The Fed's mandate is, of course, a dual mandate. We have a mandate for both employment and for price stability. And we have a framework in place that allows us to communicate and to think about the two sides of that mandate.

We talked today -- or yesterday actually -- about nominal GDP as an indicator, as an information variable, as something to add to the list of variables that we think about, and it was a very interesting discussion.

However, we think that within the existing framework that we have, which looks at both sides of the mandate, not just some combination of the two, we can communicate whatever we need to communicate about future monetary policy.

So we are not contemplating at this time any radical change in the framework. We're going to stay within the dual mandate approach that we've been using until this point.

As I noted in my opening remarks, no decisions have been made. So I want to be very clear that no final outcome here in this discussion.

But clearly there's a range of things that we can do. We can provide more information about our objectives, for example. We could provide information about where we want inflation to be in the long term, for example.  We could also provide information about the future path of interest rates, which we've done to some extent via our mid-2013 language in the statement.

An alternative approach, which Charlie Evans (ph) and others have suggested, is to tie that to economic conditions and to provide more information about under what circumstances we would raise rates. That is certainly something that we have discussed and I think is an interesting alternative.

There's a lot of interest in using the survey of economic projections in constructive ways as we have up till now to provide information to the public about our plans.  And in particular, using the SEP as a way of giving information about our future policy decisions is something that's on the table. There's no decision made about that, but that's one direction that we might find productive.

“I don’t think the Fed has run out of bullets,” though there are “costs” associated with its options, Dudley said. The Fed could extend its commitment to keep interest rates low or could embark on another round of so-called quantitative easing, he said.

At our August meeting, the Committee decided to provide more-specific information about the likely time horizon by substituting the phrase "at least through mid-2013" for the phrase "for an extended period." This clarification appears to have reduced market uncertainty about the Committee's current policy expectations.

The Committee's guidance refers to a specific calendar date, which could be periodically revised by the Committee if appropriate. However, it is explicitly framed as contingent on economic conditions, including "low rates of resource utilization and a subdued outlook for inflation over the medium run." Importantly, it is not stated as an unconditional commitment to a specific course for the federal funds rate. Market participants are naturally interested in gaining greater insight into how shifts in the economic outlook would affect the likely timing and pace of policy firming. As noted in the minutes of the August and September FOMC meetings, the Committee has discussed possible approaches to enhance its forward guidance along these lines--that is, to provide greater insight concerning its "reaction function."

One potentially promising way to clarify the dependence of policy on economic conditions would be for the FOMC to frame the forward guidance in terms of specific numerical thresholds for unemployment and inflation. Such an approach was discussed by my colleague Charles Evans, president of the Federal Reserve Bank of Chicago, in a recent speech.

The approach of numerically specifying the values of unemployment and inflation that could prompt policy tightening is not without potential pitfalls, however. For example, such thresholds could potentially be misunderstood as conveying the Committee's longer-run objectives rather than the conditions surrounding the likely onset of policy firming. Thus, in addition to giving careful consideration to this particular approach, it seems sensible to explore other potential enhancements to FOMC communications--a topic to which I will return shortly.

"I like [Evans'] framing of the problem very much," Kocherlakota told reporters after a speech to the Harvard Club of Minnesota, although he stopped short of embracing Evans' call for more easing.

Once the central bank's policy-setting Federal Open Market Committee makes its goals clear, Kocherlakota said, it could safely allow inflation to temporarily rise above its long-term 2-percent target to help bring down unemployment.

You should make policy according to the state of the economy, not according to the calendar.  It’s very awkward for the committee to be trying to move that date around.

I believe that we can substantially ease the public’s concern that monetary policy will become restrictive in the near to medium term and, hence, reduce the restraint in expanding economic activity. This can be done by clearly spelling out in our policy statements the conditionality of our dual mandate responsibilities. What should such a statement look like? I think we should consider committing to keep short-term rates at zero until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent. Such policies should enable us to make progress toward our mandated goals. But if this progress is too slow, then we should move forward with increased purchases of longer-term securities. We might even consider a regime in which we reevaluate our progress toward our policy goals and the rate of purchase of such assets at every FOMC meeting.

Simply promising to keep the policy rate near-zero for longer and longer periods of time may encourage a Japanese-style outcome in which the policy rate simply remains near zero and markets come to expect a mild rate of deflation.  This possibility has clear support in the theoretical literature but is too often ignored in policy discussions.

Now, with further slowing in the economy, some call for further monetary accommodation. Let me stress that no decision has been made on this difficult question. However, should such a decision be made, I think it is time for the Committee to discard one-time policy changes with fixed end dates. The Committee in the past never contemplated announcing several hundred basis point moves to be completed at a date certain. Yet that is how the Committee behaves today.

Asked if he would push at the Sept. 20-21 policy meeting for clarity on how long the Fed will leave interest rates unchanged, he said that “would be a welcome addition to our current conditional forward guidance.”

“At the moment we added mid-2013 to the statement and there’s some conditionality associated with that,” he said. “I would prefer to be extraordinarily clear in the conditioning to that. That would be truly clarifying.”

“I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future -- and this ability has certainly proved very useful in the past three years,” Kocherlakota said today, according to prepared remarks for a speech in Bismarck, North Dakota. “I plan to abide by the August 2011 commitment in thinking about my own future decisions. Of course, the case for any additional easing would have to be made on its own merits.”

Kocherlakota changed his mind by October.

QUESTION: Do you and your colleagues have a statistical trigger of any sorts, say, a particular level of unemployment or inflation at which you would begin the exit process? If you do, wouldn’t it make sense to announce it? If not, why not?

CHAIRMAN BERNANKE. Well, it’s pretty impossible to create a statistical trigger because we have currently 17 independent members of the FOMC. Each has his or her own view on the outlook, on the efficacy of monetary policy, and on the risks to inflation and unemployment. So we don’t have any such formula.

With the potential for inflation expectations to be more volatile in the face of energy and commodity price shocks, I think it could be an opportune time for the FOMC to be more specific and publicly announce an explicit numerical inflation objective. Establishing an explicit inflation objective would clearly communicate our policy intentions and affirm our resolve to achieve price stability. It would also help the public to better evaluate the effectiveness of our actions as events unfold.

A crucial feature of the FOMC's policy communications is that the Committee's forward guidance has been framed not as an unconditional commitment to a specific federal funds rate path, but rather as an expectation that is explicitly contingent on economic conditions. Since November 2009, the Committee has specifically indicated that the relevant economic conditions include "low rates of resource utilization, subdued inflation trends, and stable inflation expectations." An important consequence of such conditionality, serving to enhance the effectiveness of the guidance, is that incoming information about economic and financial developments has led forecasters and investors to revise their outlook for the path of the funds rate even in the absence of a change in the forward guidance language.

...

Down the road, once the recovery is well established and the appropriate time for beginning to firm the stance of policy appears to be drawing near, the FOMC will naturally need to adjust its "extended period" guidance and develop an alternative communications strategy to shape market expectations about the policy outlook. However, if there were an unexpected faltering of the recovery or a substantial widening of downside risks to economic activity and inflation, the forward guidance now in place might well be sufficient to facilitate an outward shift in the expected path of the funds rate, just as we saw over the course of last year.

Indeed, one could readily argue that buying $600 billion of Treasuries is a much more convincing form of communication of the FOMC’s plans than any words could ever be.