During the unusual economic circumstances of the past six years, the FOMC has provided forward guidance to help the public better understand the anticipated future path of interest rates. The formulation of the forward guidance has changed over time, from qualitative guidance, to calendar dates, to economic thresholds, and to a blend of state-contingent and date-based guidance. Lets walk through those changes.

In December 2008, the FOMC began with qualitative guidance indicating that it anticipated that weak economic conditions were likely to warrant exceptionally low levels of the fed funds rate for some time. In March 2009, some time became extended period. In August 2011, the FOMC changed its qualitative forward guidance to a calendar date when it said that it anticipated an exceptionally low fed funds rate at least through mid-2013. That date was later extended to late 2014, and then to mid-2015.

The FOMC changed the formulation of its forward guidance from calendar dates to thresholds in December 2012. The Committee said that it anticipated that the 0-to- percent target range for the fed funds rate would be appropriate at least as long as the unemployment rate remained above 6 percent, inflation between one and two years ahead was projected to be no more than a half percentage point above the Committees 2 percent longer-run goal, and longer-term inflation expectations continued to be well anchored.

A year later, in December 2013, the FOMC blended state-contingent forward guidance with an element of calendar-date forward guidance. First, the FOMC indicated that in determining how long to maintain highly accommodative monetary policy, it would consider information in addition to the unemployment rate and PCE inflation, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The FOMC then translated this into time, saying that based on its assessment of these factors, the 0-to- percent target range for the funds rate would likely be appropriate well past the time that the unemployment rate declines below 6 percent, especially if projected inflation continues to run below the Committees 2 percent longer-run goal.

In March of this year, the thresholds were replaced with guidance that linked the path of policy to the Committees assessment of both realized and expected progress toward its dual-mandate objectives. The guidance continued to provide a time element by indicating that based on the FOMCs assessment, the funds rate target will likely remain 0-to- percent for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

I note that the recent business cycle was not the first time the FOMC has used forward guidance. In August 2003, in the midst of elevated perceived risks of deflation, the Committee indicated that it believed policy accommodation could be maintained for a considerable period. As deflation risks eased and economic conditions changed during that cycle, the forward guidance evolved as well, eventually indicating that the FOMC would be firming policy.

Recent incoming data continue to be consistent with a slowly improving economy. This improvement is allowing the Federal Reserve to slowly pare back asset purchases and to gradually become less precise in our forward guidance. However, I believe there are several reasons to be cautious and patient before returning monetary policy to a more normal, less accommodative stance.
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Admittedly, this rather qualitative forward guidance is somewhat less specific than the previous forward guidance involving the 6.5 percent threshold. My personal view is that, ideally, forward guidance should, for the time being, remain qualitative but increasingly be linked to progress in achieving our dual mandate based on incoming economic data. In particular, I believe the FOMC’s forward guidance should be consistent with keeping interest rates at their very low level until we are within one year of reaching full employment and our 2 percent inflation target – and the guidance could explicitly state that intention.

The drop in joblessness poses a problem for the Fed's so-called forward guidance, Lockhart told reporters afterward. "I think the 6.5 percent (threshold) is not serving as well now as it may have served earlier when we were a fair distance away..." he said, "and it now requires substantially more explanation and for that matter more interpretation of what the number actually is signaling." Lockhart did not advocate lowering the threshold, as have some other Fed officials.

In an interview with Reuters, John Williams, president of the San Francisco Federal Reserve Bank, said the central bank needed to do more to convince investors that rates will stay low long after the Fed stops buying bonds. It should not wait to twin that message with a decision on cutting back its bond-buying stimulus, he said.

But once the Fed decides the economy is strong enough for the Fed to reduce its $85 billion in monthly bond purchases, it should announce an end date and a purchase total for the program, Williams said.

For now, he said, the Fed must drive the message of continued support for the economy.

"My view would be that we would not be raising the funds rate even if the unemployment rate was below 6.5 percent as long as inflation continued to be low, for some time," Williams said. "We need to be communicating more about the post-6.5-percent world now, because it could be with us much sooner than we expect, and I don't want market participants to be surprised."…

The goal, he said, is that people understand the Fed is "not in a rush" to raise interest rates. For his part, he said, he does not expect rates to rise until the latter part of 2015.

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Williams first publicly embraced the idea of capping bond buys in early November as a way to give investors clarity on the Fed's next steps, and the idea may be gaining traction. Philadelphia Fed President Charles Plosser, a hawk who opposed the Fed's current round of bond buys from the start, has also floated the idea of capping QE in order to shore up the Fed's credibility.

Although the date-based forward guidance appears to have affected the public's expectations as desired, it did not explain how future policy would be affected by changes in the economic outlook--an important limitation. Indeed, the date in the guidance was pushed out twice in 2012--first to late 2014 and then to mid-2015--leaving the public unsure about whether and under what circumstances further changes to the guidance might occur.8 In December of last year, the FOMC addressed this issue by tying its forward guidance about its policy rate more directly to its economic objectives.9Introducing so-called state-contingent guidance, the Committee announced for the first time that no increase in the federal funds rate target should be anticipated so long as unemployment remained above 6-1/2 percent and inflation and inflation expectations remained stable and near target.10 This formulation provided greater clarity about the factors influencing the Committee's thinking about future policy and how that thinking might change as the outlook changed.

All told, he said, the Fed's bond-buying program will probably add about $1.5 trillion or a bit more to the Fed's balance sheet since January 2013.

That's about $250 billion more than he had expected a few months ago, or the equivalent of about three additional months of bond-buying at the current pace. The Fed next meets in December, January and March to discuss policy.

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Evans said he would support lowering the unemployment threshold that would trigger a rethink of the low-rate policy, to as low as 5.5 percent, as his colleague Minneapolis Fed chief Narayana Kocherlakota suggested.

Specifically, he said, the Fed should consider lowering the unemployment threshold at the same meeting it announces a reduction in bond purchases. Doing so, he said, could help avoid an undesirable spike in long-term interest rates that could result if investors equate an end to bond buying with a faster return to normal short-term borrowing rates.

Lowering the threshold would be "credibility-enhancing", he said, because it would underscore, rather than undercut, the Fed's commitment to boost jobs.

As reported by Reuters News

Under a goal-oriented approach, the Committee would respond to this weak outlook by providing more monetary stimulus—for example, by lowering the interest rate being paid to banks on their excess reserves.

The Committee could also promote a goal-oriented approach to monetary policy by making other changes to its communication… I’ve recommended that the FOMC announce its intention to keep the fed funds rate extraordinarily low at least until the unemployment rate falls below 5.5 percent, as long as the one-to-two-year-ahead outlook for the inflation rate stays below 2.5 percent. A recent working paper by senior Board of Governors staff suggests that this policy stance could indeed have material benefits in terms of the evolution of prices and employment.4
Beyond these changes in communication, the Committee could also take concrete policy steps to demonstrate commitment to a goal-oriented approach to policy. In its most recent statement, the Committee says that it expects the unemployment rate to decline gradually and the inflation rate to be below 2 percent over the medium term. Under a goal-oriented approach, the Committee would respond to this weak outlook by providing more monetary stimulus—for example, by lowering the interest rate being paid to banks on their excess reserves.

I would not take off the table at least consideration {of tapering in December}.

“I would not take off the table at least consideration at that time,” Lockhart told reporters in Oxford, Mississippi, in response to a question on tapering in December. “The question of changing the mix of accommodative tools ought to be on the table at every meeting for the foreseeable future.”

Nevertheless, I don’t see LSAPs as being part of the FOMC’s toolkit once we leave the zero bound behind us. We’re still much less certain about their effects than we are about the effects of changes in the federal funds rate. According to Brainard’s classic analysis, the more uncertain you are about the effects of a policy tool, the more cautiously you should use it. Instead, you should rely more on other instruments in which you have greater confidence…

That said, I expect that the explicit link between future policy actions and specific numerical thresholds, as in the recent FOMC statements, will not be a regular aspect of forward guidance, at least when the federal funds rate is not constrained by the zero lower bound… [S]uch communication is difficult to get right and comes with the risk of oversimplifying and confusing rather than adding clarity. Therefore, in normal times, a more nuanced approach to policy communication will likely be warranted. I see forward guidance typically being of a more qualitative nature, highlighting the key economic factors that will affect future policy actions. Of course, if we again find ourselves in a situation where conventional policy has reached its limits, then we will have the ability to return to more explicit forward policy guidance to provide additional monetary stimulus.

The unemployment rate hitting 6-1/2 percent will not automatically result in an increase in the federal funds rate… When evaluating policy, we will take into account a couple of basic principles. One is that our 2 percent inflation goal is a symmetric target, not a ceiling. We’re shooting for inflation to average 2 percent over the medium term. This is different from aiming to keep it no higher than 2 percent…

Another principle is that when setting policy, we will take a balanced approach to achieving our dual mandate objectives…

Suppose the unemployment rate reached 6-1/2 percent and inflation were 1-1/2 percent. One-and-a-half percent strikes me as much too low relative to our 2 percent target, especially since inflation has been running below 2 percent for quite a long time. I think that in this situation, it would be appropriate to hold the fed funds rate near zero to get inflation confidently moving back up toward 2 percent. I can easily envision certain circumstances in which the unemployment rate could go below 6 percent before we moved the fed funds rate up.

Putting all of this together, with monetary policy continuing to provide needed stimulus, I expect economic growth to pick up somewhat next year. As the economy continues to get better, the highly accommodative stance of monetary policy will need to be gradually adjusted back to normal. The first step will be to slow the pace of asset purchases over time, eventually ending them altogether. This won’t be a slamming on the brakes, it will be an easing off the gas. And it will not be a fixed date on the calendar. Instead, it will be in response to economic developments and the progress we have made towards our dual goals of maximum employment and price stability.

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In my own projection, even though I expect the unemployment rate to fall below 6½ percent early in 2015, I don’t currently expect that it will be appropriate to raise the federal funds rate until well after that, sometime in the second half of 2015.

Credibility requires consistency, over time, between a central bank's statements and its actual subsequent actions. A central bank's statements will have greater immediate effect on the public's expectations the more they are seen as limiting the central bank's future choices. Yet there are likely to be circumstances, ex post, in which the central bank feels constrained by past statements. Yielding to the temptation to implicitly renege by reworking decision criteria or citing unforeseen economic developments may have short-term appeal, but widely perceived discrepancies between actual and foreshadowed behavior will inevitably erode the faith people place in future central bank statements. So central banks face an ex ante trade-off, as well, between the short-run value of exercising discretion and the ability to communicate effectively and credibly in the future.

I think we can be very patient in -- in raising the federal funds rate, since we have not seen any inflation pressure.

On having an inflation floor, that would be in addition to the guidance. We are discussing how we might clarify the guidance on the federal funds rate. That is certainly one possibility.

I guess an interesting question there is whether we need additional guidance on that, given that we do have a target. And, of course, implicit in our policy strategy is trying to reach that target for inflation. But that -- an inflation floor is certainly something that, you know, could be a sensible modification or addition to the guidance.

The committee has regularly reviewed the forward guidance. And there are a number of ways in which the forward guidance could be strengthened.

For example, Mr. Ip mentioned an inflation floor. There are other steps that we could take. We could provide more information about what happens after we get to 6.5 percent and those sorts of things. And -- and to the extent that we could provide precise guidance, I think that would be desirable.

Now, it's very important that we not take any of these steps lightly, that we make sure we understand all the implications and that we are comfortable that it will be -- that the -- any modifications to the guidance will be credible to markets and to the public.

So we continue to think about options. There are a number of options that we have talked about. But today, we -- as of today, we didn't -- we didn't choose to make any changes to the -- to the guidance.

Clearly, the unemployment rate plays an important role in our thinking and communication about future policy. Therefore, an important issue is whether it is giving an accurate read on where things stand relative to our maximum employment mandate. The unemployment rate measures the percent of the labor force that is out of work and looking for a job. It has a number of advantages as a measure for summarizing the state of the labor market. For one thing, over time it has proven to be a reasonably stable and predictable barometer of whether labor market conditions are too hot, too cold, or just right in terms of creating inflationary pressures. Although structural changes in the labor market affect the unemployment rate, most of the variation in unemployment over time reflects cyclical factors, that is, whether the economy is too hot or too cold. And, second, the rate closely tracks other indicators of how much slack there is in the labor market, such as data from surveys on the share of households that finds jobs hard to get and the share of businesses that say it’s hard to fill openings. This adds to our confidence in its reliability.

All the same, there are reasons to worry that the unemployment rate could now be understating just how weak the labor market is. In particular, during the recovery, the share of the working-age population that is employed has increased very little, even as the unemployment rate has fallen. Taken at face value, the very low ratio of employment to population suggests that the labor market has improved far less than what’s implied by the decline in the unemployment rate.

So should we stop using the unemployment rate as our primary yardstick of the state of the labor market in favor of the employment-to-population ratio? My answer is no. Although the unemployment rate is by no means a perfect measure of labor market conditions, the employment-to-population ratio blurs structural and cyclical influences. That makes it a problematic gauge of the state of the labor market for monetary policy purposes…

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What does that mean for monetary policy? First, the unemployment rate and a number of other labor market indicators, such as payroll job gains, point to continued progress in the labor market. Clearly, we are getting closer to meeting our test of substantial improvement in the labor market.

Second, any changes in policy will depend not only on labor market conditions, but also on inflation. In our July statement, the FOMC noted that inflation persistently below 2 percent could pose risks to economic performance. That means we will also take into consideration whether inflation is moving closer to our target. Third, any adjustments to our purchases are likely to be part of a multistep gradual process, reflecting the pace of improvement in the economy.

As I noted earlier, Chairman Bernanke has laid out a timetable for our securities purchases, which includes reducing them later this year and ending them around the middle of next year, assuming our forecasts for the economy hold true. I haven’t significantly changed my forecast since then, and I view Chairman Bernanke’s timetable to still be the best course forward. However, I can’t emphasize enough that when and how we adjust our purchases will depend crucially on what the incoming data tell us about the outlooks for the pace of improvement in the labor market and movement towards our inflation goal.