In my view, rather than try to maintain discretion, policymakers would achieve better economic outcomes and greater clarity by taking a systematic approach to policy. But how do we get there from here? I think we could vastly improve policy going forward by doing three things, which would begin to normalize monetary policy.

• The first step is to wind down our asset purchases by the end of the year in a gradual and predictable manner. As I said, I see little if any benefit from these purchases, and growing costs.
• The second step is for the FOMC to commit to its forward guidance on the fed funds rate path, that is, to begin treating the 6.5 percent unemployment rate and the 2.5 percent inflation rate in the guidance as triggers rather than thresholds.
• The third part of the strategy is to provide information on how our interest rate policy will evolve after the trigger is reached. A commitment to a robust policy rule, perhaps consistent with the way policy was conducted prior to the crisis, would provide needed clarity on how the Committee intends to vary its policy in response to changes in economic conditions.

I’m a very big believer, the Fed Reserve is a very big believer in transparency and communication. I think transparency in central banking is kind of like truth-telling in everyday life.

You got to be consistent about it. You can’t be opportunistic about it.

In response to a question about whether the Fed’s communications innovations will be permanent or not.

Well, I think most of the things that we’ve done will likely be permanent, not — of course, a future committee might decide to make changes to our projections or changes to the way we structure our minutes, or other things that certainly could happen. I think that, you know, the definition of price stability and the longer-run policy strategy, I’m hopeful that will be a long-lasting innovation.

The communications that are specifically related to the zero lower bound are particularly the forward guidance, where we’ve tried to provide not targets, not objectives, but rather guideposts to help the markets understand and the public understand, you know, when we expect policy to begin to change.

It may be that when we leave the zero lower bound and when the economy is in a more normal configuration, that that kind of guidance won’t be necessary anymore, because as was the case prior to the crisis, the markets can just look at the behavior of the Fed and essentially extrapolate that behavior to understand what the Fed is likely to do as the economy evolves.

That being said, there may be circumstances where this kind of guidance is helpful, and I just note that we’re seeing — the Fed Reserve, by the way, was not the first to use this kind of guidance. I just want to be clear that, you know, the Bank of Japan, the Bank of Canada have experimented with these types of ideas as well. And I think it’s becoming an international practice that — to various degrees in various places, but I suspect that we’ll see its use in some context at least going forward. But I don’t think it’s necessarily a permanent part of Fed Reserve policy, precisely because we will be moving away from the zero lower bound. And, I hope, we’ll — you know, in a reasonable period of time, we’ll be in a more normal monetary environment.

In response to a question about what he expects his legacy to be perceived to be:

Well, of course, that’s going to be for others to determine. I guess what I would hope to be able to say is several things. First, I came into the Federal Reserve as a governor now some 11 years ago; quite a long time — with a lot of interest in communication and transparency. And I think, you know, in the last 11 years or eight years, however you want to count, the Federal Reserve has made some significant strides in that area, including, for example, as I mentioned in the press conference, the stating of a numerical objective for medium-term inflation and other communications innovations as well.

So I think that’s something that I think is quite — has changed over the last decade. For better or worse, of course, I was at the Fed during the crisis and the aftermath. We have — you know, the future, again, will judge the response to that. But what is certainly true is that the Federal Reserve, as an institution, has changed very sharply in terms of its structure and the resources being devoted to financial stability questions.

And I would say that this relates both to the actions we took at the height of the crisis, which I viewed as bringing Bagehot’s wisdom, the lender-of-last-resort wisdom, back into the modern context, but also the work we’re doing now to try to reduce the risk that another financial crisis will hit someday. That includes our monitoring, our oversight of systemically important firms, our stress tests, which I think is an important development in financial regulation, and more generally our macroprudential approach to financial stability, which, again, means that we look not only at individual firms, as important as that is, but we also try to identify risks and vulnerabilities to the financial system more broadly.

In monetary policy, you know, we’ve confronted the zero lower bound. Again, people have to judge whether we confronted it successfully, but we’ve used new policies to do that. And I think we have in fact changed, to some extent, our approach to one that is more tied to the forecast and tries to lay out in more detail how monetary policy will react over time to changing economic conditions. So there are some changes in monetary policy.

But finally, I think the Federal Reserve is a remarkable institution. It has a superb staff, a great deal of expertise. And I hope that during the time that I’ve been there that we have succeeded in preserving those strengths and adding to those strengths, increasing the amount of expertise we have in critical areas like some of the financial stability areas, increasing interdisciplinary cooperation and work and just making the institution stronger as an institution going forward, because I think one of the lessons — I mean, we had a very fascinating day today talking about a hundred years of the Federal Reserve.

It’s a central institution in the United States. It has a very, very important role in the economy and in the lives of ordinary Americans. And it’s critical that it be a strong, well-managed, well- staffed institution. And these internal management issues, which are pretty invisible I think to outsiders, are very important because they’re the factors that determine how strong an institution this will be over the next hundred years.

The framework for implementing monetary policy has evolved further in recent years, reflecting both advances in economic thinking and a changing policy environment. Notably, following the ideas of Lars Svensson and others, the FOMC has moved toward a framework that ties policy settings more directly to the economic outlook, a so-called forecast-based approach. In particular, the FOMC has released more detailed statements following its meetings that have related the outlook for policy to prospective economic developments and has introduced regular summaries of the individual economic projections of FOMC participants (including for the target federal funds rate). The provision of additional information about policy plans has helped Fed policymakers deal with the constraint posed by the effective lower bound on short-term interest rates; in particular, by offering guidance about how policy will respond to economic developments, the Committee has been able to increase policy accommodation, even when the short-term interest rate is near zero and cannot be meaningfully reduced further.The Committee has also sought to influence interest rates further out on the yield curve, notably through its securities purchases. Other central banks in advanced economies, also confronted with the effective lower bound on short-term interest rates, have taken similar measures.

Bernanke had emerged from the June 19 meeting to say the central bank expects to reduce the pace of purchases later this year and to halt the program altogether midway through next year, when unemployment is around 7 percent, as long as the economy improves as expected.

He also sketched out the Fed's expectations for keeping rates low in the years ahead and for the even longer-term plan for shrinking the central bank's $3.4 trillion balance sheet.

"Well, that's three different parts of forward guidance," said Peter Fisher, senior director of the BlackRock Investment Institute. "I've been in this business a long time, and bond market guys aren't that clever. We can't price all that in."

As reported by Reuters.

I did, however, think it wise of Chairman Bernanke to clarify the Committee’s expectations regarding how the pace of asset purchases is likely to evolve. Bond and stock markets fell sharply in response, but that should not be too surprising. The Chairman’s statement forced financial market participants to re-evaluate the likely total amount of securities the Fed would buy under this open-ended purchase plan — in other words, how much liquor would ultimately be poured into the punch bowl. Market participants also had to reconsider their estimate of when the Federal Reserve would begin to remove the punch bowl by raising interest rates. These reassessments appear to have warranted price changes across an array of financial assets. As market participants gain additional insight from the words of Federal Reserve officials or by policy actions in coming quarters, further asset price volatility seems likely.

However, a key point is that as we approach an FOMC meeting where an adjustment decision looms, it is appropriate to give relatively heavy weight to the accumulated stock of progress toward our labor market objective and to not be excessively sensitive to the sort of near-term momentum captured by, for example, the last payroll number that comes in just before the meeting.

In part, this principle just reflects sound statistical inference--one doesn't want to put too much weight on one or two noisy observations. But there is more to it than that. Not only do FOMC actions shape market expectations, but the converse is true as well: Market expectations influence FOMC actions. It is difficult for the Committee to take an action at any meeting that is wholly unanticipated because we don't want to create undue market volatility. However, when there is a two-way feedback between financial conditions and FOMC actions, an initial perception that noisy recent data play a central role in the policy process can become somewhat self-fulfilling and can itself be the cause of extraneous volatility in asset prices.

Thus both in an effort to make reliable judgments about the state of the economy, as well as to reduce the possibility of an undesirable feedback loop, the best approach is for the Committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting--as salient as these releases may appear to be to market participants. I should emphasize that this would not mean abandoning the premise that the program as a whole should be both data-dependent and forward looking. Even if a data release from early September does not exert a strong influence on the decision to make an adjustment at the September meeting, that release will remain relevant for future decisions. If the news is bad, and it is confirmed by further bad news in October and November, this would suggest that the 7 percent unemployment goal is likely to be further away, and the remainder of the program would be extended accordingly.

In my view, the Committee could better achieve its goals by augmenting its communications to provide the missing clarity. For example, the Committee has not described how it will set its fed funds rate target when the unemployment rate has fallen below 6.5 percent but remains above 5.5 percent—a period of time that I currently expect to last about two years. In contrast, the policy strategy that I described above says specifically that the FOMC will keep the fed funds rate extraordinarily low over that time frame (as long as the inflation conditions are satisfied).

Going forward, the economic outcomes that the committee sees as most likely involve continuing gains in labor markets supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time.

If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year and that the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.

In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the committee announced this program.

Later, in response to a question about whether this was a formal committee decision:

Well, again, we don't think of this as a change in policy. What I was deputized to do, if you will, was to try to make somewhat clearer the implications of our existing policy and to try to explain better how the policy would evolve in various economic scenarios. And that's a little bit difficult to put into, you know, a very terse FOMC statement.

Now, that being said, going forward, I think that, you know, some of this -- some of these elements -- to the extent that we can make them useful will begin to appear in the FOMC statement. It's entirely possible. But it seemed like the right tactic in this case to -- to explain these fairly subtle contingencies in a context where I could answer questions and -- and respond to any misunderstandings that -- that might occur.

However, our policy approach was far from perfect. Comparing actual growth to the growth projections by FOMC participants in the Summary of Economic Projections shows that we were consistently too optimistic about growth over the 2009-2012 period. As a result, with the benefit of hindsight, we did not provide enough stimulus...

Also, we could have done better in communicating our intentions and goals. We put too much emphasis, too early, on the exit. At an earlier stage, we should have put greater emphasis on our commitment to use all our tools to the fullest extent possible for as long as needed to achieve our dual mandate objectives.

Our policies also had a “start-stop” aspect to them that may have undercut their effectiveness. For example, until September 2012, our large-scale asset programs generally specified the total size of the program, with a purchase rate and an expected ending date. This created a void when the programs ended and made our policy response sporadic and hard to forecast. This limited the scope for market prices to adjust in anticipation of our future actions in ways that would help stabilize the economy.

Another shortcoming was in our use of forward guidance with respect to the path of short-term interest rates. Although calendar-based guidance worked reasonably well in influencing expectations about the future path of short-term rates and thus the shape of the yield curve, it was clumsy in a number of respects. For example, if we moved the forward date guidance out in time, did this reflect a change in our reaction function, the amount of desired policy stimulus or greater pessimism about the outlook?

Of course, as we have learned, we have acted to rectify these shortcomings. For example, our asset purchases are now outcome based, tied to the goal of substantial improvement in the labor market outlook, and our forward guidance on short-term rates is tied to unemployment and inflation thresholds rather than to a calendar date.

I should be clear about a couple of aspects of the thresholds. First, the unemployment rate threshold is not a trigger for FOMC action. Thus, the FOMC may choose not to raise interest rates when the unemployment rate falls below 6.5 percent.

By lowering private-sector expectations of the future path of short-term rates, this guidance can reduce longer-term interest rates and also raise asset prices, in turn, stimulating aggregate demand. Absent such forward guidance, the public might expect the federal funds rate to follow a path suggested by past FOMC behavior in "normal times"--for example, the behavior captured by John Taylor's famous Taylor rule. I am persuaded, however, by the arguments laid out by our panelist Michael Woodford and others suggesting that the policy rate should, under present conditions, be held "lower for longer" than conventional policy rules imply.

One could argue that consistently missing our inflation target alone would justify a highly accommodative policy. However, coupled with persistently high unemployment, the justification for continuing highly accommodative policy by large-scale asset purchases is clear. This is a time when the dual mandate is important and, I would add, particularly useful for communicating policy to the general public.

Let me offer a comparison that may highlight that difference. Suppose, instead of monetary policy, we were talking about an example of transportation policy--widening a road to ease traffic congestion. Whether this road project is announced at a televised press conference or in a low-key press release--or even if there is no announcement--the project is more or less the same. The benefit to drivers will come after the road is widened and won't be affected by whether drivers knew about the project years in advance.

At the heart of everything I'll be explaining today is the fact that monetary policy is different. The effects of monetary policy depend critically on the public getting the message about what policy will do months or years in the future.