In terms of inflation forecasts, what the committee will do on a regular basis is include in its statement its views of where inflation is likely to be a year from now. For example, currently we already say that, you know, we expect inflation to run at or below the committee's objective in the longer term.

I believe, certainly, that {the indicator threshold approach} is superior. I’m not saying it’s the best possible approach, there may be other things we can do in the future. We’re always looking to find ways to improve our communication but I do think it’s more transparent and will allow the markets to respond quickly and promptly to changes in the outlook by adjusting when they think rate increases will begin, and therefore, it’ll act, to some extent, like an automatic stabilizer. So if the outlook worsens and that leads markets to think that the increase in rates is further out in the future, that will tend to lower longer-term rates and that would tend to be supportive of the economy. So that has an automatic stabilizer type effect. It kind of offsets adverse shocks. So it’s a better form of communication. As I said, we discussed it quite extensively at the last meeting. And so—and frankly, given that it’s a relatively complex change, it seemed like it would be a good idea to do it at a meeting where there was a press conference. So, we decided since we’re ready to go why not make the change earlier and get the benefit earlier.

The Committee may need to recognize that thresholds will likely be treated as triggers for action in financial markets.

Remember that at the beginning of my remarks I characterized my thinking on the meaning of "substantial improvement" as a work in progress. In that spirit, let me share a qualitative framework for defining "substantial improvement."

The starting point certainly should be the headline unemployment rate and the payroll jobs number. The interpretation of movements in these two statistics would be enriched and reinforced by a review of additional data elements.

Here are examples of what I would look for:

First, I would look for lower unemployment rates that are driven by increased flows of job seekers into employment. I would not interpret discouraged workers dropping out of the labor force as a sign of improvement, even if the unemployment rate falls as a consequence.

Conversely, I'd like to see growing public confidence in the labor market as measured by increased movement of people from out-of-the labor-force status into the labor force—that is, growing labor force participation. I would interpret a reduction in the number of marginally attached workers as a sign of improvement, even if the unemployment rate goes temporarily higher.

Third, I'd look for employment gains that are associated with reductions in underemployment. I would interpret a pickup in job growth less positively if it is associated with increases in part-time jobs for people who seek full-time work.

Finally, I'd like to see signs that improvements in all these indicators are gaining momentum and are sustainable. A framework for assessing labor market conditions needs to include forward indicators of labor market health, such as falling claims for unemployment insurance.

It is clear that the larger the Fed’s portfolio becomes, the greater the risk and the potential costs when it comes time to exit. And based on my economic outlook, that time may come well before mid-2015. In my view, to keep the funds rate at zero that long would risk destabilizing inflation expectations and lead to an unwanted increase in inflation. In fact, some are interpreting the FOMC’s statement that we will keep accommodation in place for a considerable time after the recovery strengthens as an indication that the Fed is focused on trying to lower the unemployment rate and is willing to tolerate higher inflation to do so. This is another risk to the hard-won credibility the institution has built up over many years, which, if lost, will undermine economic stability. We know that monetary policy can control inflation, but its ability to manage the unemployment rate is far more dubious. Chasing an elusive goal for unemployment could well risk losing control over inflation. That was the lesson of the Great Inflation during the 1970s.

Finally, I also opposed September’s decision to purchase additional mortgage-backed securities. In general, central banks should refrain from allocating credit toward one sector or industry. Those types of credit-allocation decisions rightfully belong to the fiscal authorities, not the central bank. Engaging in such actions endangers our independence and the effectiveness of monetary policy.

While these risks are very hard to quantify, it is clear that the larger the Fed’s portfolio becomes, the higher the risk and the potential costs when it comes time to exit. And based on my economic outlook, that time may come well before mid-2015.

In terms of our monetary policy regime, the FOMC statement noted that the Committee expects to maintain a highly accommodative stance of monetary policy "for a considerable time after the economic recovery strengthens." This is important because in situations such as the one we find ourselves in today, when monetary policy is somewhat constrained because we cannot lower the federal funds rate below zero, one of the most powerful things a central bank can do is to provide guidance as to how it will behave in the future. In this respect, I am pleased that we have drawn a sharper distinction between what we expect the economy to look like in a few years time and how we expect to set policy based on that outlook.

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said a reduction in the interest rate paid on reserves banks keep with the Fed is one policy tool available should the economy need more stimulus.

“There is some room to reduce that further to incentivize banks to lend,” Kocherlakota said today in response to an audience question after a speech in Minot, North Dakota. “This should be something that we think about” if further easing becomes necessary, even though a cut would have only “minimal effects on the economy,” he said.

I am convinced that scope remains for the FOMC to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions. In taking these decisions, however, we would need to balance two considerations.

On the one hand, our unconventional tools have some limitations and costs. For example, the effects of forward guidance are likely to be weaker the longer the horizon of the guidance, implying that it may be difficult to provide much more stimulus through this channel. As for our balance sheet operations, although we have now acquired some experience with this tool, there is still considerable uncertainty about its likely economic effects. Moreover, some have expressed concern that a substantial further expansion of the balance sheet could interfere with the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. I disagree with this view: The FOMC has tested a variety of tools to ensure that we will be able to raise short-term interest rates when needed while gradually returning the portfolio to a more normal size and composition. But even if unjustified, such concerns could in theory reduce confidence in the Federal Reserve and so lead to an undesired increase in inflation expectations.

On the other hand, risk management considerations arising from today's unusual circumstances strengthen the case for additional accommodation beyond that called for by simple policy rules and optimal control under the modal outlook. In particular, as I have noted, there are a number of significant downside risks to the economic outlook, and hence it may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.

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.

It’s important to recognize that our forward guidance language is a forecast of how monetary policy will turn out, not an unconditional promise. Future monetary policy decisions will depend on future economic data — and the future economic outlook. As new data arrive, the outlook for future economic conditions will change, and the outlook for the future of monetary policy should change as well.

I dissented in January because I did not believe that economic conditions are likely to warrant low interest rates all the way through 2014. (I was not a voting member last year.) My projection is that if we want to keep inflation at 2 percent, we will likely need to raise rates in 2013. Incoming data could change my assessment in either direction.

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.”