You can see in the SEP that, by the end of 2017, many participants are anticipating that rates will return to what they think are normal longer-run levels. But the economy in their view will have probably gotten back to normal levels of unemployment and near-normal levels of inflation sometime in 2016...

...There are a number of different explanations that participants give, but a common view on this is that there have been a variety of headwinds resulting from the crisis that have slowed growth, led to a sluggish recovery from the crisis, and that these headwinds will dissipate only slowly...  An example would be the fact that mortgage credit really is at this point available really to those with pristine credit. Credit conditions there are abnormally tight...In addition, we have had slow productivity growth, and a slow pace of potential output likely depresses the pace of investment spending.  And so those are some of the things that participants mentioned as why it will take some time to get back to normal...

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We stayed low for a very long time. We have been at zero for a very long time, and below the levels that some common policy rules would now be suggesting, given the level of unemployment and inflation... And similarly, we could make a similar statement with respect to where -- where the funds rate would stand relative to the recommendations of rules. So that would -- that would take some time to return to those kinds of levels.

So if you asked me -- you asked me, why has the projected funds rate path moved up? Well, you know, each participant knows the reason they wrote down what they did. But as a guess, I would hazard -- first, I would say there is relatively little upward movement in the path, and I would view it as broadly in line with what one would expect with a very small downward reduction in the path for unemployment and a very slight upward change in the projection for inflation.

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There have been any number of different analyses of this topic. There are many different survey measures and interpretations of what the market thinks. And I don't, frankly, think it's completely clear that there is a gap; there are different views on whether or not such a gap exists. To the extent that there is a gap, one reason for it could be that markets and participants have different views on the evolution of economic conditions. For example, I think I'd note that when the committee participants write down their forecasts for the federal funds rate, they are showing the funds rate path that they consider most likely. Their economic forecasts are of the conditions that they think are the most likely ones. You don't see a full range of possibilities there. And the path for the funds rate is the path that each individual thinks is most likely.

Market participants, understanding that there are a range of possible outcomes with upside and downside possibilities, are doing something slightly different, I think, when they're determining market prices. They are taking into account the possibility that there can be different economic outcomes, including, even if they're not very likely, ones in which outcomes will be characterized by low inflation or low growth and the appropriate path of rates will be low. So differences in probabilities of different outcomes can explain part of that.

In addition, given the uncertainties surrounding our forecasts of the pace of labor market improvement and the degree of remaining slack, monetary policy has to be determined largely by incoming data and the signals that data provide about the health of labor markets. If the economy disappoints we should be in no rush to raise short-term rates, but if the economy improves more quickly than anticipated we should raise short term rates earlier. Thus, we should be moving away from providing date-based forward guidance, and instead focus on what incoming data tell us about reaching full employment and 2 percent inflation within a reasonable time period.

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In fact, I actually hold the view that as we approach levels of unemployment that many consider “full employment,” the Fed should no longer issue guidance on the approximate timing of any monetary policy changes.

I do not intend this to reduce transparency in monetary policymaking. Rather, I simply want to acknowledge that any reference to calendar dates has the potential to be inaccurate. The date of “liftoff” from near-zero short-term rates is highly dependent on how the economy actually evolves – in other words, is going to be tied to the current and expected path of inflation and employment. We are getting close enough to targets that, given the uncertainty around forecasts of these variables, incoming data that cause Federal Reserve policymakers to significantly change our outlook for the economy will shift any expected lift-off date forward or backward in time. So, again, reference to calendar dates as we approach targets has the potential to be inaccurate.

If one assumes that the unemployment rate will continue to fall at the same pace in 2016 as it is expected to fall in 2015, both forecasts would reach the Boston Fed’s 5.25 percent estimate of full employment around the middle of 2016. As I’ve said on many occasions, I personally do not expect that it will be appropriate to raise short-term rates until the U.S. economy is within one year of both achieving full employment and returning to within a narrow band around 2 percent inflation. Again, that is my personal view. And, if one were to also assume that tightening would begin roughly one year before reaching full employment and the 2 percent inflation target, then one could say that the primary dealers’ estimates of a rate rise bunched around mid-2015 seem roughly consistent with the forecasts for unemployment in Figure 2.

The persistently below-target inflation rate is a signal that the U.S. economy is not taking advantage of all of its available resources. If demand were sufficiently high to generate 2 percent, then demand would be sufficiently high to allow the economy to make use of the underutilized resources. And the most important of those resources is the American people. There are many people in this country who want to work more hours, and our society is deprived of their production.

Yet the labor market’s journey is not yet complete – more progress needs to be made. My outlook is that as the expansion continues, firms will continue to add to their payrolls and the unemployment rate will continue to decline. I expect that by the end of next year, the unemployment rate will fall to around 5½ percent, which is what I view as the “natural rate,” or longer-run rate, of unemployment.

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Putting all of this together, I expect growth over the next six quarters to be somewhat above my estimate of trend growth, which I put at around 2.5 percent. Of course, there is always a good deal of uncertainty around estimates of trend growth, perhaps even more so today in the aftermath of such a deep recession. I am a bit more optimistic than some about longer-run growth because while productivity growth has been running low, I think it is good to remember the experience of the 1990s. Back then, over a period of several years, many forecasters revised down trend growth estimates only to subsequently revise them up significantly in response to strong productivity growth.

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One might ask whether that’s a reasonable inflation forecast given that we haven’t seen much acceleration in wages yet. I believe it is. Cleveland Fed analysis, based on several measures of wages and broader compensation, indicates that it is difficult to find a lead-lag relationship between wages and prices – the strongest correlations are contemporaneous ones, especially since the mid-1980s. We should expect wages to rise with prices, not necessarily lead prices. In my view, it would not be prudent for policymakers to simply wait for wages to accelerate before assessing the implications of the stance of monetary policy for future price inflation. Indeed, policymakers must always be forward looking.

“I’m holding to the mid-2015 view” when it comes to the timing of the Fed’s first increase in what are now near zero short-term interest rates, Mr. Lockhart said. “I’m a little bit more cautious then perhaps some others in declaring that the evidence we’ve seen in the last few months of a stronger economy necessarily tells us we’re going to stay on the necessary track to achieve our objectives,” he said.

Mr. Lockhart has held this view for some time, but he added that things could change for monetary policy if the economy surprises to the upside.

“If we see very, very strong data and it exceeds expectations, it could possibly move forward” the timing of that first increase in short-term rates, the official said. But the policymaker also said he would like to see “several more months of confirming evidence” before changing his outlook for monetary policy.

"I'm sticking right now with end of the first quarter [rate] liftoff," he said. "But that is very dependent on my forecast, which has us growing 3-plus percent into the second half and has nonfarm payrolls and other labor market indicators continuing to improve."

"The market is trading too dovishly compared to the committee,” Bullard said today in an interview on SiriusXM satellite radio. “I think that’s probably a mistake,” he said, adding that market participants “should come closer to where the median of the committee is.”

Bullard said he projects the FOMC will announce the first rate increase since 2006 at the end of the first quarter of 2015, while noting his forecast is “probably on the early side” of those of his colleagues on the committee.

“The case for the end of the first quarter next year is improving because labor markets have improved a lot,” he said.

“The idea that the Fed might get behind the curve is a powerful one, and that’s certainly been the history of the institution. People are right to worry about that,” Mr. Bullard said.

Mr. Bullard said he did not share the sentiment of some of his colleagues, expressed in the Fed statement after its July meeting, that its benchmark rate may need to remain historically low “even after employment and inflation are near mandate-consistent levels.”

He said he has not revised his view of the long-run fed funds rate as somewhere around 4%. For this reason, Mr. Bullard thinks the Fed may need to raise rates more quickly than some of his colleagues do. “It takes a long time to do this normalization–it’s like turning a supertanker in the ocean,” Mr. Bullard said. “Waiting too long might get us into trouble.”

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“The end of the first quarter of 2015 is still my preferred liftoff date” for raising the fed-funds rate, Mr. Bullard said.

Richmond Fed President Jeff Lacker said he believes the central bank will not raise its target for short-term interest rates until next year. In an interview in his office this week, Lacker called that scenario “pretty likely,” adding that he does not think the Fed is behind the curve in withdrawing its support for the nation’s economic recovery.

“I don’t see signs of that,” he said.

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Lacker is a prime example. His dissents in 2012 were driven by two factors: discomfort with the Fed’s official commitment to keeping rates near zero and its purchases of mortgage-backed securities to help the housing market. The latter was an inappropriate use of Fed power, Lacker has long argued, in which the central bank effectively picked winners and losers in the credit markets.

“I think matters of very important principles are at stake,” he said in the interview. “We’re in uncharted territory with regard to the expansiveness of how people talk about what the central banks can do and ought to do.”

[KELLY] EVANS: Next year Dallas Fed President Richard Fisher just said he thinks more of the Fed is coming around to his view which is a more hawkish one. I guess that means that you are not one of them?

LOCKHART: I still maintain that sometime around next year onward perhaps in the second half of next year is likely to be the right time for considering a rate move. I am still looking for let's say an accumulation of validating data to tell us that we are on the track that we need to be on to close in on our objectives. So I guess I am a little bit slower on the trigger than Richard Fisher.

ASMAN: Now, there is also a charge, uh, and this one, I think, may be more on target, that the Fed is a little too concerned these days, for the past year or so, about how the markets will react to its policies. That is, there are people like Paul Volcker, who really squashed inflation by his actions back in the day. He didn't give a damn what the market felt about what needed to be done to maintain the integrity of the dollar.

Is it true that the Fed is paying too much attention to what the market is doing?

FISHER: I think there are some differences of opinion on that. I don't agree with that. I -- by the way, was trained by the same man that trained Paul Volcker. I'm very much a Volckerite. And I think what we should focus in on is the real economy.

I have argued publicly that 0 interest rates and this massive monetary accommodation, obviously, has distorted the markets. These valuations are very, very high, because the rates are so much lower because interest rates are so low. And eventually, they'll have to be an adjustment.

But, you know, the real thing is whether the real economy, putting people back to work, keeping inflation under control, propelling the economy forward toward greater prosperity, that's what I worry about.

And I am less worried about the money changers and whether or not we're going to disappoint some of them. As long as it doesn't lead to crippling the economy...

My own assessment {in December 2013} was that the economy would gradually recover. I projected that by the fourth quarter of 2014 the unemployment rate would decline to 6.2 percent, and year-over-year PCE inflation would rise to 1.8 percent. Consistent with that view of gradual economic recovery, I believed that an appropriate monetary policy would require the funds rate to rise to 1.25 percent by year-end 2014.

With the economy having already reached my year-end 2014 forecast for inflation and unemployment, and appearing to be well on its way toward achieving my 2015 forecasts approximately a year ahead of schedule, the funds rate setting remains well behind what I consider to be appropriate given our goals.

Short-term interest-rate markets have for months priced in a slower tempo of increases than policy makers themselves forecast. Thats risky because the misalignment, a bet against a rate path that the central bank alone controls, could lead to volatility if traders have to adjust rapidly, Lacker said.

When there is that kind of gap, it gets your attention, Lacker, a consistent critic of the Feds record easing who votes on policy next year, said in an Aug. 1 interview at his Richmond office overlooking the James River. It wouldnt be good for it to be closed with great rapidity.

Investors may also be giving too much credence to a phrase in the Feds statement that even after employment and inflation are close to its goals, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.

They may be placing more weight on that than I think it deserves, said Lacker, who dissented against his colleagues at every meeting of the FOMC in 2012. They may think we have more conviction about that than we do.