Looking ahead, it’s my belief that—despite the effects of the hurricanes—the most likely path of the economy for the next several quarters is ongoing respectable growth of GDP, employment, and income. That pattern suggests to me that we should continue to move toward a neutral setting for monetary policy. The Fed already has moved interest rates a long way toward a more normal level consistent with sustainable growth. By most conventional measures, however, policy is still accommodative.

As the federal funds rate target nears a reasonable estimate of the neutral rate, monetary policy must become more and more dependent on incoming data relating to the strength of aggregate spending.

In contemplating monetary policy from this point forward, the brow begins to furrow. Most forecasters expect growth to slow from its previous pace—not so much because of the frightful destruction Hurricanes Katrina and Rita inflicted on the Gulf Coast but due to additional volatility in prices for natural gas, gasoline, certain chemicals and building supplies.

We must keep in mind that with expansions inevitably come increasing inflationary pressures.  In the near term, overall inflation will be affected by the substantial increase in energy prices.  To keep cyclical price pressures and any transitory spike in energy prices from permanently disrupting the price environment, the Fed will have to continue shifting monetary policy from its current somewhat accommodative stance to a more neutral one.

Market sentiment has coalesced around the view that news about employment growth is a significant influence on the path of the intended funds rate in the forseeable future...My emphasis on market reaction to employment surprises does not mean that the market ignores inflation.  What has happened in recent years is that core inflation--inflation excluding effects of food and energy--simply has not generated significant surprises.

If we see, over the next six months, growth on the high side and inflation on the high side, it's logical that Fed funds [rate] increases will continue for longer than might otherwise be the case.

The market is anticipating the funds rate is going higher and I respect the market and that is a reasonable expectation.

I think it is still too early to be foreseeing a pause.

We are clearly in the eighth inning of a tightening cycle.  We have the ninth inning coming up at the end of June.

We still have more ground to cover [in the removal of monetary accommodation]. Otherwise, we risk that some of the increased pressures we have seen recently from higher costs for energy and other items will become permanently embedded in the inflationary mentality of firms and households. So far, this has not happened, and we still believe that monetary accommodation can be removed at a measured pace. But if inflationary prospects do worsen, we will act as necessary to fulfill our obligation to maintain price stability.

You can imagine not too far down the road where some things in the statement aren't going to be appropriate.  And we need to decide how and when to change some of that wording.

Real short-term interest rates can't stay where they are now.

I read a report in the media just a few weeks ago that referred to the Fed “keeping its pledge” for a “measured pace” of rate increases. Guess what? I don’t think the Fed ever made such a pledge, and I think it’s unfortunate that our effort to offer some insight into our policy inclination is sometimes misconstrued.

The possibility that discussions of future policy, even nonspecific, could create presumptions about a string of policy actions makes finding a consensus among policymakers on what to say about future interest rates quite difficult--more so than agreeing on the policy today. It is no accident that the Reserve Bank of New Zealand stands out as about the only central bank to publish such a path and as one of the few in which decisions are the responsibility of only one individual.

We're going to have to raise and lower interest rates more frequently than you might otherwise think because, even if inflation doesn't wiggle around, we're just going to have to be vigilant...That's a statement apart from the current (tightening) cycle.