“There is no predetermined path, we are going to be agnostic about this, we are going to be data-dependent and I need to see more information,” Kaplan said Friday in an interview at Bloomberg headquarters in New York. “I wouldn’t even speculate on what the next move is.”

During the panel, he said that he will “stick with the view that right now it’s going to take a gradual three-year process to get interest rates back to normal.”

There are some downside risks to this forecast. We might see further declines in energy prices or greater appreciation of the dollar. In addition, undershooting our 2 percent inflation target for as long as we have invites the risk of the public beginning to expect persistently low inflation in the future. If this mindset becomes embedded in decisions regarding wages and prices, then getting inflation back to 2 percent will be that much more difficult. Here, I find it troubling that the compensation for prospective inflation built into a number of financial market asset prices has drifted down considerably over the past two years. More recently, some survey-based measures of inflation expectations, which had previously seemed unmovable, have also edged down. So to achieve our inflation target — and to provide a buffer against downside risks — it is appropriate that we follow a gradual path to policy normalization.

The important point to recognize, however, is that actual real interest rates — at about negative 1 ¾ percent — are now substantially below estimates of the current natural rate, which as I noted are around zero. Moreover, while the natural interest rate is lower than usual right now, over time one might expect it to rise as it reverts toward its longer-run mean. So despite the relatively low natural real interest rate, there are still strong reasons to expect real short-term interest rates to rise in the near term.

The broad takeaway, I’d suggest, is that even though interest rates are likely to be lower than usual for the next few years, monetary policy is still highly accommodative right now. Interest rate increases within the range envisioned by FOMC participants would be relatively slow by historic standards, and would still leave policy in an accommodative stance.

If we are near our employment mandate and the prospects for growth look solid, why are we expecting to take this gradual approach? What is different during this tightening cycle?

One issue is that the equilibrium, or the neutral, federal funds rate can move over the business cycle for a variety of reasons, and can be either above or below its long-run level. Currently, we think some remaining fallout from the financial crisis and international headwinds mean that the neutral level of the federal funds rate today is even lower than it will be in the long run. By some estimates, the equilibrium inflation-adjusted rate is currently near zero. This rate should rise gradually as the headwinds fade over time. But until they do, monetary policy rates must be even lower than they otherwise would be to provide adequate accommodation for economic growth.

Given the persistently-low- inflation record of the past six years and given how slowly inflation evolves when it is at such low levels, it may be difficult to return inflation to target over the next two or three years. So I’m in favor of very gradual policy normalization to help ensure that we meet our inflation goal within a reasonable amount of time. Moreover, as I have argued many times, prudent risk management calls for a slower removal of accommodative monetary policy. From my perspective, the costs of raising the federal funds rate too quickly far exceed the costs of removing accommodation too slowly. So taking both of these concerns into account — and considering how I think economic conditions will evolve over time — I believe that policy should plan to follow an even shallower path for the federal funds rate than currently envisioned by the median FOMC participant.

Liesman: Let's talk about just what you brought up, which is the trajectory over the next several years and the trajectory this year. The summary of economic projections says there will be four rate hikes this year. Or at least that's the median forecast of a FOMC member. Is that your view?

Fischer: Well, my view is that we have – those numbers are in the ballpark. You know, the reason we meet eight times a year is because things happen, and as they happen, you want to adjust your policy. Otherwise, we could meet in January and close down sharp until a year later. But we have to react to incoming events, and we will react to them. What's in the survey of economic projections, the famous dot plots, says it will be somewhere around three, four. That's different people's views, and we don’t know enough now to know how many there'll be.

Liesman: So let's talk about the path for fed rate hikes this year. The median seems to suggest four this year. Is that also your forecast?

Williams: Well, I think that given the forecast they have for where the economy's going, what's happening with inflation – and inflation is the one thing that we're still struggling to get back to our 2% goal. That to me is the main focus. You know, I think something in that 3 to 5 rate hike range makes sense, at least at this time. But we're data dependent. We continue to be data dependent so the data's suggesting that gradual pace of rate hikes makes sense. But we'll have to re-evaluate that, reassess that, based on where we see inflation and other indicators that kind of are factors in inflation and how we see economic growth over the next year.

“Moving up gradually means not every meeting, in all likelihood,” Lockhart said in an interview Monday with WABE, the Atlanta public broadcasting radio station. “The rate of rising interest rates will be more like every other meeting.”

Ryssdal: Does that mean you guys are ready to go back to the zero lower bound if you have to?

Powell: If you have to, you have to. Yes. It's not impossible. Monetary policy's about forecasts. You have to have a forecast of where things are gonna go and you try to set monetary policy for what you see as the likely path of the economy.

Ryssdal: "Gradually" got a lot of attention in Chair Yellen's press conference the other day. She made great efforts to say, "It's not gonna be a mechanical thing." Without using her favorite phrase, which is, "It's gonna depend on the data," what are you gonna be looking at to think and to know when it's okay to start ratcheting things up again?

Powell: Well we do look at a wide range of things. For me, at the top of the list will be continued progress in the labor market and with it continued progress on inflation. Inflation is in below our target. As I mentioned, the labor market has strengthened quite a bit, but I wanna see continued strong job growth. We've had three years of very strong job growth. I want to see that continue. And as the labor market tightens, I'd like to see wages increasing, and as the economy tightens, we need to see inflation coming up. Underlying inflation, if you look through the changes in gas prices and import prices is probably running at around one and a half percent. Our goal is two percent, so we'd like to see underlying inflation come up to two percent.

Federal Reserve forecasts pointing to four interest rate hikes in 2016 show what the U.S. central bank means when it says it anticipates raising rates at a "gradual pace," Richmond Fed President Jeffrey Lacker said on Friday.

"That's half the rate at which we raised rates in the last tightening cycle. So that's what 'gradual' means to me," Lacker told reporters in Charlotte, North Carolina after participating in a business panel discussion.

Washington Post: Let’s start with Friday’s [November] jobs numbers. Everyone is saying this is cementing the Fed’s liftoff in December. What do you think?

Bullard: I thought it was is a very strong report. I think the monthly average of 218,000 is very promising for the U.S. economy. I think it shows it was probably a mistake to delay from September, when people were concerned there was a slowdown in the fall. That hasn’t really materialized. I will argue for a move in December. I don’t want to prejudge what the committee might do, but that will be my position.

WP: An actual mistake not to move in September? What are the consequences, then? Is the Fed already behind the curve?

Bullard: The timing of the rate hike is probably not critical, and so we can certainly make up for the fact that we didn’t move earlier.

WP: You guys have been saying for a long time that it’s not just the first increase that matters: It’s the entire path. Let’s talk about what gradual means.

Bullard: There’s been so much pressure on this first move, and you can kind of understand it because we haven’t moved since December 2008. That’s seven years. We’ve been pinned down to zero. If we do move in December, it will certainly be momentous. It will be a great signal I think for the U.S. economy: It does signal confidence. It does signal that we can move away from emergency measures, finally.

But you’re right, the debate will immediately turn to how will normalization proceed? My main concern about that is we remain data dependent, and we do not get locked into a mechanical pace of rate increases the way that we did in 2004 to 2006.

In that sequence, for those that remember it, we raised the funds rate a quarter percent at every meeting for 17 meetings in a row. I’m virtually certain that was not optimal policy.

At the time, we were congratulating ourselves that this was a very organized way to go about the normalization process. But in the end, we really got burned with the huge crisis and a housing bubble that ran far out of control. And when it collapsed, it caused a major global macroeconomic disaster. So I don’t think we want to be in the position of trying to telegraph a mechanical rate hike path the way we did in that situation.

“My main concern about post-liftoff monetary policy is that it not be mechanical the way it was from 2004-2006. In that sequence, we raised the policy rate 25 basis points at each meeting for 17 meetings in a row,” he said. “It turned out to be a global macro-economic disaster in the end. By the time we got up to relatively normal policy rates, the housing crisis was upon us.”

My preference is sooner rather than later for a few reasons.

First, Milton Friedman famously taught us that monetary policy has long and variable lags.Research shows it takes at least a year or two for it to have its full effect.So the decisions we make today must take aim at where we’re going, not where we are. The economy is a moving target, and waiting until we see the whites of inflation’s eyes risks overshooting the mark.

Second, experience shows that an economy that runs too hot for too long can generate imbalances, ultimately leading to either excessive inflation or an economic correction and recession. In the 1960s and 1970s, it was runaway inflation. In the late 1990s, the expansion became increasingly fueled by euphoria over the “new economy,” the dot-com bubble, and massive overinvestment in tech-related industries. And in the first half of the 2000s, irrational exuberance over housing sent prices spiraling far beyond fundamentals and led to massive overbuilding. If we wait too long to remove monetary accommodation, we hazard allowing these imbalances to grow, at great cost to our economy.

Finally, an earlier start to raising rates would allow a smoother, more gradual process of normalization. This gives us space to fine-tune our responses to any surprise changes in economic conditions. If we wait too long to raise rates, the need to play catch-up wouldn’t leave much room for maneuver. Not to mention, it could roil financial markets and slow the economy in unintended ways.

My preference for a more gradual process also reflects that the economy, for all its progress, still needs some accommodation. We don’t need the extraordinarily accommodative policy that has characterized the past several years, but the headwinds we’re facing—the risks from abroad, for instance, and their impact on the dollar—call for a continued push. Not with a bulldozer, but a steady nudge.

[W]e must also take into account the well-documented lags in the effects of monetary policy. Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.
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As you know, there has been considerable focus on the first increase in the federal funds rate after nearly seven years in which that rate was at its effective lower bound. We have tried to be as clear as possible about the considerations that will affect that decision. Of course, even after the initial increase in the federal funds rate, monetary policy will remain accommodative. And it bears emphasizing that what matters for the economic outlook are expectations concerning the path of the federal funds rate over time: It is those expectations that affect financial conditions and thereby influence spending and investment decisions. In this regard, the Committee anticipates that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.