Empirical work done at the Fed and elsewhere suggests that QE worked in the sense that it reduced interest rates other than the federal funds rate, and particularly seems to have succeeded in driving down longer-term rates, which are the rates most relevant to spending decisions.
Critics have argued that QE has gradually become less effective over the years, and should no longer be used. It is extremely difficult to appraise the effectiveness of a program all of whose parameters have been announced at the beginning of the program. But I regard it as significant with respect to the effectiveness of QE that the taper tantrum in 2013, apparently caused by a belief that the Fed was going to wind down its purchases sooner than expected, had a major effect on interest rates.
More recently, critics have argued that QE, together with negative interest rates, is no longer effective in either Japan or in the euro zone.That case has not yet been empirically established, and I believe that central banks still have the capacity through QE and other measures to run expansionary monetary policies, even at the zero lower bound.Empirical work done at the Fed and elsewhere suggests that QE worked in the sense that it reduced interest rates other than the federal funds rate, and particularly seems to have succeeded in driving down longer-term rates, which are the rates most relevant to spending decisions.
Critics have argued that QE has gradually become less effective over the years, and should no longer be used. It is extremely difficult to appraise the effectiveness of a program all of whose parameters have been announced at the beginning of the program. But I regard it as significant with respect to the effectiveness of QE that the taper tantrum in 2013, apparently caused by a belief that the Fed was going to wind down its purchases sooner than expected, had a major effect on interest rates.
More recently, critics have argued that QE, together with negative interest rates, is no longer effective in either Japan or in the euro zone.That case has not yet been empirically established, and I believe that central banks still have the capacity through QE and other measures to run expansionary monetary policies, even at the zero lower bound.

However, I also think that inflation expectations are dropping in the U.S. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.

Once the U.S. economy began to improve and the Federal Reserve began to discuss a gradual reduction in purchases, many market participants who had been invested “alongside” the Federal Reserve became active sellers.

This was particularly true for highly leveraged investors who had borrowed “short” and invested “long” by engaging in the so-called “carry trade” – an issue of particular relevance in emerging markets where interest rates were considerably higher than in the United States. The result was a fairly significant increase in long-term rates and a repatriation of funds that had been previously borrowed short and invested long in emerging-market securities.

The unwinding of the carry trade was a particularly thorny issue for countries with high dollar-denominated yields and fixed exchange rates, and for countries that had high yields and a policy of gradual currency appreciation relative to the dollar. The speed and magnitude of the readjustment highlighted just how low long-term rates had been pushed. It also suggested that many models of the impact of Federal Reserve asset purchase programs had not fully accounted for potential investor reaction to the policy, or the impact of a sudden reassessment of investor desire to engage in the carry trade.
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In sum, this episode made clear the importance of Federal Reserve communication and market understanding about programs and policies. The episode also underlined the importance of calibrating investor reactions into models of policy impact.
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Importantly, I suspect that the benign reaction to the gradual tapering of stimulus over the last 6 months may be instructive as we consider how best to wind down the Federal Reserve’s balance sheet once the tapering of asset purchases is complete. While the optimal program for reducing the Fed’s balance sheet will need to be dependent on the state of the economy, the recent tapering experience suggests to me that a predictable, transparent reduction in the balance sheet could be done in ways that may minimize the risk of financial disruption.

Let me offer one scenario that I have been considering, in light of the sorts of financial stability concerns that I and my colleagues keep in mind. In one scenario, a reduction in the balance sheet, when that becomes appropriate, could be implemented as a basically seamless continuation of the tapering program used for reductions in the purchase program. For example, the Committee could decide to reinvest all but a given percentage of securities on the balance sheet as they reach maturity, and increase that percentage at each subsequent meeting, assuming conditions allow.

Such a tapering of the reinvestment program could allow for a gradual and transparent reduction in the Fed’s balance sheet. As the economy moved closer to the Federal Reserve’s 2 percent inflation target and full employment, there could be a gradual reduction in the reinvestment policy – which would allow for a predictable reduction in the size of the balance sheet. However, the pace of reinvestment should always be considered in the context of the economic outcomes we are seeking to achieve. If the economy was substantially stronger or substantially weaker than was expected, the reinvestment program would need adjustment. Again, I mention this as simply one scenario for consideration.
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[A] positive collateral impact of using reverse repos and interest on excess reserves in these ways is that the ability to control short-term rates would not be tied to actions that impact the size of the Federal Reserve’s balance sheet. This means the Federal Reserve could have additional financial stability tools at its disposal, if it chose to maintain a larger-than-traditional balance sheet with a greater mix of assets. Naturally, maintaining a large balance sheet comprising both U.S. Treasury securities and mortgage-backed securities would provide the Federal Reserve with continuing options for impacting long-term interest rates and the spread between mortgage-backed securities and U.S. Treasury securities. For example, if a bubble seemed to be developing in housing markets generally, the Federal Reserve would have the option of addressing it by selling MBS or long-duration U.S. Treasury securities. This again is a notion that I consider worthy of further exploration and debate.

We need to get much, much closer to two percent before we even contemplate liftoff, Evans told reporters after a presentation at the Istanbul School of Central Banking today. Whether that's late 2015 or early 2015 or 2016, it'll depend on the economy.

At this point, it would take a substantial shift in the economic outlook to derail the tapering process.

I say this a lot, because its an important message to get across: The taper does not reflect a tightening of monetary policy. Were not putting out the fire, were just gradually adding less and less fuel. Its just one small step towards policy normalization, when the economy has sufficient heat on its own. A real tightening of policywhich would mean raising the fed funds rateis still a good way off.

Federal Reserve Bank of San Francisco President John Williams said the pace at which the Fed is reducing its asset purchases is “pretty much baked in the cake” and that central the bank shouldn’t start raising interest rates until the second half of next year.

“We’re closing in on the final stages of tapering,” Williams told reporters today following a panel discussion in Dallas. “I don’t see a lot of benefit to modifying” the pace unless there’s a “dramatic change” in the economic outlook, he said.

In this context, recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labor market means our aid for the recovery need not grow as quickly. Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come. This commitment is strong, and I believe the Fed's policies will continue to help sustain progress in the job market. But the scars from the Great Recession remain, and reaching our goals will take time.

Whenever we do make any change, participants are trying to divine what else that might mean. With the taper, I was surprised -- and disappointed even -- that the discussion around tapering was misconstrued as a sign of a more hawkish or tighter FOMC. I was thinking no, no, no -- we’re continuing a process that we tried to communicate. The taper is one step in this, but in no way does moving to the next step imply a change in the view of when we’ll start raising interest rates.

I think last year we learned that the communication hasn’t totally been absorbed by people. We put an emphasis on trying to separate those two things out: The taper is one decision, raising interest rates is one. We got back to a good place.

Now the discussion about when we’re going to raise interest rates and the pace at which we’re going to raise interest rates is stirring that same thing: If the Fed is talking about it, maybe they’re going to do it sooner than we thought. I think the lesson is that confusing the two is something that we have to make sure we explain.

Greg Robb: Thank you. I'd like to take you back to last summer when there were hints, the Fed made hints, that they were going to taper and long-term interest rates spiked. Mortgage rates rose. What lessons, looking back at that -- at that period, what lessons have you -- have you learned from it? And are you confident that you won't repeat those mistakes again?

YELLEN: Well, I think there were quite a number of things happening at that time. I think it's probably true that monetary policy may have played a role in touching off that market reaction, but I think the market reaction was exacerbated by the fact that we had a very significant unwinding of carry trades and other leveraged positions that investors had taken, perhaps thinking that the level of volatility was exceptionally low and perhaps lower than was safe for them to have assumed.

But we certainly saw -- now, in some ways, the fact the term "premia" and interest rates have come up somewhat, although it has had a negative effect on the recovery, and that's evident in housing, in the slowdown in housing, perhaps it's diminished some financial instability risk that may have been associated with these carried (ph) traits and speculative activities that were unwinding during that time.

A lesson is that we will try, and we were trying then, but we will continue to try to communicate as clearly as we possibly can about how we will conduct monetary policy and to be as steady and determined and as transparent as we can to provide as much clarity as is reasonably certain, given that the economic developments in the economy are themselves uncertain.

But we will try as hard as we can not to be a source of instability here.

Federal Reserve Bank of Chicago President Charles Evans said Monday “there’s not a large expectation” the current system of numerical thresholds will remain in place for much longer. The Fed is likely to replace it with more “qualitative” guidance, he said in a speech at Columbus State University, in Georgia.

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Mr. Evans said in his speech that when it comes to shrinking the bond buys, “we are going to continue to do that.” He added to reporters after his formal remarks that “we have got a pretty high hurdle for altering our taper plan,” noting that cutting them by $10 billion at each Fed policy meeting “is a nice benchmark” for future reductions.

Mr. Evans also said that if it were up to him, the Fed would refrain from raising short-term rates until sometime in 2016. Most Fed officials believe the first rate increase will come in 2015 if economic conditions improve as they expect.

Bullard revealed for the first time that he was one of the two FOMC participants show foresaw a 2014 rate hike in December and said he made that forecast because he was "more optimistic" than many about the outlook for economic growth and employment.  He said he had previously expected the first rate hike to come in 2015.

With the March meeting less than a month away, Bullard said, "I definitely will have to reconsider at this meeting" whether the first rate hike will come in late 2014 or in 2015.

"Even in December, it was a close call," he said, adding that "if it moves back a quarter" it makes little difference.

"We have to start to get out of the mode of emergency policy" and think about making monetary policy "more normal," Bullard said.

He told his audience that, even though the Fed is scaling back its large-scale asset purchases, it is "still buying a lot." He said continued "tapering" remains on track at coming meetings of the FOMC.

Assuming the economy evolves more or less in line with our expectations—and, like the saying goes, it’s difficult to make predictions, especially about the future—the gradual tapering in the pace of asset purchases will continue. It is not locked in, but the bar for altering the path is high. In particular, it’s important for monetary policy to keep focused on the medium-term outlook for the economy and not overreact to month-to-month movements in the data.

     If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions, and inflation moving back towards its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.

     That said, purchases are not on a preset course and the Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation, as well as its assessment of the likely efficacy and costs of such purchases.

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     We began these asset purchases as a secondary tool, a supplementary tool to our forward guidance, to add some momentum to the recovery, and we said we would continue those purchases until we'd seen a substantial improvement in the outlook for the labor market, and the context of price stability.

     As I noted, there have been a substantial number of jobs created and unemployment has come down, and in December the committee judged that enough progress had been made in the labor market to begin a measured pace of reductions in the pace of our asset purchases.

     We purposely decided to act in a measured and deliberate way to take measured steps so that we could watch to see what was happening in the economy, and we've indicated that if the outlook continues to be one in which we expect, and are seeing continued improvement in the labor market, that implies growth strong enough going forward to anticipate such improvement, and inflation, which is running below our objective, if we see evidence that, that will come back toward our objective over time, we're likely to continue reducing the pace of our purchases in measured steps.

     But, we've also indicated that the -- this program is not on a preset course, which means that if the committee judges there to be a change in the outlook, that it would reconsider -- it would reconsider what is appropriate with respect to the program.

Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year.

I believe the economy has already met the criteria of substantial improvement in labor market conditions, and the economic outlook has improved as well. So my preference would be that we conclude the purchases sooner rather than later.

Although the FOMC has indicated that it doesn't anticipate raising rates when the economy crosses that threshold, I do believe that we will have complicated our communications if we are still purchasing assets at that point.