It is quite reasonable that we will get close to the 2 per cent target on the current path that we are on. The economy is improving but at a relatively slow rate. The inflation rate has been improving but at a very slow rate as well. So I think we are on the right path. It is not obvious to me right now that we are necessarily going to overshoot.

But one of the things that I highlighted in that New Hampshire talk is that [there are] both benefits and costs for waiting. The benefits tend to be accruing to the labour market and hopefully getting labour force participation to improve...

But there are also some potential costs. We talked about one, which is financial stability. A second one is that in the past we have tended to overshoot the natural rate of employment and when we overshoot significantly on the natural rate of unemployment it takes a while for the inflationary pressures to pick up but we are not so good at slowing down the economy and getting right at the NAIRU.

So if you look at the unemployment rate curve you tend to blow through the natural rate and when you start tightening you tend to get a recession shading. So it tends to be much more abrupt than we were hoping. Which means we are not like a thermostat where you can easily calibrate the difference between 70 degrees and 68 degrees . . . When we start tightening we tend to get more of a reaction in the economy than we are hoping for.

So it makes me a little tentative to hope we would overshoot significantly, because I am not so sure we are good at fine-tuning the economy. History would say we haven’t. Ideally what you would see is long periods where we are around the estimates of full employment. That is not actually what you see.

Because the outlook is uncertain, I cannot be sure which way—up or down—the next change will be. But at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook. At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases. Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment.

....

There is a risk is that market participants could overreact to any move in the process of normalization. Indeed, there is some risk that market participants could overreact even before normalization begins, when the pace of purchases is adjusted but the level of accommodation is still increasing month by month.11 Not only could such responses threaten financial stability, but also they might make it harder to calibrate monetary policy appropriately to the economic situation. We will need to think long and hard about how best to develop policy in a way that enables us to respond flexibly to a changing economic outlook, but in a way that is not disruptive to the economy.

Monetary policy is sometimes criticized for such “go-stop” policies. Policymakers step on the accelerator aggressively, only to slam on the brakes in order to change course. Such an approach to policy can be highly destabilizing, creating added volatility for financial markets and the economy... It is an approach most often driven by an excessive focus on the short run and perhaps some hubris that we will be able to successfully avert the risks such a strategy poses for the economy over the longer run.

Near-zero rate policy has its own costs. If we were proposing to remain near-zero for a few quarters, or even a year or two, one might argue that such a policy matches up well with the short-term business cycle dynamics of the U.S. economy. But a near-zero rate policy stretching over many years can begin to distort fundamental decision-making in the economy in ways that may be destructive to longer-run economic growth.

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

Yesterday, Plosser said rate cuts have been ``necessary and appropriate'' in response to a weakening economy. He told reporters he was concerned reductions could lead to accelerating inflation. ``That is the price you can pay if you become too aggressive,'' he said.

As reported by Bloomberg News

In the past it's been difficult to reverse field quickly when it seems warranted. And if that's going to be the case than it needs to affect how you approach things entering the period.

From press Q&A, as reported by Market News International

Stable expectations allow us if we so choose to go slow with policy adjustments because when the evidence comes in we can catch up. Or, if we respond too much from a Monday morning quarterback standpoint, we don't create any lasting problem, because inflation expectations are entrenched and therefore the market doesn't run away with expectations.

From press Q&A, as reported by Market News International

I don't think we've overshot yet. From press Q&A session, as reported by Market News International

I noted a moment ago that periods of financial instability are characterized by valuation risk and macroeconomic risk. Monetary policy cannot have much influence on the former, but it can certainly address the latter--macroeconomic risk. By cutting interest rates to offset the negative effects of financial turmoil on aggregate economic activity, monetary policy can reduce the likelihood that a financial disruption might set off an adverse feedback loop. The resulting reduction in uncertainty can then make it easier for the markets to collect the information that enables price discovery and to hasten the return to normal market functioning. To achieve this result most effectively, monetary policy needs to be timely, decisive, and flexible. Quick action is important for a central bank once it realizes that an episode of financial instability has the potential to set off a perverse sequence of events that pose a threat to its core objectives. Waiting too long to ease policy in such a situation would only risk a further deterioration in macroeconomic conditions and thus would arguably only increase the amount of easing that would eventually be needed.

Policy needs to be as disciplined as necessary to get the job done, but not more so.

It's possible to overtighten and to have the growth be slower than potential. It's also possible to not sufficiently address inflation problems and inflation rises. That both cuts into buying power, and it also creates the risks that the Fed would have to raise interest rates more later.

I am increasingly concerned about the well-known long and variable lags in monetary policy—specifically, that the delayed effects of our past policy actions might impact spending with greater force than expected. This could show up especially in the housing market and via housing prices and balance sheet effects on consumer spending. While I expect the housing sector to slow somewhat, I will be highly alert to the possibility of the policy tightening going too far.

[Fed officials] are trying to pick up early signs that the rate of economic growth might be cooling off, and we are also very alert to what is happening to price inflation...  Overshooting is something we are very aware of as a risk in policy today. 

I don't want rates to go too far. Obviously, you don't want to make a series of bad judgments.