The Fed has kept its short-term policy rate between zero and a quarter of a percentage point since December 2008, and Kocherlakota told the Greater Rochester Chamber of Commerce that "we should be thinking about" pushing it even lower.
"It's really about demonstrating a commitment to stay with the recovery for as long as it takes to get the economy fully recovered," he said.
…
"We would be better off having more of a collective vision as a committee to what the change in conditions would have to be that would lead us from ending the asset purchase program to raising rates… Unless we communicate as a group about what those conditions are, then we face this instability that two words in a press conference, or two words in a speech or an answer to a Senator can end up moving financial markets participants' vision of what we are trying to do with policy."

Whenever we do make any change, participants are trying to divine what else that might mean. With the taper, I was surprised -- and disappointed even -- that the discussion around tapering was misconstrued as a sign of a more hawkish or tighter FOMC. I was thinking no, no, no -- we’re continuing a process that we tried to communicate. The taper is one step in this, but in no way does moving to the next step imply a change in the view of when we’ll start raising interest rates.

I think last year we learned that the communication hasn’t totally been absorbed by people. We put an emphasis on trying to separate those two things out: The taper is one decision, raising interest rates is one. We got back to a good place.

Now the discussion about when we’re going to raise interest rates and the pace at which we’re going to raise interest rates is stirring that same thing: If the Fed is talking about it, maybe they’re going to do it sooner than we thought. I think the lesson is that confusing the two is something that we have to make sure we explain.

If you’re not specific in the statement then market participants are just grasping for scraps of information everywhere, including the dots, as a way to try to formulate what is the committee really thinking. That this is just yet another example, following the examples we had last spring and summer. If you’re not specific about what your plans are – and specificity to me means numerical specificity, quantitative specificity — then market participants are going to be grasping for every piece of information that they can. That requires a lot of disciplined communication that’s very hard to live up to. A clause in an answer to a senator can be suddenly moving markets just because the statement itself has not been clear about what the committee’s intensions are.

In response to a question about the upward drift in the FOMC’s dot chart:

Well, I -- to my mind, there is only very limited upward drift. You know, the committee -- I think the committee in assessing the economy, if you compared today's assessment with December's, is virtually identical. Almost nothing has changed in the overall committee assessment of the outlook. As I mentioned, unemployment has come down. The labor market more broadly I think has improved a little more than we might have expected. And that slightly more rapid improvement in the unemployment picture might explain -- I can't speak for why people write down what they do -- but a little bit of the upward shift in those dots.
But more generally, I think that one should not look to the dot- plot, so to speak, as the primary way in which the committee wants to or is speaking about policies to the public at large. The FOMC statement is the device that the committee as a policy-making group uses to express its -- its opinions. And we have expressed a number of opinions about the likely path of rates.

The language that we use in this statement is “considerable period”. So, I -- I, you know, this is the kind of term it's hard to define, but, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends -- what the statement is saying is it depends what conditions are like.

We need to see where the labor market is, how close are we to our full employment goal. That will be a complicated assessment, not just based on a single statistic. And how rapidly are we moving toward it? Are we really close and moving fast? Or are we getting closer, but moving very slowly?

And then what this statement emphasizes, and this is the same language we used in December and January, we use the language especially if inflation is running below our 2 percent objective. Inflation matters here, too. And our general principle tries to capture that notion.

If we have a substantial shortfall in inflation, if inflation is persistently running below our 2 percent objective, that is a very good reason to hold the funds rate at its present range for longer.

I believe the economy has already met the criteria of substantial improvement in labor market conditions, and the economic outlook has improved as well. So my preference would be that we conclude the purchases sooner rather than later.

Although the FOMC has indicated that it doesn't anticipate raising rates when the economy crosses that threshold, I do believe that we will have complicated our communications if we are still purchasing assets at that point.

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.

The drop in unemployment “reinforces the need to add some qualitative interpretation to the threshold or to find a different way to communicate,” he said. “It presents some challenges in communication” for the central bank.

A key Federal Reserve Bank of New York staffer said Monday markets may not have been as surprised by the central bank’s decision to press forward with its easy-money policies in September as many now assert.

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The official observed surveys taken ahead of the Federal Open Market Committee showed it isn’t so clear markets and the Fed were on totally different pages.

“What was actually priced into markets, it’s hard to say,” Mr. Potter told attendees at a gathering held by the Money Marketeers of New York University. Mr. Potter said it is true the market’s reaction after the September FOMC showed many were expecting a cutback in bond buying, but it nevertheless remains the case that things are a bit cloudier than the conventional wisdom now seems to hold.

“Market participants had a range of views” about what would happen, but they didn’t have strong conviction, Mr. Potter said. He explained that it may have been overseas investors and traders, who were less connected to the flow of U.S. news, who may have been the only ones truly caught off guard by the Fed’s choice to press forward with its stimulus.

As reported by the Wall Street Journal

The decision to taper is going to depend on the incoming data, and the phrase “in coming months” in the minutes, I felt, was about as precise as you can get at this point.

As reported by Dow Jones News

The spirit of the discussion last time was whether we could improve communications by providing a fuller sense to how policy is going to react to incoming data. [Officials should be] really cautious about tweaking the forward guidance apparatus [because the message is complex and changes may erode the Fed’s credibility]. If you go changing what you are saying about how you are likely to behave from time to time you could erode people’s confidence that you are going to follow through on what you say you are going to do.

As reported by Bloomberg News.

Making monetary policy is sometimes compared to driving a car, with policymakers pressing on the accelerator or the brakes, depending on whether the economy needs to be sped up or slowed down at that moment. That analogy is imperfect, however, for at least two reasons. First, the main effects of monetary policy actions on the economy are not felt immediately but instead play out over quarters or even years. Hence, unlike the driver of a car, monetary policymakers cannot simply respond to what lies immediately in front of them but must try to look well ahead--admittedly, a difficult task. Second, the effects of monetary policy on the economy today depend importantly not only on current policy actions, but also on the public's expectations of how policy will evolve. The automotive analogy clearly breaks down here, for it is as if the current speed of the car depended on what the car itself expects the driver to do in the future.

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.

…

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

The decision to maintain the pace of purchases in September and await more evidence of sustained economic progress came as quite a surprise to the public, generating widespread public debate about the FOMC's communications surrounding its policy intentions.

Not dissuading the public from its expectation of a tapering and then not taking action undermines the credibility of the FOMC and reduces the effectiveness of forward guidance as a policy tool…

In my view, this whole episode also demonstrates how difficult it is to fine-tune our open-ended asset purchases and our forward guidance about them. We cannot continue to play this bond-buying game by ear and risk the Fed's credibility while creating lingering uncertainty about the course of monetary policy.

We need to define simple, clear dimensions to "right-size" the program. This will reduce policy uncertainty and move the economy forward. My preference would be for the FOMC to announce a fixed amount for QE3, just as we did for the two prior rounds of asset purchases…

We are still learning how asset purchases affect the economy, but many believe it is the ultimate size and composition of the assets, rather than the flow of purchases, that influences interest rates and thus the economy. This was the premise of the early rounds of purchases.

Setting the ultimate size of our asset purchase program will lead us away from trying to fine-tune our decision about purchases based on the latest numbers and creating uncertainty from meeting to meeting about the FOMC's next step... By specifying a fixed amount, we would help the public understand that reducing the pace of asset purchases does not signal a change in our policy rate. Indeed, even an end to purchases only stops the efforts to increase accommodation. It is not a tightening of policy. As I said, after our purchases stop, policy will remain highly accommodative. An end to the purchase program does not imply that increases in the policy rate are imminent. We will simply set our policy rate consistent with promoting the FOMC's goals of price stability and maximum employment.

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.