Over time, the benefits of our asset purchases may be diminishing. For example, given how low interest rates currently are, it is possible that future asset purchases will not ease financial conditions by as much as they have in the past. And it is also possible that easier financial conditions, to the extent they do occur, may not provide the same boost to the economy as they have in the past.

In addition to the possibility that our policies may have diminishing benefits, they also may have some risks associated with them. I will mention four: credit risk, interest rate risk, the risk of adverse market functioning, and inflation risk. These and other risks are not easy to see or measure, but they need to be taken into account when setting monetary policy…

It is critical that we take these risks into consideration as we make our asset purchase decisions. To minimize some of these risks, we could aim for a smaller sized balance sheet than would otherwise occur if we were to maintain the current pace of asset purchases through the end of this year, as some financial market participants are expecting. This course of action would be all the more attractive if the economic outlook continues to improve, as I expect it will.

To explain this more clearly, if you could picture two lines, one sloping downward, representing the diminishing benefits of our policy actions, and one line sloping upward, representing the rising costs of those actions, we need to think carefully about where those lines will intersect. Those lines will cross at the point where the costs and benefits are equal, and where further policy actions might cause more harm than good. Reasonable people will differ on where that point of intersection may lie, especially given that many of the policy tools we are using are unconventional…

I will conclude by saying that the FOMC’s actions in the current economic cycle have been needed, understood, and generally supported. Going forward, we must take care to balance the costs and benefits of our monetary policy actions, so that we don’t introduce more uncertainty and create problems that hamper our ability to provide a balancing weight to our economy if needed down the road.

Federal Reserve Bank of Philadelphia President Charles Plosser said he expects the unemployment rate to decline close to 7 percent by the end of this year, warranting a reduction in the Fed’s monthly bond purchases.

“If my forecast is right, then I think we should at least have begun backing off on our asset purchases,” Plosser told reporters yesterday after delivering a speech in Stanford, California. “As a practical manner, we will taper” bond buying before halting the quantitative easing program, he said.

As reported by Bloomberg News

Richard Fisher, president of the Federal Reserve Bank of Dallas, said he favors reducing the pace of central bank asset purchases as the U.S. economy gains momentum this year.

“As you approach your goals and things get better, you reduce purchases,” Fisher said in an interview with Kathleen Hays on Bloomberg Radio’s “The Hays Advantage.” “I wouldn’t go from Wild Turkey to cold turkey” in monetary stimulus. “I wouldn’t have favored spiking the punch bowl to the degree we have,” though it would be too abrupt to stop purchases all at once.

Fisher, who doesn’t vote on monetary policy this year, said he opposed the Federal Open Market Committee decision last week to continue purchasing securities at the rate of $85 billion a month. Policy makers have pushed the benchmark interest rate close to zero and expanded Fed assets to more than $3 trillion to spur growth and reduce unemployment.

Fisher said he agreed with St. Louis Fed President James Bullard, who said Feb. 1 he expects the U.S. economic expansion to pick up enough to allow the Fed to reduce purchases by the middle of the year. A reduction in purchases could be motivated by either an assessment that quantitative easing hasn’t been effective or that the economy gained momentum, the Dallas Fed leader said...

“I would not advocate just stopping the program,” he said. Slowing purchases “allows the market to adjust.”

“We should think about tapering or adjusting the program,” Bullard said yesterday in an interview in Washington. “If you get some good data for a couple of months, maybe you’d say, ‘Okay, we go back to $75 billion per month instead of $85 billion or something like that.’”

“You don’t want that cold turkey aspect to the program,” he said. “If we got some good signs through the spring or the summer, then I think we could throttle back just a little bit without saying you are going to end the program on any particular day.”

"We need some substantial improvement" in the jobless rate to consider a major shift in the Fed's purchases of Treasury and mortgage debt, Federal Reserve Bank of Boston President Eric Rosengren said in an interview with Dow Jones Newswires.

Compared to the current 7.8% unemployment rate, the official said once a 7 1/4% rate is achieved, central bankers would need to have a "full discussion" about the utility of pressing forward with bond buying.

…

Mr. Rosengren also said in the interview he doesn't believe the Fed's very aggressive policy is creating new financial market imbalances.

"I am not seeing strong evidence there is collateral damage" from Fed actions, and "I'm not seeing anything more generally that would pose a macroeconomic concern at this time." For those who believe historic low yields in the bond market represent a bubble, Mr. Rosengren said "the lower interest rates are exactly what we intended on doing," adding "these rates won't stay in place" forever.

The Federal Reserve's recent adoption of new monetary policy guidance is "a step in the right direction," but it fails the test of being a systematic approach to action…

"This is not what I would have put in place," Federal Reserve Bank of Philadelphia President Charles Plosser told reporters on the sidelines of the American Economic Association annual gathering in San Diego. But compared to the Fed's calendar-based interest-rate commitments, it is an improvement, the official said.

…The central banker said one of his biggest beefs with the new threshold regime is that it leaves unresolved what action the Fed will take once those levels are achieved. As the thresholds are not triggers a tightening is not automatic, he observed, but markets may believe otherwise. Mr. Plosser said the thresholds do not achieve the systematic approach he has long called for.

…As he has for some time, he reiterated his opposition to Fed bond buying efforts. "The efficacy of asset purchases is not very high" and the risks created by continuing forward are rising, Mr. Plosser said, adding "I would have stopped earlier" with the purchases.

…The officials cautioned central bank watchers not to read to much into the December FOMC meeting minutes, released Thursday, which saw policy makers speculating over the time frame Fed asset buying might run. Mr. Plosser noted officials have different definitions about the level of progress the central bank will need to make on the jobs front before paring back the bond buying.

As reported by the Wall Street Journal

The Committee’s statement also altered the “forward guidance” regarding future monetary policy, stating for the first time that it expected a highly accommodative stance of monetary policy for “a considerable period after the economic recovery strengthens.” I disagreed with this statement because I believe a commitment to provide stimulus beyond the point at which the recovery strengthens and growth increases implies too great a willingness to tolerate higher inflation and would be inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates.

Finally, I strongly opposed purchasing additional agency mortgage-backed securities. These purchases are intended to reduce borrowing rates for conforming home mortgages. Such purchases, as compared to purchases of an equivalent amount of U.S. Treasury securities, distort investment allocations and raise interest rates for other borrowers. Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve. Central banks abuse their independence when they promote some borrowers at the expense of others. This principle was recognized in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009: “Government decisions to influence the allocation of credit are the province of the fiscal authorities,” that is, Congress and the administration.