Now I would like to emphasize that while I favor a somewhat later lift off than many of my colleagues, the precise timing for the first increase in the federal funds rate is less important to me than the path the funds rate will follow over the entire policy normalization process. After all, today’s medium- and longer-term interest rates depend on market expectations of the entire path for future rates, not just the first move. In turn, these medium- and longer-term rates are key to the borrowing and spending decisions of households and businesses.

Accordingly, when thinking about the initial stages of normalization, I find it useful to focus on where I think the federal funds rate ought to be at the end of next year given my economic outlook and assessment of the risks. And right now, regardless of the exact date for lift-off, I think it could well be appropriate for the funds rate to still be under 1 percent at the end of 2016.

Before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher. Given the current low level of core inflation, some evidence of true upward momentum in actual inflation is critical to this assessment. I believe that it could well be the middle of next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation. After liftoff, I think it would be appropriate to raise the target interest rate very gradually. This would give us sufficient time to assess how the economy is adjusting to higher rates and the progress we are making toward our policy goals.

There is an important caveat, though, to my comment downplaying the importance of the exact date of lift-off. It is critically important to me that when we first raise rates the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases. If we do not, then markets might construe an early liftoff as a signal that the Committee is less inclined to provide the degree of accommodation than I think is appropriate for the timely achievement of our dual mandate objectives. I would view this as an important policy error.

Based on central bank orthodoxy, the most prudent course of action is to begin to normalize the policy rate slowly and gradually, under the interpretation that the Committee will still be providing considerable monetary accommodation to the economy to guard against potential pitfalls and risks as the quarters and years ahead unfold. By adopting this prudent approach to monetary policy strategy, policy tools will eventually be returned to the toolbox, and the Committee may be able to lengthen the expansion longer than it may otherwise extend.

I have set up this simple classic view because I think that, on balance, this view suggests the best path forward for U.S. monetary policy.

I think the case for checking off the criterion of "reasonable confidence" that inflation will converge to the 2 percent target is harder to make than employment. Even so, I have gotten comfortable enough on the inflation question to take a first step in one of the coming FOMC meetings in what will likely be an extended process of normalization of the interest-rate environment.

Looking forward, I expect that we’ll reach our maximum employment mandate in the near future and inflation will gradually move back to our 2 percent goal. In that context, it will make sense to gradually move away from the extraordinary stimulus that got us here. We already took a step in that direction when we ended QE3. And given the progress we’ve made and continue to make on our goals, I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year. Of course, that view is not immutable and will respond to economic developments over time.

There has been a lot of conversation recently about the desirability of initiating a gradual increase in the fed funds rate sometime in 2015. In my view, we should judge the desirability of such a policy decision through the lens of the FOMC’s objectives. Personal consumption expenditures (PCE) inflation has been running well below 2 percent for more than three years and is currently at 0.3 percent. My current outlook is that it will continue to do so for several years. Based on this outlook, raising the fed funds rate in this calendar year would be inappropriate, because such an action would serve to further delay the return of inflation to target.

These considerations refer only to the price stability objective. In terms of the maximum employment objective, I believe that the FOMC can best fulfill this congressional mandate by doing what it can to facilitate further labor market improvement. Again, this consideration argues against raising the fed funds rate in 2015.

Thus, under my current economic outlook, the FOMC can best achieve its objectives by keeping the fed funds rate target at its current level during this calendar year.

Mr. Lockhart reiterated there is no preordained date for liftoff, and the timing will be data dependent. But normal gyrations in the monthly data won’t be a decisive factor in his decision-making.

”I am not expecting the data signals to point uniformly in the same direction,” he said. “I don’t need this. I’m prepared to see mixed data.”

The path of future interest rate increases is likely to be gradual, echoing remarks from other Fed officials, adding that pace is likely to be appropriate “for some time.”

Asked what he meant by gradual, he told reporters it means “something less frequent than every meeting.”

While financial market participants are particularly focused on the timing of the first rate increase, when it comes to monetary policy, timing isn’t everything. The FOMC meets eight times a year, and the difference in lifting off from a zero interest rate a meeting or two earlier or later is not significant. More important for macroeconomic performance is the expected path of policy beyond liftoff because expectations about the future path of policy can affect today’s economic decisions. According to the FOMC’s current assessment, even after the first rate increase, monetary policy is expected to remain very accommodative for some time to come, with rates expected to move up only gradually to more normal levels and with the decisions about that path depending on incoming information on the economy’s performance. One benefit of the gradual approach is that it will allow us to recalibrate policy over time as some of the uncertainties surrounding the underlying economy in the post-crisis world, like the potential growth rate, are resolved.

My own outlook for the economy and inflation is broadly consistent with the central tendency of the projections submitted by FOMC participants at the time of our June meeting. Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. … Because there are some factors, which I mentioned earlier, that continue to restrain the economic expansion, I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time. The projections of most of my FOMC colleagues indicate that they have similar expectations for the likely path of the federal funds rate.

I still believe this will be the year for liftoff, and I still believe that waiting too long to raise rates poses its own risks. I know not everyone agrees and there are those who believe we should wait until we’re nipping at the heels of 2 percent. My reasons for advocating a rise before that happens remain the same. Monetary policy has long and variable lags, as Milton Friedman famously taught us. Specifically, research shows it takes at least a year or two to have its full effect. We’re therefore dealing with my favorite analogy: The car speeding towards a red light. If you don’t ease up on the gas, you’ll have to slam on the brakes, possibly even skidding into the intersection. Waiting until we’re close enough to dance with 2 percent means running the very real risk of having to dramatically raise rates to reverse course, which could destabilize markets and potentially derail the recovery. I see a safer course in starting sooner and proceeding more gradually.

As we consider the decision of policy rate normalization, we are mindful of possible spillovers to other economies, including emerging market and developing economies. In an interconnected world, fulfilling the Federal Reserve's objectives under its dual mandate requires that we pay close attention to how our own actions affect other countries and how developments abroad, in turn, spill back into U.S. economic conditions.

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In order to minimize the likelihood of surprises and thus avoid creating unnecessary market and policy volatility, we are striving to communicate our policy strategy clearly and transparently. Beyond communicating our intentions, we also emphasize that monetary policy normalization in the United States will occur in the context of a strengthening U.S. economy, which should benefit the emerging market and developing economies.

Still, one feature of the era after the first increase of the federal funds rate will, in all likelihood, be higher U.S. and global interest rates compared with their extraordinarily low levels of recent years. The increase in global interest rates could cause investors to adjust their portfolios, triggering capital outflows from emerging market and developing economies.

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Once we begin to remove policy accommodation, the Committee's assessment is that economic conditions will likely warrant raising the federal funds rate only gradually. Thus, we expect that the target federal funds rate will remain for some time below levels viewed as normal in the longer run. But that is only a forecast, and monetary policy will, in practice, be determined by the data--primarily data on inflation and unemployment.

The Fed likely would raise rates at a gradual pace, Mr. Powell said, in part because inflation is expected to continue undershooting the central bank’s 2% annual target. The precise timing and pace of rate increases will depend on incoming economic data, he said, and officials don’t want to “fall into a pace of mechanical increases.”

Mr. Powell said his forecast “calls for liftoff in September and for an additional increase in December” and further increases of about one percentage point a year are likely. But he cautioned that rate forecasts are accompanied by great uncertainty.

“Definitely my own forecast would be having us raise rates two times this year, but that would depend on the data," San Francisco Fed President John Williams told reporters at the bank's headquarters.

"I still believe this will be the year for liftoff, and I still believe that waiting too long to raise rates poses its own risks," Williams said in a speech earlier. "I see a safer course in starting sooner and proceeding more gradually."

Let me emphasize that the importance of the initial increase should not be overstated. The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate in order to support continued progress toward our objectives of maximum employment and 2 percent inflation.