I've given you the broad strokes of a pretty optimistic outlook...

As confirming evidence, I'll be paying attention to consumer spending and consumer confidence. Data on both have been, on balance, encouraging. I'll be monitoring industrial activity closely. While the manufacturing production numbers stepped down in April following very strong gains in February and March, the April report from purchasing managers on production and orders was quite positive. And I'll be looking for sustained employment gains...

At any given juncture, absolute certainty of the economy's direction is not achievable. As I've suggested, I feel the need to see confirming evidence in the data validating the view that above-trend growth is occurring and is sustainable, and that the FOMC is closing in on its policy objectives. One quarter's data isn't enough. I expect it will take a number of months for me to arrive at conviction on that account.

When the first move to tighten policy is taken, I would expect it to begin a cycle of gradually rising rates. This will be a significant, even historic, transition that must be executed skillfully, with tools sufficient to the task, and with clear communication that fosters orderly market adjustment, to the extent possible. The discussion of so-called policy normalization documented in the latest minutes of the FOMC was just a first step, in my opinion.

It bears repeating that a discussion of policy normalization does not necessarily imply that a shift in policy is imminent. For the reasons I have discussed, I, as one policymaker, am not in a rush to get to liftoff. I continue to be comfortable with a projection of the second half of next year (2015) as likely timing.

BRADY: When do you expect a normalizing interest rates? When do you expect that to begin, assuming the Fed's economic projections hold?    

YELLEN: So what we have said in our most recent guidance is that in determining when that time has -- is right, we will be looking at how much progress we have actually made in coming close to our mandate from Congress to attain maximum employment, and inflation of 2 percent. And we'll evaluate the pace at which we expect progress going forward.     Concretely, the committee indicated that at the time the purchase program ends, it thinks that it will be a considerable time beyond that before it will be appropriate to begin that process. And the reason is, that under its baseline outlook, it would like to see, or expects it will need to see, further progress in the labor market. And it's emphasized that the level of inflation will also -- will also matter.    

BRADY: If the Fed's economic projections hold, what is that range? If I were to say it will begin normalizing interest rates in 2015, would I be wrong?    

YELLEN: So there is no mechanical formula or timetable for when that will occur.    

BRADY: But I know in my -- I know that you work through your projections going forward. And certainly, if those were to hold, do you have some range of time that you'll begin that process? What range is that?    

YELLEN: So the committee has simply set a considerable time without mechanically stating what that time interval is.    

BRADY: Is considerable -- if I were to say this will begin normalizing in 2016, would I be wrong?    

YELLEN: So, again, there is no specific timeline for doing that. Individual members of the Federal Open Market Committee, however, every three months provide their own forecasts for how they see the economy evolving under appropriate monetary policy. And that becomes a basis for discussion in the committee.     And you can look at those projections that include individual participants' expected paths for normalization, you would see that most members believe that in 2015 or 2016, normalization would begin under their baseline outlook.    

BRADY: Do you -- to put it in perspective, what year, what range of years could we expect the target rate to reach 2 percent, for example?    

YELLEN: So I think the answer is that it depends on the evolution of the economy. What we're focused on is adjusting our monetary policy in light of incoming evidence about the evolution of the economy.    

BRADY: But if it holds -- granted. Obviously, all this dependent, from your view, on economic performance. But given your projections, how far out are we looking at to just move about halfway back to normalization?    

YELLEN: So, again, I'm afraid I can't give you a timetable. But the committee did try to, in its recent statements in March and April, provide some guidance to the public about the pace at which it expects interest rates, short-term rates, to increase once that process is started.    

And what they said is that they think it will take some time, even after the economy is, in a sense, functioning normally; namely, we're operating at full employment, and inflation's around 2 percent. They think it's likely it will take some time to come back to normal, or historically average levels of interest rates -- short-term interest rates, they would see as normal levels, based on history, of something on the order of 4 percent. And they've indicated that they think it's going to take some time to reach levels like that.    

I would emphasize that that's a forecast. It's not a promise. But we've had headwinds that have acted on the economy, and headwinds in the global economy, and perhaps, a slowdown in the pace of growth in the economy. And those are some of the factors that lead them to believe a gradual pace of interest-rate increases will prove appropriate.

“One of the big risks is that we withdraw our accommodative policies prematurely… I think it’s just human nature to start thinking we’ve been doing this for a long time.”

The Fed’s benchmark short-term interest rate has been pinned near zero since late 2008, which could prompt some policy-makers to think “that must have been long enough. Maybe it’s time to start the process of renormalizing,” Mr. Evans said.

“Well, let me just remind everybody inflation is 0.9% in the U.S.” in February... Mr. Evans also stressed that inflation around the world is low. “I think that’s a sign of weakness; I think that’s a sign of risk,” he said.

He said it would be fine for inflation to exceed the Fed’s target. “Overshooting would not be a problem as long as it’s done in a reasonable fashion,” he said.

In this context, recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labor market means our aid for the recovery need not grow as quickly. Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come. This commitment is strong, and I believe the Fed's policies will continue to help sustain progress in the job market. But the scars from the Great Recession remain, and reaching our goals will take time.

Bullard revealed for the first time that he was one of the two FOMC participants show foresaw a 2014 rate hike in December and said he made that forecast because he was "more optimistic" than many about the outlook for economic growth and employment.  He said he had previously expected the first rate hike to come in 2015.

With the March meeting less than a month away, Bullard said, "I definitely will have to reconsider at this meeting" whether the first rate hike will come in late 2014 or in 2015.

"Even in December, it was a close call," he said, adding that "if it moves back a quarter" it makes little difference.

"We have to start to get out of the mode of emergency policy" and think about making monetary policy "more normal," Bullard said.

He told his audience that, even though the Fed is scaling back its large-scale asset purchases, it is "still buying a lot." He said continued "tapering" remains on track at coming meetings of the FOMC.

     If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions, and inflation moving back towards its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.

     That said, purchases are not on a preset course and the Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation, as well as its assessment of the likely efficacy and costs of such purchases.

…

     We began these asset purchases as a secondary tool, a supplementary tool to our forward guidance, to add some momentum to the recovery, and we said we would continue those purchases until we'd seen a substantial improvement in the outlook for the labor market, and the context of price stability.

     As I noted, there have been a substantial number of jobs created and unemployment has come down, and in December the committee judged that enough progress had been made in the labor market to begin a measured pace of reductions in the pace of our asset purchases.

     We purposely decided to act in a measured and deliberate way to take measured steps so that we could watch to see what was happening in the economy, and we've indicated that if the outlook continues to be one in which we expect, and are seeing continued improvement in the labor market, that implies growth strong enough going forward to anticipate such improvement, and inflation, which is running below our objective, if we see evidence that, that will come back toward our objective over time, we're likely to continue reducing the pace of our purchases in measured steps.

     But, we've also indicated that the -- this program is not on a preset course, which means that if the committee judges there to be a change in the outlook, that it would reconsider -- it would reconsider what is appropriate with respect to the program.

We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook. We will, of course, continue to monitor the situation.

ROBIN HARDING: Mr. Chairman, your inflation forecasts never get back to 2 percent in the time horizon that you cover here, out to 2016. Given that, why should we believe the Fed has a symmetric inflation target? And in particular, why should we believe you're following an optimal policy, optimal control policy, as you've said in the past, given that that would imply inflation going a bit above target at some point? BERNANKE: Well, again, these are individual estimates, big standard errors implicitly around them, and so on. We do think that inflation will gradually move back to 2 percent, and we allow for the possibility, as you know, in our guidance that it could go as high as 2.5 percent. Even though inflation has been quite low in 2013, let me give you the case for why inflation might rise. First, there are some special factors, such as health care costs and some other things, that have been unusually low and might -- and might be reversed. Secondly, if you look at the fundamentals for inflation, including inflation expectations, whether measured by financial markets or surveys, if you look at growth, which we now anticipate will be picking up both in the U.S. and internationally, if you look at wages, which have been growing at 2 percent and a little bit higher, according to many indicators, all of these things suggest that inflation will gradually pick up. But what I tried to emphasize in my opening remarks -- and which is clear in our statement -- is that we take this very seriously. It's not easy to -- inflation cannot be picked up and moved where you want it. It takes -- it requires, obviously, some luck and some good policy. But we are very committed to making sure that inflation does not stay too low, and we are continuing to monitor that very carefully and to take whatever action is necessary to achieve that. ROBIN HARDING: And on optimal control? BERNANKE: Well, even under optimal control, it would take a while for inflation -- inflation is quite -- can be quite inertial, can take quite a time to move. And the responsiveness of inflation to increasing economic activity is quite low, so -- and particularly given an environment where we have falling oil prices and other factors that are contributing downward forces on inflation, it's -- it's difficult to get inflation to move quickly to target. But we are, again, committed to doing what's necessary to get inflation back to target over the next couple of years.

“A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014,” Bullard, a supporter of record stimulus, said yesterday in St. Louis. “Should inflation not return toward target, the committee could pause tapering at subsequent meetings.”

When the FOMC meets next week, I expect discussion about the possibility of reducing the pace of asset purchases. The key issue, in my view, is the extent to which the benefits of further monetary stimulus are likely to outweigh the costs. Economic growth trends currently appear to be driven mainly by population growth and productivity growth, in which case monetary stimulus will only have limited and transitory effects. But further stimulus does increase the size of our balance sheet and correspondingly increases the risks associated with the "exit process" when it becomes time to withdraw stimulus. This is why I have not been a supporter of the current asset purchase program.

In my view, we at the Fed should begin tapering back our bond purchases at the earliest opportunity. To enable the markets to digest this change of course with minimal disruption, we should do so within the context of a clearly articulated, well-defined calendar for reducing purchases on a steady path to zero. We should make clear that, barring some serious economic crisis, we will stay the course of reduction rather than give an imprecise nod as we did after the May and June meetings that led markets to believe the program might end as unemployment reached 7 percent.

Plosser

For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.

We do have to take account of what's happening in the markets, what impact market conditions are likely to have on spending and the economic outlook. So it is the case, and we highlighted this in our statement, when we saw a big jump in rates -- a jump that was greater than we would have anticipated from the statements that we made in May and June -- and particularly saw mortgage interest rates rise in the space of a few months by over a hundred basis points, we had to ask ourselves whether or not that tightening of conditions in a sector where we were seeing a recovery and a recovery that could really -- recovery in housing that could drive a broader recovery in the economy -- we did have to ask ourselves whether or not that could potentially threaten what we were trying to achieve.

I think that there are dangers, frankly, on both sides of ending the program or ending accommodation too early. There are also dangers that we have to keep in mind with continuing the program too long or more generally keeping monetary policy accommodation in place too long. So the objective here is to assure a strong and robust recovery so that we get back to full employment, and that we do so while keeping inflation under control.

I’d like to see some movement toward the {inflation} target before tapering.

“I’d like to see some movement toward the target” before tapering, Lockhart said today in a Bloomberg Radio interview with Kathleen Hays. Inflation is “stable but too low” and a move up would “give me some confidence we are not dealing with some downside scenario that might develop,” said Lockhart, who doesn’t vote on policy this year.
…
The Fed must also communicate to investors its intent to keep policy stimulus even as it tapers, which could mean changing its communication of “forward guidance” on interest rates at the same meeting, Lockhart said.
“I would be supportive of consideration of that,” he said. “We might enhance the forward guidance to convince the public and the market that the environment is not going to change much” after a reduction in bond buying.