``If evidence arrives that we need a policy move, of course I will consider it and I will take that evidence seriously,'' he said in an interview with Reuters today. ``That evidence would be of the nature of information that alters the outlook for real spending and inflation.''

``If it lowers growth and real spending, that is going to warrant a lower path for real interest rates,'' Lacker said, adding the impact is `` very unclear.''

As reported by Bloomberg News  

Large run-ups in asset prices present serious challenges to central bankers. The analysis of the role of housing in the monetary transmission mechanism argues against a special role for house prices in the conduct of monetary policy and in favor of a policy response to them only to the extent that they have foreseeable effects on inflation and employment. Nevertheless, central banks can take measures to prepare for possible sharp reversals in the prices of homes or other assets to ensure that they will not do serious harm to the economy.   

It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions.  But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.

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Well-functioning financial markets are essential for a prosperous economy… The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets...

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The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.

Financial market volatility, in and of itself, does not require a change in the target federal funds rate, in my view. Interest rate policy needs to be guided by the outlook for real spending and inflation. Financial turbulence has the potential to change the assessment of the appropriate rate if it induces a sufficient revision in growth or inflation prospects.

It is highly desirable that the central bank behave in a rule-like way, both for the political objective of the rule of law rather than the rule of men and because predictable policy promotes more efficient decisions in the private sector. To the maximum possible extent, we desire an equilibrium in which the markets behave as the central bank expects and the central bank behaves as the markets expect. Central bank behavior to anchor expectations of low and stable inflation is the single most important aspect of policy predictability. I believe that the Fed has come a long way in that direction though, obviously, there are certainly opportunities for the Fed to refine its policy rule. In this context, by “rule” I simply mean that the Fed’s policy actions are systematic and highly predictable responses to new information.

And so the challenge for the Fed is always to balance supply and demand, to think about whether or not the level of demand that we're generating with our interest rate policies and with other policies -- government policies for example -- is consistent with the underlying supply. It's not so much that a given level of unemployment is, per se, inflationary, but if the economy is overheating, one might see a temporary dip in unemployment reflecting the extra resource utilization associated with it. So we don't have a magic unemployment rate that we look at and say, "Oh, that's too low or too high."   What we try to do is look at the whole economy, look for sources of price pressure. Are firms finding it easy to raise prices? Are there indications that markets are very tight, both at the labor level and the product level? And we try to make a judgment about the balance of supply and demand.  And that helps to govern our thinking about this.

The labor market -- you mentioned 6 percent -- the labor market changes a lot over time in terms of demographics, in terms of skills and education, in terms of job-finding through the Internet and so on. And so that number is not a fixed number. We always have to think about, you know, how it might be changing over time.

From the Q&A session

Monetary policy, or the short-term interest rate, is not a good tool for leaning against or trying to pop asset price bubbles for a variety of reasons, including the fact that it is very difficult for us to know when an asset price is in a bubble; it’s very hard to know how the asset price would react to increases in interest rates; it’s hard to know what to do when some asset prices might be in bubbles and others not; it’s a concern what would happen to the real economy if you raise interest rates a lot to pop a bubble and the higher interest rates have adverse effects on the real economy. So there a lot of unknowns and uncertainties that make me very cautious and conservative about thinking about using monetary policy to address asset prices.

Turning to monetary policy, I hope I've made it clear that—based on what we know now—I think the current stance of policy is likely to foster sustainable growth with a gradual ebbing of inflationary pressures. It has been heartening to see core consumer inflation edging down in recent months. However, as the most recent statement noted, "a sustained moderation in inflation pressures has yet to be convincingly demonstrated." Moreover, upside risks to inflation continue to be present, given the possibility that labor markets are somewhat tight. I believe it is important to be particularly attentive to these risks not only because price stability is desirable in its own right, but also because a credible commitment to keeping inflation low and stable is necessary to ensure that inflation expectations remain well-anchored. At the same time, we must be careful not to pose unnecessary risks to continued expansion.

We're always making judgments depending on what we're seeing, smelling, hearing, and feeling in the economy, and seeing in the data.  I'm happy with policy at present.

For certain, the current Federal Reserve is the most open and transparent in history. We announce policy moves and issue policy statements. Further, the minutes of FOMC meetings are released on a timely basis so that the public can get a better sense of the range of views on the FOMC.

Although the Fed is much more transparent than at any time in its history, it is arguably less transparent than a number of other central banks. As you may well be aware, the FOMC is currently studying ways to further improve its communications. It is too early, however, to say precisely what the results of that inquiry will be. Suffice it to say that there is a realization in monetary policy-making circles, gained through recent advances in monetary theory and the experience of the last 30 years, that maintaining credibility for low inflation is an important aspect of good monetary policy.

To paraphrase the late Milton Friedman, inflation is always and everywhere an expectational phenomenon.  To put it another way, inflation expectations are an outcome of monetary policy, not an autonomous help or hindrance.  Central banks are as responsible for the behavior of inflation expectations as they are for the behavior of inflation.  

I expect the economy to continue to operate at a high level relative to its potential, which could eventually lead to the emergence of increased inflationary pressures. In addition, if actual inflation does not show clear enough signs of returning to the center of the range I associate with price stability, there is a danger that expectations of inflation could run too high, which would likely be a self-fulfilling prophesy. Taking all of these factors into account, my assessment is that the risk of inflation remaining too high during the forecast period is greater than the risk of growth falling too low. Thus, some additional firming of policy may yet be necessary to address this inflation risk.

I believe that the optimal rate of inflation is zero, properly measured. However, biases in price indexes imply that, in practice, price stability will likely be consistent with a small positive measured rate of inflation. These biases arise from the difficulty of capturing improvements in the quality of goods and services, as well as substitutions among products that comprise consumers’ total purchases. Differences in how price indexes are put together imply that the specific rate of inflation that is consistent with price stability will likely vary across countries and over time. For the United States, I’ll hazard a guess that zero true inflation translates to an annual rate of increase in the CPI of about 1 percent and in the broader price index for personal consumption expenditures of about 0.5 percent.

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A number of FOMC members have spoken about a “comfort zone” of 1 to 2 percent inflation, measured by the PCE price index excluding food and energy—the so-called “core” inflation rate.  That statement is fully acceptable to me.  My way of stating my comfort zone is core inflation of 1.5 percent per year, plus or minus a range of 0.5 percent to allow for unavoidable short-run fluctuations.  My statement is meant to indicate that I would like monetary policy to aim at 1.5 percent core inflation and not just accept inflation barely inside one end or the other of a 1 to 2 percent range.  

Our principal focus should ... be not in the search for the capacity to preemptively diffuse conditions of excess leverage or liquidity, but in improving the capacity of the core of the financial system to withstand shocks and on mitigating the impact of those shocks.  And, as always, central banks need to stand prepared to make appropriate monetary policy adjustments if changes in financial conditions would otherwise threaten the achievement of the goals of price stability and sustainable economic growth.  

Monetary policy decisions are made without the direct input or the immediate approval of the other branches of government. This helps keep monetary policy independent of political pressures and influence. Nevertheless, we are independent within the government - not of the government. Ultimately, we are accountable to Congress for achieving two objectives: price stability and maximum sustainable economic growth.