With huge resource gaps, slow growth and low inflation, the economic circumstances warrant extremely strong accommodation.

I support using our balance sheet to provide additional accommodation. I think our action in June that continued our Maturity Extension Program was useful; but I would have preferred an even stronger step, such as the purchase of more mortgage-backed securities.

Finding a way to deliver more accommodation — whether it is monetary or fiscal — is particularly important now because delays in reducing unemployment are costly.

I believe the FOMC can do better at describing our thinking with respect to tolerance bands around our long-run inflation and unemployment goals. Clarification would increase both transparency and accountability. Importantly, it would help markets better anticipate Fed actions, creating one less source of risk for economic agents to manage.

The current stance of monetary policy is ultra-easy, and remains appropriately calibrated given the macroeconomic situation in the U.S.

The ultra-easy monetary policy has been appropriate so far, but could reignite a 1970s-type experience globally if pursued too aggressively. The 1970s era included 4 recessions in 13 years, double-digit inflation, and double-digit unemployment. The lesson was clear: “Do not let the inflation genie out of the bottle.”

If anything, the Committee may be trying to do too much with monetary policy, risking monetary instability for the U.S. and the global economy.

Monetary policy is a blunt instrument which affects the decision making of everyone in the economy. It may be better to focus on labor market policies to directly address unemployment instead of taking further risks with monetary policy.

The {Fed's} current communication strategy operates with only a few variables, while the economy is described by many variables. The FOMC could instead publish a quarterly document akin to the Bank of England’s “Inflation Report.” A report of this type could potentially lay down a benchmark “Fed view” on the key issues facing the U.S. economy. Release of the report could be coordinated with the quarterly press briefings conducted by Chairman Bernanke.

I have proposed that any further accommodative policies should contain a safeguard against an unreasonable increase in inflation. In my judgment, nominal income level targeting is an appropriate policy choice and has such a safeguard. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I support a conditional approach, whereby the federal funds rate is not increased until the unemployment rate falls below 7 percent, at least, or if inflation rises above 3 percent over the medium-term. The economic conditionality in my 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low.

My outlook for both economic activity and inflation relies on monetary policy remaining accommodative. Therefore, I have voted in favor of the FOMC's policy statements and actions, including the statement that economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014." This date is not a commitment; rather, it conveys the FOMC's collective judgment of when economic conditions would warrant an increase in the federal funds rate. If there is a substantial change in the economic outlook, or risks to the outlook, then the guidance would change appropriately.

I would be willing to consider tightening policy at a somewhat earlier stage if growth strengthened sufficiently to materially improve the medium-term outlook and substantially reduce tail risks, or if there was evidence of a genuine threat to medium-term inflation, including a rise in inflation expectations. In such a case, I would anticipate that the first step would be to bring in the late 2014 date of the policy guidance.  This would effectively tighten financial conditions not only by changing the expected path of short-term interest rates, but also by bringing forward the expected start of balance sheet normalization.

“Circumstances today in the United States call for continued measured efforts to quicken the pace of recovery and shrink unemployment, while keeping inflation controlled and close to the FOMC’s official target of 2 percent,” Lockhart said. “Those efforts for the time being should fall in the realm of communications.”

“As popular as it might be in some quarters to rule out” a third round of so-called quantitative easing, “I do not think this option can be taken off the table,” Lockhart said today in Tokyo. “QE3 will work under the right circumstances. But I don’t believe such circumstances prevail at this time.”

I suspect that the FOMC participants are not ready to agree on a specific policy rule or reaction function because they use different models and have different loss functions. In the meantime, it does seem feasible that participants could agree on a set of economic variables to which monetary policy should react. The academic literature suggests using rules that respond aggressively to deviations of inflation from the central bank’s target and less aggressively to deviations of output from some concept of “potential output” or some alternative measure of resource utilization. If we choose a consistent set of variables and systematically use them to describe our policy choices, the public will form more accurate judgments about the likely course of policy — thereby reducing uncertainty and promoting stability.

Dudley said the Fed might “reconsider” additional stimulus measures if the economy got worse.

He described the conditions that would prompt this: “If we get back into a situation where the U.S. economy is faltering and we’re not having the kind of economic growth putting the unemployment rate on a clearly downward trajectory. If inflation is well behaved or if inflation expectations are starting to falter.”

The policy-making Federal Open Market Committee reiterated in its March 13 meeting that the economy will likely warrant low interest rates through at least late 2014. That date will likely change as the outlook for the economy shifts, Bullard said today.

“As we get closer to the actual date, we’re going to have to move it around because the situation will have changed,” he said. “I wouldn’t be reluctant to revise it.”

Bullard said he was opposed to the 2014 conditional pledge, which may lead consumers and businesses to believe the Fed has an unduly negative outlook.

“Neither the Fed nor any other forecaster has a clear idea of what macroeconomic conditions will be like at that time,” he said. “This is an unwarranted pessimistic signal for the FOMC to send.”

Lockhart said the Fed’s pledge to keep rates low through late 2014 “is very much dependent on the outlook” though currently “aligns with the outlook I see.”

“As an accountable central bank in a democratic society, the Federal Reserve has an obligation to clearly articulate what it is trying to achieve with monetary policy,” he said. “The economic thresholds I am proposing put a higher and more predictable standard on the removal of accommodation.”

I believe that the Fed should provide more information about its reaction function. The practice of using systematic rules as guides to monetary policy imposes an important discipline on policymaking and improves communication and transparency. This is because systematic rules make policy more predictable and therefore helps the public and markets make better decisions. Moreover, if policymakers choose to deviate from the guidelines, they are forced to explain why and how they anticipate returning to normal operating practices. Systematic policy also reduces the temptation to engage in discretionary policies.

I believe the Committee is still some way from agreeing on one systematic policy rule or reaction function. Such choices will involve elaborate discussions and agreement on the appropriate class of models and an agreed-upon loss function. One way to move toward more systematic policy would be to describe the variables that are important for our response function.

I believe the Federal Reserve should do a more comprehensive monetary policy report four times a year. Currently, the Chairman testifies before Congress twice a year — in fact, he is doing so today — and that testimony is accompanied by a written report. In addition, the Chairman holds press briefings four times a year to summarize the SEP. I think there is an opportunity to combine these efforts in a more comprehensive report on monetary policy. Most central banks that have adopted an inflation target have also sought to improve communication and transparency through the publication of a regular policy report. In the U.K., for example, the Bank of England issues a quarterly Inflation Report. Other countries produce a Monetary Policy Report that discusses the central bank’s forecasts and the longer-term context of policy.

My predecessor at the helm of the Dallas Fed, Bob McTeer, used to say, “The first rule of forecasting should be ‘don’t do it.’” The second rule, he would add is, “If you give a number, don’t give a date.” But given the assignment to venture a vision as to where the fed funds rate would be in each of the next three years and over “the longer run” to the nearest one-quarter of one percent, the 17 intrepid souls of the FOMC, including yours truly, did so. Only three envisioned that the fed funds rate might rise from current levels by year-end 2012; six saw it doing so by year-end 2013 and 11 by year-end 2014. Over the longer term, the 17 members envisioned a funds rate of between 3¾ and 4½ percent.

Bob McTeer’s admonishment clearly does not resonate with the FOMC. And yet I would caution, again, that at best, the economic forecasts and interest-rate projections of the FOMC are ultimately pure guesses. I have yet to find a single economist on this planet who consistently forecasts the economy accurately, let alone projects with any precision the interest rate on overnight funds one year out or far into the future. If you examine the record of the Blue Chip economists or even of our superb Federal Reserve staff, you will find confirmation of a paucity of reliable economic forecasts.