When the Fed has delayed needed policy adjustments in the past, it has often been in response to financial market developments that turned out, with hindsight, to be false signals. The record shows that if we delay too long or raise rates too slowly, we run the risk of needing to make larger, potentially more disruptive rate increases in the future. Given the extent to which global risks to the United States have subsided, prudence suggests staying the course with a gradual sequence of rate increases.

The move in December I think was the right move, but I think we are going to have to be slow and patient – doesn't mean standing still – and I think we will make another move sometime in the not too distant future if GDP recovers in the way I expect. But I think people should expect it is going to be a slow, patient, gradual normalization. And so, no, I don't think December is a mistake.

While I view the gradual approach as appropriate, postponing the removal of accommodation when the economy is near full employment and inflation is rising toward the 2 percent target could promote alternative risks that would decrease the likelihood of achieving our longer-run objectives. In the long run, a failure to keep interest rate policy in line with improving fundamentals can distort the allocation of capital toward less fruitful—or perhaps excessively risky—endeavors. Within the last two decades we have faced episodes of accelerating equity prices, housing prices and, most recently, commodity prices. Currently, commercial real estate markets, where prices have continued to drift higher, bear watching. When these types of imbalances tip, the entire economy can face the consequences of their fallout, with some sectors and populations more impacted than others. My concern for some time has been that extending monetary policy too far beyond its scope of capability risks undesirable financial, economic and
political distortions.

In the current environment, waiting to make additional adjustments to monetarypolicy may seem costless in the face of benign inflation pressures. Some argue that we have the ability to make more rapid adjustments later if inflation moves higher than currently projected. From a technical standpoint, it is true that the Fed has the ability to steer short-term rates and could raise them quickly if needed. But such actions are likely to be costly, inducing financial market volatility and slowing economic activity. Historically, rapid increases in interest rates end poorly, resulting in economic recessions.

Mr. Kaplan said the feedback loop between Fed policy and moves in foreign-exchange markets was one reason “normalization” would be very challenging for the central bank. The best way for the Fed to approach “normalization” would be gradually and patiently, he said.

To recap, policymakers would have to resort to second-best policy tools to deal with unexpected weakness in activity or inflation, but we can use our old tried-and-true instruments for addressing stronger-than-expected outcomes. Even if the odds of upside and downside shocks are the same, the costs are not. How should the FOMC address these asymmetric risks? Well, we should buy some insurance against unexpected weakness by accepting a somewhat higher likelihood of stronger outcomes. Translated into monetary policy, this means being more accommodative than usual to provide an extra boost to aggregate demand as a buffer against possible future downside shocks that might otherwise drive us back to the effective lower bound.

Even beyond this asymmetry in costs, I see the distribution of future shocks as skewed in the direction of output running somewhat softer and inflation somewhat lower than what I have written down in my baseline projection. This tilting of the odds strengthens the rationale for shading policy in the direction of accommodation and provides additional support for a gradual path in normalizing policy.

To sum up, in 2016, I expect growth that is somewhat above trend and further progress in moving inflation toward our 2 percent target. As I consider how to calibrate monetary policy in the months and years ahead, I see two general — but key — considerations to keep in mind: 1) There are a number of downside risks to my near-term forecast; and 2) the equilibrium real federal funds rate is likely lower today than in the past (not only in the short run, as the economy continues to heal from the past wounds, but also in the long run). Today, the confluence of these considerations leads me to conclude that a very shallow path — such as the one envisioned by the median FOMC participant in March — is the most appropriate path for policy normalization over the next three years.

Indeed, as of the end of last week... the federal funds futures market implied the belief that there would be roughly one more quarter-point increase by the end of 2016, and an additional quarter-point increase by the end of 2017. This extremely gradual path for reducing monetary policy accommodation would imply either a weak outlook for the economy or significant concerns that even if the expected outlook was benign, there were significant “tail” risks. My own view is that the outlook is not as weak, and the tail risks not as elevated, as would be implied by this very gradual path.
...
With financial market volatility subsiding since earlier this year, it is to me surprising that
the expected path of monetary policy embedded in futures markets is so low. A weak forecast
doesn’t seem to explain the path expected for the funds rate. As I see it, the risks seem to be abating that problems from abroad would be severe enough to disrupt the U.S. recovery. Financial-market volatility has fallen, and most economic forecasts do not reflect expected large spillovers from continued headwinds from abroad.

So, while problems could still arise, I would expect that the very slow removal of accommodation reflected in futures market pricing could prove too pessimistic. While it has been appropriate to pause while waiting for information that clarified the response of the U.S. economy to foreign turmoil, it increasingly appears that the U.S. has weathered foreign shocks quite well. As a consequence, if the incoming data continue to show a moderate recovery – as I expect they will – I believe it will likely be appropriate to resume the path of gradual tightening sooner than is implied by financial-market futures.

I do not think the FOMC is behind the curve, but while there are risks to moving too soon, there are also risks to waiting too long to take the next steps on the normalization path given the lags with which monetary policy affects the economy. We live with uncertainty and one could always make the case that we should wait to act until we gather more information.
...
As we've seen over this expansion, things can take unexpected turns, and we want policy to appropriately react to changes in the medium-run outlook. The policy path I foresee as appropriate today is slightly more gradual than the path I foresaw in December, partly because of the slight downward revision to my growth forecast but mainly because I now estimate a lower longer-run equilibrium interest rate. But these are small changes. The important point is that the economy has shown considerable resiliency, and in my view, the outlook and risks around the outlook will likely support gradual reductions in the degree of accommodation this year.

Liesman: But the markets right now just pricing in one [hike in 2016], and it's consistently been below. The guidance seems to be, you know, you start a normalization process which makes people think that you're heading up towards something that's higher than zero and perhaps higher than the 37 base points where you are now but right now it seems like all bets are off that you could be in this permanent neutral here.

Evans: Well, so look, the dot charts give the current best assessment of what we think the economy is doing and the appropriate monetary policy. You're right. We've used the term "normalization, renormalization" to kick things off and eventually we certainly want to get the funds rate up to a normal level, that 3% 3.5% rate, but look I have got to tell you I thought the chair was terrific yesterday when she said, you know, the dots aren't set in stone. There's a lot of conditionality that will depend on how things play out. We did use this term normalization, I think that's still correct but that doesn't mean we're going to get there tomorrow.

Liesman: You talked about agreements and disagreements is there a split on the federal reserve? A bunch of folks stepped out last week and said that april was the time the feds should consider it but i don't hear that from fed chair janet yellen at all that april is even on the table.

Evans: Well, in fairness I think she did say during the press conference well, of course we go into these meetings, April is live, they're all live meetings, we go in to talk about things. I would say the threshold for having confidence that inflation is going to sustainably move up towards our 2% inflation target is high. That hurdle is pretty high. So I'd be surprised if we met that condition myself in April. I think moving in June would be on the basis of further improvements in the labor market like what we've had.

In comments to reporters Kaplan declined to rule out a rate increase at the Fed's next meeting on April 26-27.

"I would make the point generally, I think it is a good practice to assume that all eight Fed meetings are live," he said.

“You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,” Bullard said in a Bloomberg interview in New York Wednesday, in which he criticized the Fed’s practice of publishing officials’ projections on the path of interest rates. “I think we are going to end up overshooting on inflation” and the natural rate of unemployment, he said.
...
“We’re in reasonably good shape” with regard to monetary policy but “the odds that we will fall somewhat behind the curve have increased modestly,” Bullard said. “We are going to get some overshooting here in the relatively near term” on unemployment “that might cause the committee to have to raise rates more rapidly later on.”

Bullard said there was a “credible case” to be made to move in March. “We didn’t do it -- so now we can look at April and see what the data looks like when we get to April,” he said.

While I believe that excessive accommodation carries a cost in terms of distortions and imbalances in hiring, asset allocation and investment decisions, I also believe that, at this juncture, the Fed needs to show patience in decisions to remove accommodation. Again, this is particularly true in light of key global secular trends as well as recent developments relating to slowing global economic growth and tightening financial conditions.

I believe that the Fed should avoid having a predetermined mindset regarding the path of policy. This path should be driven by our ongoing analyses of cyclical as well as secular trends.

I think it makes sense to emphasize that, at this juncture, monetary policy remains accommodative; although I would note again that policy is somewhat less accommodative than it was on January 1 in light of tightening global financial conditions.

While most observers expect that the appreciation of the dollar and the fall in oil prices will eventually stabilize, recent global events may make it less likely that the 2 percent inflation target will be achieved as quickly as had been projected in recent forecasts by private economists or by Federal Reserve policymakers. In my own view, if inflation is slower to return to target, monetary policy normalization should be unhurried. A more gradual approach is an appropriate response to headwinds from abroad that slow exports, and financial volatility that raises the cost of funds to many firms.

It is also fair to say that the risks to my outlook are tilted to the downside. The nervousness in the financial markets and the increased caution that it may cause for economic decision-makers, both households and firms, could imply somewhat slower growth, at least in the first half of the year.

Also, inflation is not likely to pick up substantially until the second half of the year, although, for the reasons I have discussed, I remain confident that inflation will move toward the Committee’s long-run objective of 2 percent.

These considerations make me a bit more conservative in my approach to policy, at least in the very near term. Although I cannot give you a definitive path for how policy will evolve, it might prove prudent to wait until the inflation data are stronger before we undertake a second rate hike. Thus, I am approaching near-term policy a bit more cautiously than I did a few months ago. That is part of being data dependent. And attentiveness to the data will be a key factor in all of my future policy recommendations as well. If financial headwinds dissipate quickly and inflation picks up a bit more aggressively, it will require a slightly more aggressive approach to policy.

I believe as we move into the second half of the year with economic activity growing at trend or slightly above trend, the unemployment rate below its natural rate, and price pressures starting to assert themselves, policy can truly normalize. I mean this in the sense that we can move away meaningfully from the zero lower bound and that our reaction to incoming data can return to a more historical pattern.

"Standard monetary policy strategy says a little less inflation, maybe a little less growth ... argue for just a smidgen slower process of normalizing rates," Williams said.

"We got a little stronger dollar, some mixed data on the economy, some weakness in (fourth-quarter U.S. GDP growth), all of those coming together kind of tell me that we probably need a little bit more monetary accommodation this year than I was thinking in the middle of December."