Based on our experience with Operation Twist in the 1960s and with last year’s QE2, the reduction in long-term rates from our actions in September is likely to be less than 20 basis points for the 10-year Treasury yield, which is currently only 2 percent. The pass-through to the rates at which consumers and businesses actually borrow is likely to be considerably less. Thus, I am skeptical that this will do much to spur businesses to hire or consumers to spend, given the ongoing adjustments occurring in the economy and the uncertainties posed by the fiscal challenges both here and abroad.

The estimated effects [of LSAPs on asset prices] typically lie in the neighborhood of 15 to 20 basis points. Generally, the estimates are reasonably precise. Although some might argue that 15 to 20 basis points is small, keep in mind that the typical response of the 10-year Treasury yield to a 75 basis point cut in the federal funds rate is also about 15 to 20 basis points. I’ve never heard anyone argue that a 75 basis point cut in the funds rate is small potatoes!

Overall, Bullard said that QE2 was classic monetary policy easing. “This experience shows that monetary policy can be eased aggressively even when the policy rate is near zero,” he said.

“The financial market effects of QE2 looked the same as if the FOMC had reduced the policy rate substantially,” Bullard said. “In particular, real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose. These are the ‘classic’ financial market effects one might observe when the Fed eases monetary policy in ordinary times.”

Under my baseline forecast, it would be desirable for the FOMC to raise the fed funds target interest rate by a modest amount toward the end of 2011. Of course, the FOMC could also reduce accommodation by shrinking the Fed’s holdings of long-term government securities... I’m open to these approaches to reducing accommodation. However, based on what I know now, I would prefer to reduce accommodation primarily by raising the fed funds target interest rate.

I have been describing how monetary policy should react to one particular scenario, my baseline forecast. As I noted, my baseline forecast about inflation was wrong last year, and could well be again this year... If core PCE inflation were to fall over the course of 2011 relative to 2010, then it would be desirable for the FOMC to ease further in response to that decline. I imagine that easing would take place through the purchase of more long-term government securities.

“There’s a very high bar [for another round of assets purchases] in my opinion” for a new program, Lockhart said.

“A high bar doesn’t mean totally impossible,” he said. “The way the economy is evolving simply suggests to me that further stimulus of any large magnitude, along the lines of what you would imagine a QE3 program would be like, is simply not going to be necessary.”

I do think that the Fed needs to shrink its large balance sheet. But I see that as a longer-term mission that can take place over the next five or six years or so. I believe that this mission should be guided by two key principles. First, the Fed should commit itself to a viable path of shrinkage of its asset holdings. Second, that path should be sufficiently gradual that it will interact little with the effectiveness of monetary policy. Along these same lines, the FOMC should offer as much certainty as possible about the rate of shrinkage.

At some point, presumably early in our exit process, we will -- I suspect based on conversations we've been having around the FOMC table -- it's very likely that an early step would be to stop reinvesting all or a part of the securities which coming -- which are maturing. But take note that that step, although a relatively modest step, does constitute a policy tightening, because it would be lowering the size of our balance sheet and therefore would be expected to essentially tighten financial conditions.

Shrinking the Fed’s $2.65 trillion balance sheet should be done actively rather than by “runoff” through maturing mortgage-backed securities, Bullard said. “That is a passive policy,” he said. “That doesn’t sound like optimal policy to me.”

Once the Fed decides to pare its balance sheet, it would need to sell securities at a “gradual and predictable” pace to “mitigate the uncertainty” from selling longer-term assets. “I would expect such sales when they came to put some pressure on financial markets,” she said.

“I would not expect to see a significant financial-market reaction to the conclusion” of the $600 billion in purchases, Yellen said.

It’s quite likely that $600 billion could be about the right number.  I thought going into the asset-purchase program that we might need to do more than $600 billion eventually, but $600 billion was a good start.

"My view is QE2 was unnecessary,” Hoenig said of the plan to purchase $600 billion in Treasuries in a second round of quantitative easing, during a Bloomberg Television interview in London. “My concern would be if there were any further easing into a recovery is that you do accelerate imbalances that then cost you dearly later."

[The Fed] “opened the floodgates” and “it worked,” the regional bank chief, who votes on monetary policy this year, said during a speech today in Dallas. “We re- liquefied the economy. In my opinion, we might have done too much."

I don’t think tinkering with the timing [of the end of the current LSAP campaign] is nearly as important as the amount.