With the potential for inflation expectations to be more volatile in the face of energy and commodity price shocks, I think it could be an opportune time for the FOMC to be more specific and publicly announce an explicit numerical inflation objective. Establishing an explicit inflation objective would clearly communicate our policy intentions and affirm our resolve to achieve price stability. It would also help the public to better evaluate the effectiveness of our actions as events unfold.

No amount of forthcoming accommodation... will help the process which is afflicting the United States right now and may well make it worse. The problem afflicting the United States right now is that Americans are out of work.

It is important to emphasize that we at the Federal Reserve have been expecting the economy to strengthen. We provided additional monetary policy stimulus via the asset purchase program to help ensure that the recovery regained momentum. A stronger recovery with more rapid progress toward our dual mandate objectives is what we have been seeking. This is welcome and not a reason to reverse course.

Bullard stated that ahead of the November FOMC meeting, the policy change had been largely priced into markets, and the financial market effects were conventional. In particular, he said, “real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose.” Bullard added, “These are the ‘classic’ financial market effects one might observe when the Fed eases monetary policy in ordinary times.” Bullard concluded that “quantitative easing has been an effective tool, even while the policy rate is near zero.”

Since QE2 was announced, the economic outlook has improved, Bullard noted. “The natural debate now,” he said, “is whether to complete the program, or to taper off to a somewhat lower level of asset purchases.”

I have no intention of supporting, under political pressure, the monetizing of the debt.. [That would be] a central banker’s cardinal sin.

The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases. I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation. And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream. I am a veteran of the Carter administration and know how easily prices can spin out of control and how cruelly markets can exact their revenge. I would not want to relive that experience.

Monetary policy can surely have great influence--most notably by establishing stable prices and appropriate financial conditions--on the real economy. By my way of thinking, the risk-reward ratio for Fed action peaks in times of crisis when it has a full toolbox and markets are functioning poorly. But when non-traditional tools are needed to loosen policy and markets are functioning more or less normally--even with output and employment below trend--the risk-reward ratio for policy action is decidedly less favorable. In my view, these risks increase with the size of the Federal Reserve's balance sheet. As a result, we cannot and should not be as aggressive as conventional policy rules--cultivated in more benign environments--might judge appropriate.

To me, the key to crafting monetary policy is placing the theoretical analysis―done by our able staffs of economists using quantitative modeling―within the qualitative context of economic behavior as practiced by businesses, consumers, investors and other players actually operating in the field.

I believe that moving rates modestly off of zero, where they have been since December 2008, still represents highly accommodative monetary policy... More importantly, such action is necessary if we are to ensure a more stable economy.

So, did accommodative interest rates fuel the housing bubble? Actually, the relationship between interest rates and bubbles is not as obvious as one might think... I am not saying that low rates could have had no role in moving housing prices higher. But I suspect the booming demand for real estate derived in large measure from incorrect expectations that housing prices would not fall, rather than from the short-run effect on housing demand of low short-term rates and slightly lowered mortgage rates.

[W]e said we would keep short term rates low, exceptionally low for an extended period.  So until we change that, that’s where we are. Short term rates are going to stay low for a considerable period of time to come... among my very informal set of people that I asked that question they said that “extended” in their minds means at least six months... So what I want to stress is extended means at least six months. It could be a year from now… two years from now. It’s going depend on how the economy develops.

What does "extended period" mean? I don't want to put a date on it. To me, it means the policy rate will be kept low until recovery has shown momentum that is based on private business and consumer demand, job growth is established or at least imminent, and the downside risks appear to be safely navigable.

 The market’s focus on interest rates is disappointing, given quantitative easing.  Markets are still thinking of monetary policy strictly as changes in interest rates—even though the Fed has been conducting successful policy this past year through quantitative easing. Markets should be focusing on quantitative monetary policy rather than interest rate policy.

Having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated.  All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs.  However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach.

During the last three decades, many central banks around the world have adapted to advances in the science of monetary policy. We have learned much from the experiences of those central banks that were early adopters of these advances. One theme that has emerged from this mix of academic research and experience is the important role played by the public's and market participants' expectations regarding policy actions. Uncertainty regarding policymakers' goals and the actions they will take to achieve them can make it more difficult to achieve those goals. Moreover, this uncertainty introduces unnecessary volatility into economic outcomes.