We will have to be careful not to leave monetary accommodation in place longer than it's needed to put upward pressure on inflation, or to conceivably touch off a bubble in some other area of the economy

From press Q&A as reported by Market News International

There's no textbook answer to what monetary policy should be doing at this time.

From Q&A as reported by Market News International and Bloomberg News

Asked if she regretted not having a vote as the Fed faces its most challenging period in decades, Yellen said that all the Fed policy-makers are "noodling it out together ... it doesn't matter that much if you cast a vote or not."

From Q&A as reported by Reuters

In recent months, the Federal Reserve has been intensely focused on the continuing strains in financial markets. Healthy, well-functioning financial markets are essential to sustainable growth. In particular, much experience shows that economies cannot perform at their full potential when financial conditions are such as to restrict the supply of credit to sound borrowers. We are addressing these financial strains and their potential economic consequences with a number of tools, including the provision of extra liquidity to the system and reductions in our target for the federal funds rate.

Here is a simple analogy to help you think about our effort. The Federal Reserve is charged with conducting monetary policy that sustains noninflationary economic growth. We have at our disposal a tool called the federal funds rate, which we set as the base lending rate for the economy. Think of the fed funds rate as a monetary spigot, and the Fed’s goal is keeping the lawn of the economy green and healthy. If we turn the spigot up too forcefully, we will flood and kill the grass with inflation. If we provide too little, the lawn turns brown, starved for money. To get the money from the spigot to the lawn requires a working system of pipes and sprinkler heads. The “shadow banking system,” however, looks like a Rube Goldberg device designed by a hydrologist on acid, with pipes and conduits that lead every which way and not always toward the goal of sustainable economic growth. Moreover, the system of pipes and outlets is clogged with the muck and residue of a prolonged and frenetic period of unrestrained growth and abuse. Until the confusion and the debris are cleared away, financial intermediaries will be reluctant to book new loans or incur additional risk. This retards the impact of additional monetary accommodation.

Thus, even as we have been cutting the fed funds rate—even as we have been opening the monetary spigot—interest rates for private sector borrowers have not fallen correspondingly, and rates for some borrowers have increased. The grass is turning brown.

As my mother often told me when I was growing up, "The road to hell is paved with good intentions." Similarly, discretionary monetary policy, even though well intended, can lead to poor economic outcomes.

With regard to monetary policy, the FOMC has taken significant steps since September, cutting the federal funds rate by 3 full percentage points to 2¼ percent. With core PCE price inflation running at around 2 percent, the real—inflation-adjusted—funds rate is at an accommodative level of around zero or slightly higher.

I consider such accommodation an appropriate response to the contractionary effects of the ongoing financial shock and the housing downturn, and I anticipate that the resulting stimulus, combined with that of the fiscal package, will foster a moderate pickup in growth later this year.

Asked whether she was concerned that the Fed would be keeping rates too low, too long. she said it's "something we really have to consider going forward. With the benefit of hindsight maybe we did contribute" to the housing bubble by keep rates too low."

From Q&A, as reported by Market News International

Asset price declines—triggered by concern about the outlook for economic performance—led to a reduction in the willingness to bear risk and to margin calls. Borrowers needed to sell assets to meet the calls; some highly leveraged firms were unable to meet their obligations and their counterparties responded by liquidating the collateral they held. This put downward pressure on asset prices and increased price volatility. Dealers raised margins further to compensate for heightened volatility and reduced liquidity. This, in turn, put more pressure on other leveraged investors. A self-reinforcing downward spiral of higher haircuts forced sales, lower prices, higher volatility and still lower prices.

This dynamic poses a number of risks to the functioning of the financial system. It reduces the effectiveness of monetary policy, as the widening in spreads and risk premia worked to offset part of the reduction in the fed funds rate. Contagion spreads, transmitting waves of distress to other markets ...

The most important risk is systemic: if this dynamic continues unabated, the result would be a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole. This is not theoretical risk, and it is not something that the market can solve on its own. It carries the risk of significant damage to economic activity. Absent a forceful policy response, the consequences would be lower incomes for working families, higher borrowing costs for housing, education, and the expenses of everyday life, lower value of retirement savings and rising unemployment.

What we were observing in U.S. and global financial markets was similar to the classic pattern in financial crises. Asset price declines—triggered by concern about the outlook for economic performance—led to a reduction in the willingness to bear risk and to margin calls...

This dynamic poses a number of risks to the functioning of the financial system. It reduces the effectiveness of monetary policy, as the widening in spreads and risk premia worked to offset part of the reduction in the Fed Funds rate.

Unfortunately, what the public has come to expect of monetary policy, and central banking more generally, has risen considerably over the years. Indeed, there seems to be a view that monetary policy is the solution to most, if not all, economic ills. Not only is this not true, it is a dangerous misconception and runs the risk of setting up expectations that monetary policy can achieve objectives it cannot attain. To ensure the credibility of monetary policy, we should never ask monetary policy to do more than it can do.    

One important characteristic of simple rules is that they can be more easily explained to the public. That makes it easier for the public and for financial market participants to form expectations about policy. Simple rules could enhance the credibility of monetary policy, help anchor expectations, and better align the public’s expectations with the central bank’s intentions, which would minimize policy surprises and the detrimental effects often caused by such surprises.

A less aggressive cut would have been more appropriate.

From Q&A as reported by Bloomberg News, referring to the March 18 0.75-point rate cut.

There is no inherent conflict They do go together ... I don't think there is a fundamental trade-off. ... [But] while related, they need to be thought about separately.

As reported by Market News International, on whether there is a conflict between the Fed's monetary policy job and its role as lender of last resort, and on the relationship between monetary and policy and financial stability.

We are thinking of the forecasts for the real economy not where it is today.

From Q&A as reported by Market News International