"One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting," said Dudley, a permanent voter on the Federal Open Market Committee, the Fed's monetary policy arm.

"So if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision," he said.

Federal Reserve Bank of Kansas City President Esther George said recent financial-market turmoil should not have been surprising and is no reason to delay further interest-rate increases.

“While taking a signal from such volatility is warranted, monetary policy cannot respond to every blip in financial markets,” George, who votes on policy this year, said in prepared remarks in Kansas City, Missouri. “The recent bout of volatility is not all that unexpected, nor necessarily worrisome, given that the Fed’s low interest rate and bond-buying policies focused on boosting asset prices as a means of stimulating the real economy.”

Increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets. At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.

“Underlying fundamentals of the U.S. economy remain very sound,” Mester said Monday in an interview on Bloomberg Television. “There’s going to be volatility in the markets, that’s kind of the nature of financial markets.”

Volatility is generally a friend, not a foe, of market functioning. It should not be treated as an externality from which we suffer. Volatility, absent destabilizing moves, should be allowed to effectuate change in the financial architecture of private markets. Only then, I suspect, will a more robust recovery in market liquidity, investor confidence, and real economic activity be achieved.

One of the most significant changes in the U.S. economy over the past quarter century has been the marked reduction in economic volatility. Following the terminology of the Great Depression and the Great Inflation, this period of increased stability has been termed “The Great Moderation.”

The Great Moderation—this period of relatively stable GDP growth—has been accompanied by a lower average level and reduced volatility of long-term interest rates. The more stable financial environment makes it easier for firms and households to plan for the future. The Great Moderation has also made the job of forecasters somewhat easier.

Financial market volatility, in and of itself, does not require a change in the target federal funds rate, in my view. Interest rate policy needs to be guided by the outlook for real spending and inflation. Financial turbulence has the potential to change the assessment of the appropriate rate if it induces a sufficient revision in growth or inflation prospects.

Faced with the challenges of managing policy in an increasingly integrated world economy, the dominant instinct of officials is often to try to shield the economy from volatility.  But the crises of the 1990s helped demonstrate why this approach can be both futile and counterproductive...The more promising approach is to invest in the complement of institutions and policies that enable an economy to live more comfortably with openness.  Focusing on those measures that will enable an economy to be more flexible and to adapt more quickly to change ultimately will be a more effective policy strategy.  It is politically more difficult, but economically more effective than those solutions that seem to offer protection from competition and volatility.

"It's possible" the recent jump in fluctuations marks a return to historical levels, Geithner said in responding to questions following a speech today in Singapore. "It's hard to know what normal is in a world that's changed so much and what normal will prove to be."

As reported by Bloomberg News

Perhaps because of more complete markets, shocks to liquidity are less likely to become self-fulfilling and less likely to impose more lasting damage. That hypothesis seems particularly credible when the shock is based neither on rapidly changing economic fundamentals nor a genuine breakdown in market infrastructure. In the recent episode [in Febryary 2007], opportunistic capital apparently viewed large movements in asset prices as trading opportunities. Or, perhaps, striking as it was, we have not yet witnessed a scenario that subjects the latest product innovations and behavior of market participants to a sufficiently stringent stress test.

Recently, however, we have seen increasing signs that economic conditions are becoming less favorable.  Continuing high energy costs and rising interest rates appear to be slowing economic growth.  At the same time, inflationary pressures are beginning to emerge.  These developments have been associated with increased volatility in commodity markets and in financial markets around the world.

Providing information about the expected path of policy helped to ensure that long-term interest rates and other asset prices did not build in a projected pace of tightening that was more rapid than the Committee itself anticipated, and the statement's focus on the conditionality of future policy actions emphasized the ongoing need for both policymakers and financial market participants to respond to economic news. In retrospect, the clear communication of policy provided notable benefits, in my view, by increasing the effectiveness of monetary policy while minimizing unnecessary volatility in financial markets.

[P]olicy moved gradually, tightening in one-quarter point increments over fourteen successive meetings. Together with expanded communication, this gradual approach served to stabilize policy expectations and damp market volatility.

Well, we are trying, and we have been for some time, to be transparent and as clear as we can about our strategy, our objectives and our approach. And one of the implications of that has been that interest rate moves have been highly predicted by the markets.  And I think as a general matter that that's good. It reduces volatility in financial markets and makes policy actually more effective.

Although the data are suggestive, tests based on asset pricing models have not firmly established an empirical link between reduced macroeconomic volatility and higher asset prices. The ability to establish such a link is limited, in part because many of the fundamental concepts underlying asset prices, such as risk aversion and expected volatility of growth, are difficult to measure and the model outcomes depend greatly on assumptions regarding these key variables.