Basically, an unemployment rate of 7.3 percent means that the U.S. labor market is far from healthy.
But I would say that this measure—troubling as it is—overstates the improvement in the U.S. labor market… Most of the declines in the unemployment rate since October 2009 have occurred because the fraction of people who are choosing to look for work has fallen.
…
It is true that, even without the Great Recession, demographic forces would have led to some decline in the employment-to-population ratio since 2007. As the baby boom birth cohort—born between 1946 and 1964—ages, the fraction of retirees in the population grows steadily. But these demographic forces are simply too small to account for much of the decline in the employment-to-population ratio that I’ve described.

Under a goal-oriented approach, the Committee would respond to this weak outlook by providing more monetary stimulus—for example, by lowering the interest rate being paid to banks on their excess reserves.

The Committee could also promote a goal-oriented approach to monetary policy by making other changes to its communication… I’ve recommended that the FOMC announce its intention to keep the fed funds rate extraordinarily low at least until the unemployment rate falls below 5.5 percent, as long as the one-to-two-year-ahead outlook for the inflation rate stays below 2.5 percent. A recent working paper by senior Board of Governors staff suggests that this policy stance could indeed have material benefits in terms of the evolution of prices and employment.4
Beyond these changes in communication, the Committee could also take concrete policy steps to demonstrate commitment to a goal-oriented approach to policy. In its most recent statement, the Committee says that it expects the unemployment rate to decline gradually and the inflation rate to be below 2 percent over the medium term. Under a goal-oriented approach, the Committee would respond to this weak outlook by providing more monetary stimulus—for example, by lowering the interest rate being paid to banks on their excess reserves.

“I would not take off the table at least consideration at that time. ” Lockhart told reporters in Oxford, Mississippi, in response to a question on tapering in December. “The question of changing the mix of accommodative tools ought to be on the table at every meeting for the foreseeable future.”

As reported by Bloomberg News

I would not take off the table at least consideration {of tapering in December}.

“I would not take off the table at least consideration at that time,” Lockhart told reporters in Oxford, Mississippi, in response to a question on tapering in December. “The question of changing the mix of accommodative tools ought to be on the table at every meeting for the foreseeable future.”

“For me, you don't have to be in a hurry {to taper} because of low inflation," St. Louis Federal Reserve President James Bullard told CNBC television.

Bullard, who at the Fed's policy meeting last week voted in favor of maintaining the central bank's monthly bond buying campaign at an $85 billion monthly pace, said he wanted to see inflation heading back toward policy-makers' 2 percent goal before tapering bond buying.

“I would say in terms of my own support, that I wouldn’t rule out my supporting doing something {on tapering} before March.

…

“I think at the earliest possible moment we need to focus on transitioning back to having an interest rate-driven monetary policy,” he said.

“I can envisage us holding the base rate low for a very long time until we see an acceleration in the economy and especially in our case given our mandate on employment, as long as inflation stays in its current range, at less than 2 percent,” Fisher said.

“To the extent that key labor market indicators continue to show cumulative improvement, the likelihood of tapering asset purchases will continue to rise,” Mr. Bullard said in a presentation prepared for delivery at a hometown speech. That is because the Fed’s “criterion of substantial improvement in labor markets gets easier and easier to satisfy on a cumulative basis as labor markets continue to heal,” the official said.

I’d like to note here that the exact pattern of the reduction in purchases eventually taken isn’t so critical because the path is likely to have only a marginal impact on what is most important — the total amount of purchases that are eventually made. The assumption underlying my current forecast is that by the time we end the program, total asset purchases since January 2013 will be in the neighborhood of $1.25 trillion. This is a very substantial program — one that is about double the size of our QE2 program that we ran between the fall of 2010 and the summer of 2011.

Putting all of this together, with monetary policy continuing to provide needed stimulus, I expect economic growth to pick up somewhat next year. As the economy continues to get better, the highly accommodative stance of monetary policy will need to be gradually adjusted back to normal. The first step will be to slow the pace of asset purchases over time, eventually ending them altogether. This won’t be a slamming on the brakes, it will be an easing off the gas. And it will not be a fixed date on the calendar. Instead, it will be in response to economic developments and the progress we have made towards our dual goals of maximum employment and price stability.

…

In my own projection, even though I expect the unemployment rate to fall below 6½ percent early in 2015, I don’t currently expect that it will be appropriate to raise the federal funds rate until well after that, sometime in the second half of 2015.

I see three key parallels between the economic situation in 1979 and the economic situation in 2013. First, just like in 1979, the Federal Open Market Committee faces a challenging macroeconomic problem—although this time, the problem is stubbornly low employment as opposed to stubbornly high inflation. Second, there is a widespread perception that monetary policymakers lack either the tools or the will to solve this problem.

And third, the perception of monetary policy ineffectiveness is itself a key factor in generating the problem… If the public thinks that monetary policy is ineffective, then it will expect relatively weak macroeconomic conditions in the future. But these expectations about the future have a direct impact on current macroeconomic outcomes…

We’ve seen how the FOMC dealt with its problems in 1979 by adopting a goal-oriented approach to monetary policy. Given the parallels between 1979 and 2013, I believe that a goal-oriented approach would be useful again…

But, as Paul Volcker said in his 1979 speech, it is not enough to formulate or communicate a goal. The Committee has to stick to its formulated approach—that is, it must do whatever it takes to achieve its communicated goal. In the early 1980s, doing whatever it took meant being willing to keep money tight, even though interest rates and the unemployment rate rose to unusual heights. By doing whatever it took to achieve its goal, despite these short-term costs, the FOMC was able to bring down inflation and inflation expectations.

The bright spot in real GDP through much of the recovery has been the interest-sensitive sectors. Figure 4 shows that residential investment has been strong – in fact it has averaged just over 15 percent growth over the last four quarters. This strength comes, in part, in response to the Federal Reserve’s asset-purchase program, which was designed to lower market rates and boost interest-sensitive economic activity. Similarly, auto sales have been quite strong – helped by unusually low auto-loan rates, which reflect competitive forces among auto lenders (including community banks) as well as the Fed’s asset-purchase program. In short, the most interest-sensitive sectors have been growing strongly, in part because of highly accommodative monetary policy.

“We’re not on a pre-set course,”Charles Evans, president of the Federal Reserve Bank of Chicago told reporters on the sidelines of a monetary policy conference in Oslo. He said the Fed’s decision to start reducing its $85 billion in monthly bond purchases “could be in October, it could be in December, but it also could be at the January meeting.”

Delaying action not only allows potential costs to grow, it also has the potential to threaten the credibility and the predictability of future monetary policy actions. Policy moves that surprise the market often result in additional volatility. And by deciding that it needs to await further data, the Committee is suggesting its desire to be “data dependent” involves putting more emphasis on the most recent data points, which can be volatile and subject to revision, rather than on its own medium-term view of the economy. Another risk is that markets might misconstrue the postponement of action as reflecting a Committee assessment that the broader economic outlook is substantially weaker, when that is not the case.

Beyond the communication challenges associated with asset purchases, explaining the Committee’s interest rate policy and how long rates will remain near zero will be a crucial next step. To further mitigate risks when the time comes to start raising interest rates, it may be important to signal that increases in the federal funds rate, after liftoff, are likely to be gradual in order to gauge the economy’s response.

The title of my speech today is “A Time of Testing.” Paul Volcker, then Chairman of the Federal Reserve Board of Governors, used the same title for a speech that he gave on October 9, 1979. Chairman Volcker intended his title to underscore that monetary policymakers in 1979 were confronted with a severe test in the form of high inflation and high inflation expectations. I use the title today to underscore that monetary policymakers in 2013 are again confronted with a severe test—but this time a test created by low employment and low employment expectations. Back in 1979, Chairman Volcker said that “this is a time of testing—a testing not only of our capacity collectively to reach coherent and intelligent policies, but to stick with them”1 [italics mine]. My theme today is that his powerful phrase applies with equal force to our current situation.

“That was a borderline decision” after “weaker data came in,” Bullard said today on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “The committee came down on the side of, ‘Let’s wait.’”

Bullard called October a “live meeting,” because “it’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October.”

…

“I’m a little dismayed at those in markets that are saying they’re surprised by this,” Bullard said. The Fed said that, “if the economy was going to improve in the second half of the year, and if we saw that improvement, we would taper.”

... I think it enhanced our credibility in the sense that it showed we really are paying attention to data and not on some automated program to cut QE to zero.