“For me personally, it would take a very significant change in the outlook for me to support not tapering,” Mr. Lacker told journalists after addressing a meeting of the Risk Management Association here. “I don’t think the data we’ve seen so far are close to that,” he said.

“It makes a lot of sense to take measured steps to adjust the purchase-flow rate,” he said. “At the moment, the plan seems quite reasonable. And it is at measured steps so we can assess if the outlook is actually proceeding along the lines we are expecting. I think that is the right way to go.”

I was pleased with the decision to finally begin tapering our bond purchases, though I would have preferred to pull back our purchases by double the announced amount. But the important thing for me is that the committee began the process of slowing down the ballooning of our balance sheet, which at year-end exceeded $4 trillion.

Here is a rather pungent quote from a note Peter Boockvar sent out on Jan. 2:

“…QE [quantitative easing] puts beer goggles on investors by creating a line of sight where everything looks good…”

For those of you unfamiliar with the term “beer goggles,” the Urban Dictionary defines it as “the effect that alcohol … has in rendering a person who one would ordinarily regard as unattractive as … alluring.”

Here is the point as to the market’s beer goggles. Were a stock market correction to ensue while I have the vote, I would not flinch from supporting continued reductions in the size of our asset purchases as long as the real economy is growing, cyclical unemployment is declining and demand-driven deflation remains a small tail risk; I would vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date.

Chairman Ben Bernanke indicated in his December press conference that if we are making progress in terms of inflation and continued job gains, then the program would be concluded late in 2014. The December employment report has not changed my belief that the economy has already met the criteria of substantial improvement in labor market conditions. So my preference would be that we conclude the purchases sooner than this, but I am glad that we have taken the first step on the path to ending the program. 

"[The Fed's tapering decision] is data dependent, and not just on the labor market, but on inflation,” he said. “If inflation stepped lower in a clear way I think that would give me some pause” about supporting more trims to bond purchase, Bullard said.

Payrolls in December increased at the slowest pace in almost three years, indicating a pause in the recent labor market strength that may have reflected the effects of bad weather. The drop probably won’t keep policy makers from discussing another $10 billion cut in asset purchases, Lacker told reporters today after a speech in Raleigh, North Carolina.

“As a general principle, it’s wise not to overreact to one month’s employment report,” Lacker said. “Employment has been growing along a pretty steady trend this year. It takes a lot more than one labor-market report to be convincing that the trend has shifted, and in my experience one employment report rarely has an effect by itself on monetary policy.”

Our forecast has the unemployment rate only gradually coming down and the economy growing only about 3%. I can imagine a scenario where the economy is growing much faster than that, employment is improving much more quickly and unemployment coming down much sharper and we would want to step up the pace of reductions in the asset purchases by more than $10 billion per meeting, in a situation like that, to accelerate the end of the program.

While the Fed has tied further withdrawal of stimulus to continued economic progress, Rosengren detailed what he would need to see to either halt the tapering or ramp it up.

"To halt it, certainly if we stop seeing progress in the labor markets ... and we were to start seeing the unemployment rate go up—that would be certainly a source of concern and a reason to stop it," he said.

On the other hand, "it would take some fairly strong, unexpected growth, and inflation much more quickly than I'm expecting back towards 2 percent, to make me want to remove accommodation more quickly," Rosengren said. "I don't expect that to happen," he added.

The Federal Reserve could well consider cutting its bond-buying by more than a $10 billion monthly increment in the future, Philadelphia Fed President Charles Plosser said on Saturday, floating $25 billion as a hypothetical amount. The U.S. central bank trimmed its quantitative easing program to $75 billion per month, from $85 billion, at a much anticipated policy meeting last month, reducing its extraordinary support for the U.S. economy. "It's good that we did it," Plosser, a hawkish Fed official, told reporters on the sidelines of a conference. But "if the economy continues to grow and strengthen I think that there's no reason why we shouldn't want to consider speeding the process up if we can," he said. "I have no problem with gradually unwinding it, but my preference would be to move a little quicker and end it sooner rather than later," Plosser added.

Federal Reserve Bank of Dallas President Richard Fisher, who will be a voting member of the policy-setting committee next year, said he argued for a $20 billion reduction in the Feds monthly bond purchasing pace instead of the $10 billion announced last week. The market could have digested that, he said in an interview with Fox Business Network today.

The Federal Reserve's decision to slow its monthly bond purchases was justified by an improving labor market but the central bank could still adjust the pace of tapering based on incoming data, a top Fed official said on Monday. "I think the time was right," Richmond Fed President Jeffrey Lacker, a long-time critic of the Fed's monthly bond purchases, said in an interview on CNBC-TV. "Given the data....this decision was kind of a slam dunk." Lacker acknowledged that the Fed could still speed up or slow down the pace of stimulus withdrawal as needed. "You have to consider the door open to us pausing if the data comes in weaker than thought or accelerating if the data comes in stronger," he said, though he added that he would want to see a substantial change in current trends before pausing. "You don't want to over-react to a little swing" in the jobless rate, Lacker said.

My hope and my forecast is that we will continue to accumulate evidence indicating a strengthening economy in coming months. Thus, my decision to cast a dissenting vote was focused on counseling patience in removing monetary accommodation... Over the recovery period, my forecasts, as well as forecasts of many others, have proven to be more optimistic than the actual outcomes. Furthermore, we remain far from both parts of the Federal Reserve's "dual mandate" on employment and inflation. As a result, I would prefer to wait until the economic improvement that I am forecasting is clearly evident in the data before reducing the size of the asset-purchase program. Given the remaining shortfalls from our targets, I think patience remains appropriate at this time.

YLAN MUI: Today was the first reduction in asset purchases, and you just said that future reductions will likely occur in measured steps, but are not on a predetermined course. Can you tell us any more about the framework that you all plan to use to determine the -- the timing of those reductions? And previously you had said that you expect the program to end altogether by the middle of next year. Is that still a likely scenario? CHAIRMAN BERNANKE: Well, as I said, the steps that we take will be data-dependent. If we're making progress in terms of inflation and continued job gains, then I imagine we'll continue to do probably at each meeting a measured reduction. That would take us to late in the year, not -- necessarily not by the middle of the year. If the economy slows for some reason or we are disappointed in the outcomes, we could -- we could skip a meeting or two. On the other side, if things really pick up, then of course we could go a bit faster. But my expectation is for similar moderate steps going forward throughout most of 2014. STEVE LIESMAN: Mr. Chairman, thank you. When you say similar moderate steps going forward, is $10 billion an increment that people should anticipate? And is equal amounts of mortgage-backed securities and Treasuries also what one should anticipate? Finally, when you say well past the unemployment rate of 6.5 percent, why not pick a number? Why say "well past"? Thank you. CHAIRMAN BERNANKE: Sure. On the first issue of $10 billion, again, we say we're going to take further modest steps subsequently, so that would be the general range. But, again, I want to emphasize that we are going to be data-dependent. We could stop purchases if the economy disappoints; we could pick them up somewhat if the economy is stronger. In terms of MBS versus Treasuries, we discussed that issue. I think that the general sense of the committee was that equal reductions or approximately equal reductions was the simpler way to do this. It obviously doesn't make a great deal of difference in the end to how much we hold, so that was going to be our -- our strategy. On the issue of another number, the unemployment rate, let's talk first about the -- about the labor market condition. The unemployment rate is -- is a good indicator of the labor market. It's probably the best single indicator that we have. And so we were comfortable setting a 6.5 percent unemployment rate as the point at which we would begin to look at a more broad set of labor market indicators. However, precisely because we don't want to look just at the unemployment rate, we want to -- once we get to 6.5 percent, we want to look at hiring, quits, vacancies, participation, long-term unemployment, et cetera, wages, we couldn't put it in terms of another unemployment rate level, specifically.

And so I do want to reiterate that this is not intended to be a tightening. We don't think that there's an inflation problem or anything like that. On the one hand, asset purchases are still going to be continuing. We're still going to be building our balance sheet. The total amount of assets that we acquire are probably more than was -- certainly more than was expected in September 2012 or in June 2013. So we'll have a very substantial balance sheet, which we'll continue to hold.