I am closely monitoring how slowing growth, high levels of overcapacity and high levels of debt to GDP in advanced economies outside the U.S. might be impacting economic conditions in the U.S. I am also closely tracking how these issues might be affecting the slope of the U.S. Treasury yield curve as well as measures of tightness in financial conditions.

In light of these challenges, I have been suggesting that removal of accommodation should be done in a gradual and patient manner, based on a realistic assessment of economic conditions. I am also very cognizant that, from a risk management point of view, our monetary policies have an asymmetrical impact at or near the zero lower bound.

SHELBY: Madam Chair, the FOMC's target for the fed funds rate has been at one-half percent or lower since December, 2008. A report last year from the Bank of International Settlements found that the prolonged period of low interest rates may be damaging the U.S. economy resulting in, and I'll quote, "Too much debt and too little growth." In addition the report states, "The low rates may in part have contributed to costly financial booms and busts."

Do you agree that persistently low interest rates can have negative long-term effects on the U.S. economy and could you explain?

YELLEN: Well, I believe that persistent low interest rates we've had have been essential to achieving the progress, but of course low rates can induce households or banks or firms to reach for yield and can stoke financial instability and we are very attentive to that possibility and I would not at this time say that the threats from low rates to moderate to financial stability are elevated. I do not think they're elevated at this time, but it is of course something that we need to watch because it can have that impact. You mention debt, I don't think we're seeing an (inaudible) build up of debt throughout the economy.

The Federal Reserve Bank of St. Louis is changing its characterization of the U.S. macroeconomic and monetary policy outlook. An older narrative that the Bank has been using since the financial crisis ended has now likely outlived its usefulness, and so it is being replaced by a new narrative. The hallmark of the new narrative is to think of medium- and longer-term macroeconomic outcomes in terms of regimes. The concept of a single, long-run steady state to which the economy is converging is abandoned, and is replaced by a set of possible regimes that the economy may visit. Regimes are generally viewed as persistent, and optimal monetary policy is viewed as regime dependent. Switches between regimes are viewed as not forecastable.

The upshot is that the new approach delivers a very simple forecast of U.S. macroeconomic outcomes over the next 2 ½ years. Over this horizon, the forecast is for real output growth of 2 percent, an unemployment rate of 4.7 percent, and trimmed-mean PCE inflation of 2 percent. In light of this new approach and the associated forecast, the appropriate regime-dependent policy rate path is 63 basis points over the forecast horizon.

First, the statement indicated the committee needed to see “some further improvement in the labor market.” In my own view, this condition has largely been met by the continued growth in payroll employment – averaging in excess of 200,000 jobs per month, year-to-date through July, and a U-3 unemployment rate – the typical, widely reported measure of unemployment – that is currently at 5.3 percent.

The second condition noted in the statement was that policymakers must be “reasonably confident that [PCE] inflation will move back to its 2 percent objective over the medium term.” For this condition, the data have not been as clear-cut. Core PCE inflation for the past year has only been 1.2 percent, and recently there have been substantial declines in oil prices and other commodity prices. These will likely feed into core (and headline) measures of inflation for some months to come, temporarily lowering inflation readings. Adding to this, recent reports on wages and salaries still show few signs that the tightening labor markets are translating to increases in wages and salaries consistent with reaching 2 percent inflation.

As a result, current data have yet to indicate that this second condition will be met in the coming months; instead, policymakers will need to rely on forecasts of inflation...

Such a forecast needs to be mindful of recent developments, including data that suggest the slowing of foreign economies, coupled with volatile stock prices and falling commodity prices – both of which are consistent with a weaker global economy. In my view, these developments might suggest a downward revision in the forecast that is large enough to raise concerns about whether further tightening of labor markets is likely. And without an expectation of growth above potential and further tightening of labor markets, I would lose my primary rationale for a forecast of rising inflation, diminishing my confidence that inflation will reach the 2 percent target within a reasonable time frame.

Inflation is appropriately a focal point because its firming will reduce concerns that the economy is somehow stalling, that prophesies of long-term stagnation have any basis, and that chances of accomplishing the FOMC's policy goals are receding.

As of today, I remain comfortable with the assumption that circumstances will come together around mid-year, or a little later, that will deliver sufficient confidence to begin normalization with the liftoff decision. I won't be more definitive than that. I think all possibilities from June on should remain open. I don't at this juncture have a prediction or preference. Timing will depend on what the data tell us.

"We're getting to the point where it's hard to justify not raising rates," said Mr. Plosser, who will retire next month. "There's a good justification for increasing rates earlier."

Given how low total and core inflation have fallen in most developed countries, a policy of patience in the United States continues to be appropriate. This is particularly true given the inherent asymmetry that we face at the zero lower boundmeaning, while we have all kinds of room to respond to an unexpectedly favorable shock, we remain quite limited in our ability to respond to negative shocks.

Based on my forecast and the risks I see around that forecast, I believe it will soon be appropriate to begin moving rates up from zero. Because policy must be forward looking, in my view liftoff should occur before our goals are fully met. But even after liftoff, policy will remain very accommodative for some time, promoting attainment of both goals. Indeed, if incoming economic information supports my forecast, I would be comfortable with liftoff in the first half of this year, but as the FOMC has emphasized, policy isnt on a pre-set path. Both liftoff and the path of policy thereafter will be based on incoming information to the extent that it affects the economic outlook and progress toward our goals of maximum employment and price stability.

Raising the target range for the fed funds rate in 2015 would only further retard the pace of the slow recovery in inflation. It would also increase the risk of a loss of credibility, in the sense that the public could increasingly perceive the FOMC as aiming at a lower inflation target. Hence, given my current outlook for inflation, I anticipate that, under a goal-oriented approach, the FOMC would not raise the fed funds rate target this year.

Around midyear is a good guess for when we are getting around that point that raising rates will be appropriate, Mr. Williams told CNBC. Im not predicting it will be June or any particular meeting, but I think we are getting closer to that point when the Fed can start to act, he said.

I would say I would rather get off zero sooner, and then have more flexibility to go slower and react to data down the road.

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.

Accordingly, before the Fed raises rates we should have a great deal of confidence that we wont be forced to backtrack on our moves and face another painful period at the ZLB. We should be exceptionally patient in adjusting the stance of U.S. monetary policy even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives.

I agree with Atlanta Fed President Lockhart in thinking that we ought to be whites of their eyes inflation fighters. The last thing we want to do is regress back into the ZLB. Indeed, such a relapse would be a sign there was something else going on that was preventing the economy from being as vibrant as we thought possible.

To summarize, I am very uncomfortable with calls to raise our policy rate sooner than later. I favor delaying liftoff until I am more certain that we have sufficient momentum in place toward our policy goals. And I think we should plan for our path of policy rate increases to be shallow in order to be sure that the economys momentum is sustainable in the presence of less accommodative financial conditions.

WINKLER: Five-year bond yields suggested for expected inflation have turned positive for the first time in more than three years. Is the Fed ready to accept this tightening of financial conditions?

DUDLEY: Well I think we evaluate what the economic outlook is and what's happening to financial conditions. And obviously we don't control financial conditions. It also depends on what's happening in the global economy. But we definitely take that on board. I think when I - the dollar it has appreciated a bit over the last few months, not by a significantly (inaudible), but obviously that does factor in terms of our economic forecast. If the dollar were to strengthen a lot it would have consequences for growth. We would have poorer trade performance, less exports, more imports. And if the dollar were to appreciate a lot it would tend to dampen inflation. So it would make it harder to achieve our two objectives. So obviously we would take that into account.

...

I think that the dollar partly reflects the relative performance of the U.S. economy relative to performances in other countries, and in that case that you could sort of understand what we're seeing. I think from our perspective we don't care about the dollar per se. In other words that's not a goal, independent goal of policy. Our goal policy is maximum sustainable employment and two percent inflation. Obviously as the dollar moves that affects the appropriateness of a given monetary policy to achieve those objectives. And we certainly take it on board just like we take on board what's happening to the stock market, what's happening to the bond market, what's happening to credit spreads, what's happening to credit availability. All those factors sort of drive our assessment of what's happening to financial conditions. And then that influences our economic outlook. And then that in turn then influences the monetary policy response.

WINKLER: Five-year bond yields suggested for expected inflation have turned positive for the first time in more than three years. Is the Fed ready to accept this tightening of financial conditions?

DUDLEY: Well I think we evaluate what the economic outlook is and what's happening to financial conditions. And obviously we don't control financial conditions. It also depends on what's happening in the global economy. But we definitely take that on board. I think when I - the dollar it has appreciated a bit over the last few months, not by a significantly (inaudible), but obviously that does factor in terms of our economic forecast. If the dollar were to strengthen a lot it would have consequences for growth. We would have poorer trade performance, less exports, more imports. And if the dollar were to appreciate a lot it would tend to dampen inflation. So it would make it harder to achieve our two objectives. So obviously we would take that into account.

...

I think that the dollar partly reflects the relative performance of the U.S. economy relative to performances in other countries, and in that case that you could sort of understand what we're seeing. I think from our perspective we don't care about the dollar per se. In other words that's not a goal, independent goal of policy. Our goal policy is maximum sustainable employment and two percent inflation. Obviously as the dollar moves that affects the appropriateness of a given monetary policy to achieve those objectives. And we certainly take it on board just like we take on board what's happening to the stock market, what's happening to the bond market, what's happening to credit spreads, what's happening to credit availability. All those factors sort of drive our assessment of what's happening to financial conditions. And then that influences our economic outlook. And then that in turn then influences the monetary policy response.