The median projected rate in 2017 remains below the 3.75 percent or so projected by most FOMC participants as the longer-run value of the federal funds rate, even though the central tendency of the unemployment rate by that time is slightly below its estimated longer- run value and the central tendency for inflation is close to our 2- percent objective... Participants provided a number of explanations for the federal funds rate running below its normal longer-run level at that time. These included, in particular, the residual effects of the financial crisis, which are likely to continue to constrain spending and credit availability for some time.

But I want to emphasize sometimes too much attention is placed on the timing of the first increase in the federal funds rate. And what should matter to market participants is the entire trajectory, the entire expected trajectory of policy.

Mr. Plosser, speaking to reporters, again argued in favor of the Fed raising short-term rates off of their current near zero reading sooner rather than later. He also said the Fed needs to remove from its official policy statement its current commitment to be patient on the timing of rate rises.

Mr. Plosser also told reporters that he could see the Feds overnight target rate rising to 1% to 1.5% by years end. He noted that it would be better to get started on rate rises soon so that they can be gradual.

WSJ: Lets talk about how the cycle is likely to play out after liftoff. It sounds like youre saying your inclination is to act and then observe and then consider acting later on.

MESTER: It is not on a preset course.

WSJ: Could there be pauses in the process?

MESTER: Yes, but I cant say now whether there will or wont be pauses. We need to see how the economy reacts and evolves over time. It is hard to sit here today and say that is how were going to behave.

I would've liked to have seen us slowly raise rates. I was in favor of an early and slow approach.
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"To me, (a later date for the initial rate hike) means run the risk of doing what the Fed has always done. You get to full employment, you raise rates too rapidly and every time we've done that, we've driven the economy to a recession."
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Heres the point: I believe that rates will be raised in 2015. The question is the timing, and that will be decided by other people in the committee. I wanted to start in March, but I lost that argument.

Based on my forecast and the risks I see around that forecast, I believe it will soon be appropriate to begin moving rates up from zero. Because policy must be forward looking, in my view liftoff should occur before our goals are fully met. But even after liftoff, policy will remain very accommodative for some time, promoting attainment of both goals. Indeed, if incoming economic information supports my forecast, I would be comfortable with liftoff in the first half of this year, but as the FOMC has emphasized, policy isnt on a pre-set path. Both liftoff and the path of policy thereafter will be based on incoming information to the extent that it affects the economic outlook and progress toward our goals of maximum employment and price stability.

I would say I would rather get off zero sooner, and then have more flexibility to go slower and react to data down the road.

Q: Given the low level of inflation, what's so dangerous about pressing for faster growth?

A: It may work out just fine, but theres a risk to that strategy, and the risk is that we wait until the point where markets force us to raise rates and then we have to react quickly and aggressively. I believe that if we wait too long, then we run the risk of falling very far behind the curve or disrupting the economy by rapid rate increases. I would prefer us not to be in that bind because then we really will be between a rock and a hard place. Theres no way at the end of the day that we can change policy without having some volatility. But I would prefer us trying to be a little more I guess Greenspan would have called it pre-emptive but monetary policy works with pretty long lags sometimes and so I think we have to be prepared. Id prefer us acting a little earlier and being able to go gradually than having to wait a long time and having to go rapidly.

Although the 1994 normalization cycle was considered disorderly (i.e., uneven amounts that were somewhat unpredictable), it seemed to set up the U.S. economy for success in the second half of the 1990s. On the other hand, the 2004-06 normalization cycle was considered orderly (i.e., perfectly even amounts that were generally anticipated) but, in retrospect, turned out to be suboptimal because it allowed for the continuation of speculation in housing markets and in mortgage finance. For the upcoming normalization cycle, some combination of the twothe data dependency from the 1994 case and the transparency from the 2004-06 casewould probably provide the optimal method of returning the policy rate to normal.

Federal Reserve Bank of St. Louis President James Bullard said Friday he still favored raising U.S. interest rates by the end of the first quarter, even with inflation well below the central banks 2% target.

Mr. Bullard said he was willing to adjust the pace of further rate increases to reflect wider economic trends, but that a lift off in inflation was not as important as moving short-term rates from near zero.

I still think we should get going with our rate rises, he told reporters after a speech in Chicago. The data lift off {date of liftoff?}is not so critical as the pace.

Mr. Bullard said the Fed risked falling behind the curve if it waited until June, when many investors and some policy makers expect the first rate increase. He added that if the central bank waits until summer to move, the rise could be followed by a faster pace of subsequent increases.

The level of inflation is not so low that it can alone justify a policy rate of zero, Mr. Bullard said earlier in a speech in Chicago.

I think the momentum evident in the second half of 2014 will carry over into 2015, and the ongoing outlook will remain solid.

If that is indeed the case, I believe the first action to raise interest rates will in all likelihood be justified by the middle of the year.

The phrase "middle of the year" is admittedly not very precise. That's purposeful on my part. Understandably, some financial market participants are fixated on what exact month the first move will occur. Perhaps it's easy for me to say, but I don't think the exact timing of liftoff is the most important concern. A couple of years hence, whether the first rate increase came at a particular meeting or anotherwhether a bit earlier or later than expectedisn't going to make a great deal of difference for the real, Main Street economy.

The key liftoff decision criteria ought to be closely linked to the FOMC's two principal policy objectivesmaximum employment and low and stable inflation. In my view, the biggest factor influencing the actual timing of a liftoff decision should be the Committee's confidence that these objectives will be achieved in an acceptable timeframe and, especially, that inflation will move at deliberate speed toward the target of 2 percent per annum.
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It's quite possible there will be considerable ambiguity in the picture presented by data in the first half of the year. Beyond the noise in inflation numbers, it's obvious there is simply a lot moving around at this timeoil prices, the dollar, even quarterly growth numbers, in all likelihood.

Noisy, jumpy data affect my confidence in the outlook. I'm likely to decide what policy decision to support based on where I think things are headed. When the numbers come in noisy, it's just harder.

If the early months of this year bring mixed news on the economy, the risk manager in me will lean to preferring a later date for the first policy move to an earlier one. That said, after six years of recovery and considering all that that has both transpired and been accomplished, I don't think we policymakers should get too rigid about liftoff a little earlier or later. My preferred timing may not be the Committee's consensus decision.
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At the recent meeting of the FOMC in December, the Committee made an adjustment of its forward guidance by introducing the theme of patience in beginning to normalize the stance of policy. I supported and expect to continue to support a patient approach, one that is relatively cautious and conservative as regards the pace of normalization of rates.

That basic framework pertains to how the Fed intends to move toward more normal levels of interest rates and asset holdings. I suspect some of you are just as avidly interested, if not more so, in when and how rapidly the Fed will raise rates. I hate to disappoint you, but the truth is nobody knows yet. There is no pre-set timetable for raising rates. The FOMCs actions genuinely will depend on the economic data available at the time. So I cannot tell you when and, more importantly, how rapidly our rate target will rise.

I will share an observation, however. The economic outlook can change rapidly, and judgments about appropriate policy need to respond accordingly. Its not hard to find historical examples: The outlook for real activity shifted dramatically from late 1998, when overseas turmoil was thought to jeopardize U.S. growth, to early 1999, when it became clear that the effects would be minimal and activity was accelerating. Similarly, the outlook for growth and inflation shifted significantly from mid-2003, when inflation seemed to be sinking below 1 percent, to early 2004, when growth and inflation were clearly rising. Arguably, the Fed fell at least somewhat behind the curve in each case. The lesson, I believe, is that policymakers should strive to look through clearly transitory phenomena to assess the underlying real economic developments that as long as inflation is anchored determine the appropriate path for interest rates. And they need to be prepared to respond promptly.

What ought to matter in thinking about the stance of policy is what the entire path of interest rates will look like, and I really don't have much for you other than to say that they will be data- dependent, that over time, the stance of policy will be adjusted to try to keep the economy on a track where we see continuing progress toward achieving our goals of maximum employment and price stability.

The federal funds rate has been sitting in this zero to a quarter percent range now for 6 years. And we have a very large balance sheet. We're providing a very highly accommodative monetary policy, and even as we begin to normalize the stance of monetary policy when that becomes appropriate, it's important to remember that monetary policy will still be very accommodative for a long time.

And as we begin to normalize policy, we will be looking at unfolding economic developments, and as the economy strengthens and we come closer to achieving our objectives, I think it's very likely that we will progress on the path of normalizing policy.

But I can't tell you specifically other than saying it will depend on progress, and moves will be data-dependent. I can't say much more than that.

If the labor market continues to strengthen, and if we see some signs of inflation beginning to increase, then the natural thing is to get the interest rates up, Mr. Fischer said at The Wall Street Journal CEO Council annual meeting. And we call it normalization.

Mr. Fischer, who took on the No. 2 position at the Fed in June, said the first rate rise will be very important. There is a process that is being set off when the first step startsinterest rates are going to go up and they are going to keep going up for some time, he said.

Accordingly, before the Fed raises rates we should have a great deal of confidence that we wont be forced to backtrack on our moves and face another painful period at the ZLB. We should be exceptionally patient in adjusting the stance of U.S. monetary policy even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives.

I agree with Atlanta Fed President Lockhart in thinking that we ought to be whites of their eyes inflation fighters. The last thing we want to do is regress back into the ZLB. Indeed, such a relapse would be a sign there was something else going on that was preventing the economy from being as vibrant as we thought possible.

To summarize, I am very uncomfortable with calls to raise our policy rate sooner than later. I favor delaying liftoff until I am more certain that we have sufficient momentum in place toward our policy goals. And I think we should plan for our path of policy rate increases to be shallow in order to be sure that the economys momentum is sustainable in the presence of less accommodative financial conditions.