There are encouraging developments in the economy, to be sure, but the evidence of sustainable momentum that will deliver “substantial improvement in the outlook for the labor market” is not yet conclusive. I favor a “wait and watch” mode for the time being. Several more months of positive data—especially in a range of employment data—would give me confidence that the economy has real traction and is unlikely to backslide.
…

The key word in the phrase “substantial improvement in the outlook for the labor market” is outlook. For my part, a critical consideration in judging how much longer asset purchases should continue will be confidence in the positive outlook. Confidence that is solidly grounded in improving economic data, accumulated over a sufficient span of time, will help me conclude that the work of the large-scale asset purchase program, as a temporary supplement to conventional interest-rate policy, is complete.

The decision to curtail asset purchases ought to be forward-looking, and in my judgment, that point could come later this year or early next year without harm to the momentum of the economy.

Business leaders in my District report being pleasantly surprised by orders and activity levels so far this year.

…

The economy is still far from full employment of its resources, and monetary policy still needs to remain accommodative. Undoubtedly, more unforeseen developments, and risks, lie ahead. However, I would like to conclude with an emphasis on the positive. The economy appears to be on a steady, albeit moderate, growth path, and the potential risks associated with our large-scale asset purchases appear manageable at the moment. I would regard a slowing in the pace of asset purchases to be a welcome direction for monetary policy if it resulted from a significant improvement in the outlook for labor market conditions. That outcome could emerge before long, but it still remains to be seen.

The economy is still far from full employment of its resources, and monetary policy still needs to remain accommodative. Undoubtedly, more unforeseen developments, and risks, lie ahead. However, I would like to conclude with an emphasis on the positive. The economy appears to be on a steady, albeit moderate, growth path, and the potential risks associated with our large-scale asset purchases appear manageable at the moment. I would regard a slowing in the pace of asset purchases to be a welcome direction for monetary policy if it resulted from a significant improvement in the outlook for labor market conditions. That outcome could emerge before long, but it still remains to be seen.

My own forecast, conditional on the FOMC’s current monetary policy stance, is that inflation will run below the Fed’s target of 2 percent over the next two years and the unemployment rate will remain elevated. This forecast suggests that, if anything, monetary policy is currently too tight, not too easy.

“My own viewpoint is that we need to continue with those asset purchases at the $85 billion pace until we see labor-market improvement. That’s likely to be at a minimum six months I would say, perhaps as long as a year,” Mr. Evans said in an interview with BNN, a Canadian business television network. He defined labor market improvement as payroll employment growth of 200,000 a month for about six months, above-trend growth, and a drop in the jobless rate.

I should stress that our recently announced purchase program is intended to be flexible and adjust to changing circumstances. Unlike our past asset purchase programs, this one doesn’t have a preset expiration date. Instead, it is explicitly linked to what happens with the economy. In particular, we will continue buying mortgage-backed securities until the job market looks substantially healthier. We said we might even expand our purchases to include other assets. But, if we find that our policies aren’t doing what we want or are causing significant economic problems, we will adjust or end them as appropriate.

The current rate of 8.1 percent is too high and showing that the economy has yet to achieve sustainable growth, he said.

"That tells me that more accommodation would be appropriate, especially if it's effective," Evans said during a "Squawk Box" interview. "By all the analyses I've seen, it will be effective and the inflation risks are not very large at the moment."
...

"There's scope for doing more. I would have been doing more for a longer period of time," Evans said. "The committee made the determination that we're a lot closer to something like unacceptable growth — stall speed — and it's time to do more."

Now, I am an optimist. I think we can do better than this gloomy outlook.

There are many who believe otherwise. In their view, our current low output and high unemployment are the hallmarks of an economy that has lost its competitiveness — an economy that experienced permanent disruptions in its infrastructure, the skills base of its work force and its technological capability.

I see little evidence to support such a pessimistic view of the world. And I refuse to be so nihilistic in the absence of strong evidence of permanent disruptions. It is very hard to believe that millions of people who were working productively just a few years ago have suddenly become unemployable. And while many of the pessimists have been predicting higher inflation for several years, it hasn’t materialized.

“The FOMC has in fact essentially behaved as if it was price level targeting. In this sense, policy since 2008 looks close to optimal,” he said, calling this “a singular achievement of recent monetary policy.”

My main message today is that the FOMC can provide additional monetary stimulus by making this sentence more precise in the form of what I’m going to call a liftoff plan: a description of the economic conditions that would lead the Committee to contemplate the initial increase in the fed funds rate above its currently extraordinarily low level.

I will suggest the following specific contingency plan for liftoff:

As long as the FOMC satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent.

The fed funds rate is a short-term interbank lending rate that is the FOMC’s usual vehicle for influencing credit conditions. I’ll be much more precise later about the meaning of the phrase “satisfies its price stability mandate.” Briefly, though, I mean that longer-term inflation expectations are stable and that the Committee’s medium-term outlook for the annual inflation rate is within a quarter of a percentage point of its target of 2 percent. The substance of this liftoff plan is that, as long as longer-term inflation expectations remain stable, the Committee will not raise the fed funds rate unless the medium-term outlook for the inflation rate exceeds a threshold value of 2 1/4 percent or the unemployment rate falls below a threshold value of 5.5 percent. Note that neither of these thresholds should be viewed as triggers—that is, once the relevant cutoffs are crossed, the Committee retains the option of either keeping the fed funds rate extraordinarily low or raising the fed funds rate.

This is a remarkable change of views.  See his comments from earlier this year.

Growth in 2013 will pick up from this year’s pace, while the risks associated with the central bank’s new asset-purchase program will be "manageable," Lockhart told reporters after the speech. The district bank chief said he would like to examine the state of the economy before deciding what policy would be appropriate once Operation Twist ends.

As reported by Bloomberg News

On the market response to the Fed's September 13, 2012 asset-purchase announcement:  [S]tock prices are up substantially, mortgage rates are lower, and exchange rates are lower. On the latter I would point out that our efforts to lower long rates are focused on stimulating domestic demand, but at the same time lower long-term rates affect demand for U.S. assets, resulting in a modest change in the exchange rate – and this is likely to provide some support for export-oriented industries.

[I]t is clear the Fed could be “missing on both sides of its mandate” during the entire time it takes the economy to return to normal, even when the monetary policy is sound. In fact, missing on both sides of the mandate is exactly what one would expect under an appropriate monetary policy. Furthermore, the literature suggests that the adjustment times are quite long, possibly many years.

As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

Participants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation.

[T]he possibility that the situation in Europe will worsen further remains a significant risk to the outlook.

[F]iscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.

The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.

Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.