“My main concern about post-liftoff monetary policy is that it not be mechanical the way it was from 2004-2006. In that sequence, we raised the policy rate 25 basis points at each meeting for 17 meetings in a row,” he said. “It turned out to be a global macro-economic disaster in the end. By the time we got up to relatively normal policy rates, the housing crisis was upon us.”

When we had a normalization in 2004 to 2006 we moved at the same 25 basis points per meeting for 17 meetings in a row. I am virtually certain that was not optimal monetary policy. That was a very mechanical approach to increasing rates. This time I am hopeful we can be more flexible and reactive to data.

Former Federal Reserve Chairman Alan Greenspan said in an interview that taking bold action as a central bank looks easier than it is. Central banks are creatures of legislatures, which can be suspicious of extraordinary actions, and financial markets can react in unexpected ways, he said.

Greenspan said there is an unspoken consensus about keeping in the bounds of orthodox policy that is difficult for any central banker to violate.

“If we are right, but the consensus is wrong, we are tolerated,” Greenspan said. “If we are wrong, and the consensus is right, we get pilloried. So there is an acute bias to staying with short-term policy and that is what limits the range of action.”

As reported by Bloomberg News.

[A]s we learned from this most recent crisis, emerging risks can be hard to judge and it can be even harder to determine what action should be taken ahead of any obvious or near-term threat. In addition, riskier financial activity can grow outside the regulated sector. For these reasons, asking bank regulators and supervisors, or the newly-tasked monitors of financial stability, to single-handedly identify and contain the risks introduced by a highly accommodative monetary policy is not realistic.

In response to a question about whether he was surprised that the public felt his views had changed radically.

In some ways, yes, I was surprised.

I was surprised by the reaction in the sense that I felt I was putting a lot of weight on the price stability mandate by suggesting that even an inflation outlook—medium-term outlook, two-year outlook—that is a quarter percentage point higher than 2 percent should be viewed as a cause for concern. I’m not saying we’re going to raise rates at that point, just to be clear. But I’m saying it’s a time to consider raising rates.

I felt that I was actually being highly respectful of the price stability mandate, and properly so. With that said, I think it is true that to suggest that unemployment could get as low as 5 1/2 percent without pushing inflation above 2 1/4 percent, that was a change in my thinking relative to where I was in April. That change in my thinking came just because of the data on inflation and reading a ton of work that had been done on the factors generating high unemployment.

…

I gave a speech about structural unemployment in August 2010 in which I pointed to the shift in the “Beveridge curve.” This is a plot of unemployment and vacancies over time. It has shifted outward, meaning that, roughly speaking, it looks like firms are having a surprisingly hard time filling their job openings given how many people are looking for jobs. There are other interpretations of this, though, as there always are in economics. So, I laid out my concerns about that shift in August 2010. That shift is still there in the data.

But what’s changed since August 2010 is that there’s been a lot of research trying to parse out what is responsible for this shift. That work goes through a number of factors. It’s summarized in a paper that Professor Edward Lazear gave at the Kansas City Fed’s Jackson Hole Conference earlier this year [2012].8 As a Fed president, I was already aware of a lot of that work because much of it has been done within the [Federal Reserve] System.

What this work usually does is look, factor by factor, at how much unemployment is caused by each structural factor. Generally, the answer is not a lot. You can get to maybe a percentage point, or point and a half, of the increase in unemployment since 2007, due to structural factors, something like that.

Those studies were very important in shaping my thinking. Another thing that happened was that inflation over the course of 2012 came in considerably lower than I had anticipated. Both of those things mattered in shaping how I thought about inflation going forward.

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

Economic theory and historical experience tell us that a central bank’s ability to maintain price stability and promote economic growth hinges on its credibility. Actions that undermine credibility can put at risk the effectiveness of a central bank’s ability to achieve its objectives. In my view, the actions taken in August and September risk undermining the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not. We should not take actions simply because we can.

“My sense of Operation Twist is if it has economic effects, it is more likely to raise inflation that it is to measurably raise growth,” Lacker told reporters after his speech. “I would not have supported it.”

With hindsight, I think it is fair to say that policymakers [in the last cycle] overestimated the extent to which high unemployment would keep inflation from accelerating, and as a result, waited too long to withdraw monetary stimulus. Four years of 3 percent inflation may not have been the worst of all possible outcomes, but I do not consider it a success. I hope we do better this time. In particular, I believe we need to heed the lesson of the last recovery that inflation is capable of rising even if the level of economic activity has not returned to its pre-recession trend.

"My view is QE2 was unnecessary,” Hoenig said of the plan to purchase $600 billion in Treasuries in a second round of quantitative easing, during a Bloomberg Television interview in London. “My concern would be if there were any further easing into a recovery is that you do accelerate imbalances that then cost you dearly later."

[The Fed] “opened the floodgates” and “it worked,” the regional bank chief, who votes on monetary policy this year, said during a speech today in Dallas. “We re- liquefied the economy. In my opinion, we might have done too much."

As the United States continues to ease policy into its recovery, once again there are signs that the world is building new economic imbalances and inflationary impulses. I would suggest also that the longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth.

I really want to take away the punch bowl before the room gets drunk, because this punch is, I think, a little bit spiked.  I’m not for tight monetary policy, I’m for non-zero monetary policy.

In essence, the Federal Open Market Committee has maintained an emergency monetary policy stance in a recovering economy and has continued to ease into the recovery. I believe these actions risk creating a new set of imbalances, or bubbles. Importantly, such actions as they continue are demanding the saving public and those on fixed incomes subsidize the borrowing public.

But risks remain, especially those associated with inadvertently creating false expectations that the Fed is preoccupied with achieving a specific level of the unemployment rate. Our ability to manage those risks will depend on when and how we choose to tighten policy, as eventually we must. To wait until unemployment reaches some predetermined level, as the Martin FOMC did in the 1960s, is likely to mean waiting too long. That strategy proved bitterly disappointing for Martin and his colleagues, and I expect it would prove disappointing for us as well. At some point in the not-too-distant future, we are likely to face an economy growing in a self-sustaining way while the unemployment rate is still relatively high by historical standards. The decisions we make at that time will be the true test of whether we've learned our lessons.