However, a key point is that as we approach an FOMC meeting where an adjustment decision looms, it is appropriate to give relatively heavy weight to the accumulated stock of progress toward our labor market objective and to not be excessively sensitive to the sort of near-term momentum captured by, for example, the last payroll number that comes in just before the meeting.

In part, this principle just reflects sound statistical inference--one doesn't want to put too much weight on one or two noisy observations. But there is more to it than that. Not only do FOMC actions shape market expectations, but the converse is true as well: Market expectations influence FOMC actions. It is difficult for the Committee to take an action at any meeting that is wholly unanticipated because we don't want to create undue market volatility. However, when there is a two-way feedback between financial conditions and FOMC actions, an initial perception that noisy recent data play a central role in the policy process can become somewhat self-fulfilling and can itself be the cause of extraneous volatility in asset prices.

Thus both in an effort to make reliable judgments about the state of the economy, as well as to reduce the possibility of an undesirable feedback loop, the best approach is for the Committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting--as salient as these releases may appear to be to market participants. I should emphasize that this would not mean abandoning the premise that the program as a whole should be both data-dependent and forward looking. Even if a data release from early September does not exert a strong influence on the decision to make an adjustment at the September meeting, that release will remain relevant for future decisions. If the news is bad, and it is confirmed by further bad news in October and November, this would suggest that the 7 percent unemployment goal is likely to be further away, and the remainder of the program would be extended accordingly.

Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much.

Recognizing the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates. Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets. Moreover, renewed economic weakness would pose its own risks to financial stability.

Because only a healthy economy can deliver sustainably high real rates of return to savers and investors, the best way to achieve higher returns in the medium term and beyond is for the Federal Reserve--consistent with its congressional mandate--to provide policy accommodation as needed to foster maximum employment and price stability. Of course, we will do so with due regard for the efficacy and costs of our policy actions and in a way that is responsive to the evolution of the economic outlook

However, our policy approach was far from perfect. Comparing actual growth to the growth projections by FOMC participants in the Summary of Economic Projections shows that we were consistently too optimistic about growth over the 2009-2012 period. As a result, with the benefit of hindsight, we did not provide enough stimulus...

Also, we could have done better in communicating our intentions and goals. We put too much emphasis, too early, on the exit. At an earlier stage, we should have put greater emphasis on our commitment to use all our tools to the fullest extent possible for as long as needed to achieve our dual mandate objectives.

Our policies also had a “start-stop” aspect to them that may have undercut their effectiveness. For example, until September 2012, our large-scale asset programs generally specified the total size of the program, with a purchase rate and an expected ending date. This created a void when the programs ended and made our policy response sporadic and hard to forecast. This limited the scope for market prices to adjust in anticipation of our future actions in ways that would help stabilize the economy.

Another shortcoming was in our use of forward guidance with respect to the path of short-term interest rates. Although calendar-based guidance worked reasonably well in influencing expectations about the future path of short-term rates and thus the shape of the yield curve, it was clumsy in a number of respects. For example, if we moved the forward date guidance out in time, did this reflect a change in our reaction function, the amount of desired policy stimulus or greater pessimism about the outlook?

Of course, as we have learned, we have acted to rectify these shortcomings. For example, our asset purchases are now outcome based, tied to the goal of substantial improvement in the labor market outlook, and our forward guidance on short-term rates is tied to unemployment and inflation thresholds rather than to a calendar date.

What can policy, broadly speaking, do to foster growth, innovation, and job creation? At a high level, three things. First, policymakers can remove obstacles to growth—for example, uncertainty regarding the fiscal path of government, policies that discourage new business formation, and disincentives to invest. Second, and the mirror image of obstacles, is positive, pro-growth policies. Examples include investment in human capital and critical infrastructure.

And finally, there is a role for monetary policy. In my view, monetary policy can deliver appropriately favorable interest rate conditions, always in a context of low and stable inflation. Monetary policy plays a critical role in creating the most favorable conditions for other policy actions to do their work.

I would give each of these four explanations some weight for why the recovery has been consistently weaker than expected. But I would add a fifth, monetary policy, while highly accommodative by historic standards, may still not have been sufficiently accommodative given the economic circumstances.

The fix lies not within the purview of the Federal Reserve. The fix lies solely in the hands of a government that has the power to shape taxes and spending programs to incent businesses to go out and hire rather than ball up into a defensive crouch, or worse, go elsewhere in the world that we worked so hard to liberate, to create jobs for others rather than for our own people.

The private sector and American business community are poised to expand. But they will not do so as long as we have a government that cannot resist the temptation to devise a politically convenient patchwork instead of laying out a convincing, reliable, long-term program that job creators and consumers can count on and plan around.

Bullard said that inflation is sometimes seen as a way to partially default on existing nominal debts; if actual inflation is higher than anticipated, the debtor ends up paying less to the lender in real terms. In this scenario, he said, “The partial default would occur against savers, mostly older U.S. households, and against foreign creditors.”

Such a policy would not be without future costs, Bullard emphasized. “A partial default today through higher inflation would be paid for via higher inflation premiums in future borrowing,” he said. “Creditors would want to protect themselves against the unpredictable central bank that might surprise them with a burst of inflation. Nominal interest rates would be higher than otherwise into the distant future.”

"I don't think we should be in a mode where we are waiting to see what the next few data releases bring. We are well past the threshold for additional action; we should take that action now."

"Clear and steady progress toward stronger growth is essential. Because we are not seeing that now, I support further use of our balance sheet to provide even more monetary accommodation."

"There's some sentiment around that table for doing more. Personally, my sense is that monetary policy isn't capable of having a material effect on growth, or employment, or unemployment at this point."

“I’m in the camp of being a bit of a skeptic about more monetary stimulus at this time.”

“We’re at the risk of overburdening the central banks” and “we keep applying what I call monetary Ritalin to the system. We all know there’s a risk of overprescribing.”

"We have done our job. We have done enough. Just doing more does not solve the problem. The problem is engaging the transmission. We provided the gas. The gas tank is full. Who will incent the driver of this economy to step on the accelerator and move it forward? That is the private sector.”

"My point is that we have so much extra cash and reserves sitting on the sidelines, it is not being put to work right now. The question is: what will incent people to use the copious amounts of money we put out there and step on the accelerator and move job creation forward when we have the fiscal policy uncertainty? I think we’re pushing on a string. It is a great risk that I am not only worried about, but the Bank for International Settlements wrote their entire annual report and concluded we are at the risk of overburdening the central banks.”

"The time to do more would have been in August. I disagree with that policy, but if you’re going to do it, we should have done it. The closer we get to an election, the more I think the perception incorrectly will be that we have become too politically pliant. So there’s a lot of downside here and the question is, for what upside?”

"I'm just opposed to a pure inflation-only mandate in which the only thing a central bank cares about is inflation and not employment," Yellen says now. "I've never been opposed to having a numerical objective. I don't think the committee can operate intelligently unless people can agree on what we're trying to accomplish."

"Certainly an important part of what I try to do in my role on the committee is take my personal point of view and try to explain it as clearly as I possibly can and advocate for it," she said. "But it's not just 100 percent that. I do absolutely understand that the committee needs to make a decision and we need to find something to do that can command sufficient support."

"But monetary policy is not a panacea," she said. "There are questions about the efficacy of unconventional policy tools and their use may entail some cost."

"We failed completely to understand the complexity of what the impact of the decline - the national decline - in housing prices would be in the financial system," she said at her confirmation hearings

The current stance of monetary policy is ultra-easy, and remains appropriately calibrated given the macroeconomic situation in the U.S.

The ultra-easy monetary policy has been appropriate so far, but could reignite a 1970s-type experience globally if pursued too aggressively. The 1970s era included 4 recessions in 13 years, double-digit inflation, and double-digit unemployment. The lesson was clear: “Do not let the inflation genie out of the bottle.”

If anything, the Committee may be trying to do too much with monetary policy, risking monetary instability for the U.S. and the global economy.

Monetary policy is a blunt instrument which affects the decision making of everyone in the economy. It may be better to focus on labor market policies to directly address unemployment instead of taking further risks with monetary policy.

The {Fed's} current communication strategy operates with only a few variables, while the economy is described by many variables. The FOMC could instead publish a quarterly document akin to the Bank of England’s “Inflation Report.” A report of this type could potentially lay down a benchmark “Fed view” on the key issues facing the U.S. economy. Release of the report could be coordinated with the quarterly press briefings conducted by Chairman Bernanke.

The benefit of using risk-neutral probabilities arises from the observation that resources may be more valuable in one state of the world relative to another, equally likely, state of the world. (For example, the economy might be in a deep recession in the former state and in a boom in the latter.) In weighing future costs and benefits, the policymaker should take account of this differential valuation of resources in different states. Because they are derived from market prices, risk-neutral probabilities provide the needed information about the relative values of resources in different states of the world in a way that purely statistical forecasts cannot.

But if I were bound and determined to address the concerns that savers are being disadvantaged by low interest rates, there are three prescriptions that I could imagine undertaking. And let me tell you, two of them are bad.

First, the FOMC could immediately undertake a program to raise short-term interest rates. In other words, monetary policy could exogenously turn more restrictive. Would this help savers and the economy? In my judgment, that would be a very bad policy. More restrictive credit would further reduce investment and job creation and limit the supply of credit to small business entrepreneurs, resulting in growth even slower than it is now. Savers would not be left with higher returns. And savers’ other sources of income would be reduced, like employment and entrepreneurial income. I have few doubts that policy would need to quickly retrace such a misguided increase.

Alternatively, the FOMC could decide to undertake expansionary policies to the point of “recklessness” by pursuing an extremely high rate of inflation. Persistently higher rates of inflation—outside of reasonable tolerance bands around our long-run inflation objective—would indeed lead to higher interest rates for all. Savers would receive higher nominal interest income; but as Chairman Bernanke said recently, the FOMC would clearly view this as reckless and would not choose to pursue such a policy. Again, this is a case where higher nominal interest rates would be bad for savers and the entire public.

But third, if the FOMC and other policymakers could engineer stronger growth policies so that the economy boomed again and unemployment fell, this would organically lead to higher real rates of return on investment and higher interest rates in general, which would benefit savers and the entire public. A more vibrant economy would benefit owners of unused resources, like unused factory capacity and unemployed workers. This is the policy path that is most desirable in my opinion. I also think it is most consistent with the accommodative policies I have been advocating.