appropriate flexibility.

But I agree with that.  As I said earlier, I think we do have any mechanical interpretation  that applies to this.  It, of course, gives an impression about what we think will be appropirate, but there is no mechanical interpretatin.

I've said repeatedly -- and I want to say again -- that if events surprise us, and we're moving more quickly toward our objectives, and the committee sees a need to move sooner or later, depending on what the data is, that we do feel -- I do feel we have the flexibility to move. And it is important for markets to understand that there is uncertainty and that the statement is not some sort of firm promise about a particular amount of time.

The language that we use in this statement is “considerable period”. So, I -- I, you know, this is the kind of term it's hard to define, but, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends -- what the statement is saying is it depends what conditions are like.

We need to see where the labor market is, how close are we to our full employment goal. That will be a complicated assessment, not just based on a single statistic. And how rapidly are we moving toward it? Are we really close and moving fast? Or are we getting closer, but moving very slowly?

And then what this statement emphasizes, and this is the same language we used in December and January, we use the language especially if inflation is running below our 2 percent objective. Inflation matters here, too. And our general principle tries to capture that notion.

If we have a substantial shortfall in inflation, if inflation is persistently running below our 2 percent objective, that is a very good reason to hold the funds rate at its present range for longer.

Federal Reserve Bank of Philadelphia President Charles Plosser said he expects the unemployment rate to decline close to 7 percent by the end of this year, warranting a reduction in the Fed’s monthly bond purchases.

“If my forecast is right, then I think we should at least have begun backing off on our asset purchases,” Plosser told reporters yesterday after delivering a speech in Stanford, California. “As a practical manner, we will taper” bond buying before halting the quantitative easing program, he said.

As reported by Bloomberg News

Thus policymakers and the public at large live in an uncertain world.  For example, most of you are probably wondering when this speech will end.  I thought about gradually drawing to a close at, say, a measured pace, but my risk-management instincts tell me just to stop.  Thank you.

In each of the next 16 consecutive meetings, the FOMC voted to raise the target for the federal funds rate by 25 basis points, finally pausing at 5¼ percent in August of this year. It appeared to some that policy was on autopilot, as the FOMC raised the target by 25 basis points meeting after meeting, apparently independent of incoming information. That view, I believe, was mistaken. When the FOMC began the series of rate increases, in June 2004, the statement included this sentence: “Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.” Similar language has appeared in every statement since and the minutes of the meetings have emphasized the same point.  What happened over the 18 months after June 2004 was, basically, that incoming data indicated that the economy was so close to the track expected earlier that there was no reason to depart from the “measured pace” of rate increases of 25 basis points at every meeting.

In this regard, I think the policy tactics followed by the FOMC over recent years will be helpful. We have moved rates higher gradually and announced our intentions in a manner that underscores that these intentions depend on the economic outlook. The announcement should enable market participants to get a more accurate view of our intentions sooner and build them into financial market conditions, which then feed back on spending. This transparency, together with the gradual trajectory of policy actions, should help us to get a better and more timely fix on the effects of our actions than in the past.

In this environment of somewhat faster growth in aggregate spending and greater upward pressure on prices, the Federal Open Market Committee (FOMC) raised its target for the federal funds rate to 3-1/2 percent in early August. At the same time, the Committee reiterated its belief that, with the appropriate monetary policy actions, the upside and downside risks to the outlook for sustainable economic growth and price stability were roughly equal and that the removal of monetary accommodation could proceed at a "measured pace." Thus, before the hurricanes, the outlook was relatively benign: continued moderate economic growth accompanied by little change in the underlying pace of core inflation.

If the economy evolves as I expect, then my sense is that the policy path upon which we embarked just over a year ago — a movement toward neutrality at a measured pace — will continue to be appropriate.  If the economy evolves as I expect, it is likely that we can continue to move the federal funds rate toward neutrality at what we have described as a measured pace, steadily converging to a level of interest rates that supports the current expansion into 2006 and beyond. 

I'm not willing to set a time frame on it but yes, I am comfortable with the measured pace characterization right now.

A moderate pace of continued tightening is a sensible outlook at this point and it's too soon to say when we're going to stop.