The most comprehensive and complete evaluation of monetary policy tools can take place only after a return to more normal economic conditions and monetary policy. Still, with that caveat, my overall assessment of quantitative easing is that it was quite successfully utilized in the United States. One reason the U.S. is now relatively close to achieving both aspects of the Federal Reserve’s dual mandate from Congress – full employment and price stability (which the Federal Reserve targets at 2 percent inflation) – is the early and forceful use of quantitative easing in the aftermath of the financial crisis.

Well I think its a bit much that I said anything like that. I said you might consider pausing in our taper program. Our taper program was supposed to be a state contingent program that would be adjusted as the data came in and as I was speaking we certainly had markets thinking that global recession was on the horizon and if there was ever a time to be state contingent maybe that was it. Now as it turns out that all kind of evaporated and the committee did a very sensible thing at the meeting last week; we cited lower market measures of inflation expectations which showed concerns for that issue, but we also cited survey based measures which are more stable about inflation expectations. And so I think that it shows we are keeping a watchful eye on this issue. We went ahead and closed the QE program; I thought that was the right judgment for that meeting.

Although theres general consensus that the measures we took in the immediate wake of the crisis were necessary, critics of the Feds policies believe that weve been too accommodative since then, and that after 2010, we shouldve stepped back and let the economy move on its own. I often hear that the economys recovering, so why is the Fed still intervening? Or, in other words: enough is enough.

Ending accommodative policy prematurely would have been a major mistake. In 2010, the economy wasnt yet back on trackin fact, it had barely begun to recover. When we initiated the second round of asset purchases, or QE2, in November 2010, the unemployment rate was around 9 percentonly slightly down from its peak of 10 percent.

The latest round of asset purchasesor QE3was announced in September 2012, when the economy was better, but still well short of healthy. At around 8 percent, the unemployment rate had improved, but was still very high by historical standards, and inflation was running below the preferred 2 percent longer-term goal. In both situations, the very real danger of the recovery stalling and the economy slipping into a state of prolonged stagnation called for additional monetary stimulus.

When you break a leg, you dont just snap the pieces back into place; you leave the cast on until the bone heals. Otherwise, you risk doing even greater damage. And in this case, the economy wasnt ready to walk on its own. Not doing anything, or not doing enough, would just have led to more pain and the need to take even stronger measures down the road.

I was recently in Japan, which offers a real-life example. They shied away from sufficiently aggressive policy and the Japanese economy remained mired in deflationary stagnation for 20 years. Only now are they starting to put more forceful policies into place, and, happily, theyre workingbut those policies are much more forceful than they wouldve been had they been instituted 15 or 20 years ago. In keeping with the patient analogy, you can keep the cast on for a few weeks and let it heal, or you can go without and require extensive surgery later. So if we take the longer view, the Feds actions are in line with people who prefer a light policy touch: were essentially doing less now to avoid having to do more later.

I am aware that not everyone is a fan of the Fed or of accommodative policy. Im not deaf to criticism, and reasonable people disagree on policy all the time. But the bottom line is, it has worked. And the asterisk is that its not permanent. We wont raise interest rates for some time, which is the real marker of tightening policy. However, weve already considerably reduced the pace of our asset purchases, which will likely end this year. Were moving towards normalization, and as the economy continues to improve, well take off the cast; when its able to move on its own, well take away the walking stick. The events of the past several years demanded strong policy action, and we were right to take it. But it doesnt reflect a fundamental shift in our goals or strategy.

Philadelphia Fed President Charles Plosser told CNBC on Friday that it's probably time to "gracefully exit" the central bank's quantitative easing bond purchases because the November jobs report was more evidence of a strengthening economy.
…
"It's pretty positive clearly. We continue to make solid progress," he said, but warned that investors should not to make too much of one month's report.
…
Acknowledging that he's no fan of the current QE buying, Plosser said "it would be wise if we began to get rid of this program." He continued, "I don't think it's doing very much good for us. It has a lot of unintended consequences and risk for the economy down the road."
When Plosser was on "Squawk Box" last month, he said the Fed "clearly missed" a chance to begin tapering in September when central bank had primed the financial markets for action.
Plosser had also said the Fed should put specific dollar limits on the size of the central bank balance sheet—an assertion he stood by on Friday.
But he added: "I think we need to go back to where we were in the earlier rounds of QE where we set a total amount, ... bought that purchase and then we stopped. Then we re-evaluated to whether or not we should go on."

Our view is that asset purchases work primarily through the asset side of the balance sheet by transferring duration risk from the private sector to the central bank’s balance sheet.  This pushes down risk premia, and prompts private sector investors to move into riskier assets.  As a result, financial market conditions ease, supporting wealth and aggregate demand.  The fact that such purchases increase the amount of reserves in the banking system and the size of the monetary base is a byproduct—not the goal—of these actions.

[On] the potential costs of the Federal Reserves asset purchases, there are some that definitely need to be monitored over time. At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program.

The Federal Reserve's recent adoption of new monetary policy guidance is "a step in the right direction," but it fails the test of being a systematic approach to action…

"This is not what I would have put in place," Federal Reserve Bank of Philadelphia President Charles Plosser told reporters on the sidelines of the American Economic Association annual gathering in San Diego. But compared to the Fed's calendar-based interest-rate commitments, it is an improvement, the official said.

…The central banker said one of his biggest beefs with the new threshold regime is that it leaves unresolved what action the Fed will take once those levels are achieved. As the thresholds are not triggers a tightening is not automatic, he observed, but markets may believe otherwise. Mr. Plosser said the thresholds do not achieve the systematic approach he has long called for.

…As he has for some time, he reiterated his opposition to Fed bond buying efforts. "The efficacy of asset purchases is not very high" and the risks created by continuing forward are rising, Mr. Plosser said, adding "I would have stopped earlier" with the purchases.

…The officials cautioned central bank watchers not to read to much into the December FOMC meeting minutes, released Thursday, which saw policy makers speculating over the time frame Fed asset buying might run. Mr. Plosser noted officials have different definitions about the level of progress the central bank will need to make on the jobs front before paring back the bond buying.

As reported by the Wall Street Journal

“It is reasonable to think that an outright purchase program has more impact on inflation and inflation expectations than a Twist program,” Bullard said today in a speech in Little Rock, Arkansas. “If the goal is to keep policy on its present course, the replacement rate should be less than one-for-one.”   From the Bloomberg News summary

Responding to questions after his speech, Mr. Bullard said he would like to keep monetary policy on an even keel after Operation Twist's end, and given the desire to keep the potency of policy about the same, he said he favored the Fed buying about $25 billion a month in Treasury purchases.  From the Dow Jones News summary

I want to close my discussion of FOMC performance by explaining why there is no longer an intrinsic connection between the size of the Fed’s balance sheet and inflation. I’ve mentioned how the Federal Reserve has bought over $2 trillion of government securities. It has funded that purchase by tripling the amount of deposits held by banks with the Fed—what are called bank reserves. The standard reasoning is that this kind of reserve creation is inflationary. Banks are only allowed to offer checkable deposits in proportion to their reserves. Economists view checkable deposits as a form of money because, like cash, checkable deposits make many transactions easier. In this sense, bank reserves held with the Fed are essentially licenses for banks to create a certain amount of money. By giving out more licenses, the FOMC is allowing banks to create more money. And if you took any economics in school you learned: more money chasing the same number of goods—voilà, inflation. Indeed, I think I’m pretty safe in saying that after four years in economics grad school, I’ve uttered this phrase—more money chasing the same number of goods creates inflation—more often than anyone else in this room.

But this connection between bank reserves and inflation is simply not operative right now. Banks have few good lending opportunities, and so they’re not trying to attract deposits. As a result, they are keeping nearly $1.6 trillion of reserves at the Fed in excess of what they need to back their deposits. In other words, banks have the licenses to create money, but are choosing not to do so.

I’m confident, though, that at some point in the future, the economy will improve and banks will once again have good lending opportunities. Some observers are concerned that once this happens, the banks’ excess reserves will serve as kindling for an inflationary fire. This concern would have been entirely appropriate three years ago. But in October 2008, Congress granted the Federal Reserve the power to pay interest on bank reserves. Right now, that interest rate is 25 basis points, or 0.25 percent. By raising that rate judiciously, the Fed has the ability to deter banks from using their reserves to create money, and through this mechanism, the Fed can prevent inflation. The Fed’s ability to pay interest on reserves means that the old and familiar link between increased bank reserves and higher inflation has been broken.

Of course, this requires the Fed to raise the interest rate on reserves in response to changes in economic conditions. You might well ask: Will the Fed raise interest rates in a sufficiently timely and effective manner to keep inflation at 2 percent or a little less? But that’s always been the key question to ask about Fed policy, even when the Fed had a much smaller balance sheet. And that’s my point: Because the Fed can pay interest on reserves, the size of its balance sheet does not, in and of itself, undercut the credibility of its commitment to keep inflation at 2 percent or a bit under. I believe that’s why both survey and market-based measures of expected inflation over the next five to 10 years have remained remarkably stable as the Fed has expanded its liabilities.

Overall, Bullard said that QE2 was classic monetary policy easing. “This experience shows that monetary policy can be eased aggressively even when the policy rate is near zero,” he said.

“Balance sheet policy, like all monetary policy, should be conducted in a state-contingent way,” Bullard added. (In other words, policy should be adjusted based on the state of the economy.)

“The financial market effects of QE2 looked the same as if the FOMC had reduced the policy rate substantially,” Bullard said. “In particular, real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose. These are the ‘classic’ financial market effects one might observe when the Fed eases monetary policy in ordinary times.”

“The financial market effects of QE2 looked the same as if the FOMC had reduced the policy rate substantially,” Bullard said. “In particular, real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose. These are the ‘classic’ financial market effects one might observe when the Fed eases monetary policy in ordinary times.”

MENENDEZ:   And so would you give me your view of how the first and second rounds of quantitative easing are working?

BERNANKE: I think they're working -- I think they're working well. The first round in March 2009 was almost -- almost the same day as the trough of the stock market. Since then, the market has virtually doubled. The economy was going from total collapse at the end of the first quarter of '09 to pretty strong growth in the second half of '09. And as I said, it's now in the seventh quarter of expansion. So I think that was clearly a positive.

The current -- the current Q.E, as it's called, as I've said, appears to have had the desired effects on markets in terms of creating stimulus for the economy. And I cited not just Federal Reserve forecasts, but private sector forecasts which have almost uniformly been upgraded since August, since November, suggesting that private sector forecasters are seeing more growth and more employment this year than they had previously expected. And so I think it is in fact having benefits for growth and employment.

From the Q&A session

A related concern is whether the Federal Reserve will be able to act sufficiently fast once it determines that it is time to raise the IOER. This concern reflects the view that the excess reserves sitting on banks' balance sheets are essentially “dry tinder” that could quickly fuel excessive credit creation and put the Fed behind the curve in tightening monetary policy.

In terms of imagery, this concern seems compelling—the banks sitting on piles of money that could be used to extend credit on a moment's notice. However, this reasoning ignores a very important point. Banks have always had the ability to expand credit whenever they like. They didn't need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve's standard operating procedure for several decades has been a commitment to supply sufficient reserves to keep the fed funds rate at its target. If banks wanted to expand credit that would drive up the demand for reserves, the Fed would automatically meet that demand by supplying additional reserves as needed to maintain the fed funds rate at its target rate. In terms of the ability to expand credit rapidly, it makes no difference whether the banks have lots of excess reserves on their own balance sheets or can source whatever reserves they need from the fed funds market at the fed funds rate.