A noted hawk on the Fed's largely dovish board, Plosser said he believes interest rates should hit 3 percent by the end of 2015 and 4 percent in 2016.

"It's a little bit puzzling that the market would react the way it did," Plosser said on CNBC's "Squawk Box." "I don't think the Fed changed its position. In fact, it tried to say very explicitly in its statement that we believe forward guidance or the expectations have not changed as far as we're concerned."

Yellen later clarified her comments on interest rates, which she said may rise six months after the Fed ends its bond-buying stimulus programs, Plosser said…

Still, Plosser told CNBC it's more productive to talk about economic conditions rather than timing. He said Yellen's comments were in line with data and surveys that the Federal Open Market Committee used to measure the economy.

"There was a lot of evidence and a lot of surveys that suggest six months wasn't a wildly unexpected timeframe," Plosser said. "But it is better to get away from talking about timeframes. Talking about economic conditions is a much better way to think about it."

Plosser added: "I was surprised the market reacted as much as it did ... I don't count months. It's silly for us to contemplate raising rates until we stop purchases."

In my view, we haven’t changed fundamentally. The statement had to evolve because the unemployment rate came down to 6.5 percent. Sure, you do see in the projections that the committee members forecast a little bit higher average interest rate in 2016, but to me that’s consistent with the fact that unemployment has come down a little bit. As we get toward the end of 2016, sure, we’re maybe normalizing monetary policy out there a little bit more than people thought in December. But that’s not a shift in monetary policy. That’s just a reflection that the economy has gotten a little bit better and interest rates might be just a little higher than people thought before.

In the big picture, the policy hasn’t changed. Any kind of standard way of thinking about monetary policy is, with unemployment lower, then down the road interest rates will normalize a little bit faster. We’re talking again about 2016. There’s no, to my mind, near-term change for monetary policy.

What does a "considerable period" [after ending asset purchases] mean? It’s not specific about a time frame. That was a conscious decision. My view is if the economy evolves the way I expect, I expect us to end the asset purchase program late this year -- when exactly that occurs will depend. I don’t expect us to start raising interest rates until the second half of 2015.

Any interest rates increases we do have in 2015 will be relatively gradual. Similarly for 2016, the central tendency of the group is to have interest rates 2 percent or a little bit above, which again is very low by any standard. In the FOMC statement, we specifically made note of that.
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Eventually we’re going to raise interest rates. Understand that any interest rate increases we do are going to be in the context of a shallow glide path, or a gradual process over what looks like several years before we get back to a normal level.

The view is that we’re going to raise rates relatively gradually, so that at the end of 2016 my own view is that interest rates will be well below 4 percent. Even if 4 percent is the right number -- which, you know, who knows? -- it will take quite a long time before we get to that 4. Of course along the way we’ll be evaluating this and even actually reevaluating whether 4 percent is the right long-run number.

Federal Reserve Bank of Dallas President Richard Fisher said Friday that the U.S. central bank's revamped interest-rate guidance might be "sloppier" than its previous incarnation but should be less vulnerable to any errors officials make in their forecasts.

In a speech at the London School of Economics, Mr. Fisher said the Fed has entered "unexplored territory" but that its new guidance is aimed at smoothing the transition between the Fed's expansionary period of large-scale asset purchases and the eventual return to higher interest rates.

"What we are trying to do now is to articulate the best we can what happens after our massive QE," Mr. Fisher said, referring to quantitative easing, another name for central-bank asset purchases.

"What we have done is we have de-quantified our guidance and are seeking to provide qualitative indicators of how we might proceed," he said.

The official added that "by its very nature qualitative guidance will be a little bit sloppy" and that investors tend to prefer more precision. But he said "you cannot expect specific quantitative guidance without mistakes being made," referring to forecasting errors that may have led investors to misjudge the central bank's intentions.
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He said central banks pursuing forward guidance, which include the European Central Bank and the Bank of England, all are aiming "to ensure we have a sustainable recovery."

Mr. Fisher also sounded a warning note on risks that may be building in the financial system from a prolonged period of low interest rates, which many economists fret may inflate bubbles in asset prices.

"We are seeing in my opinion some exhibitions of excessive risk," he said, pointing to low yields on some riskier types of corporate bonds in particular.

During the Great Recession, GDP fell by 4.3 percent over a six-quarter interval, but other indicators document even greater hardship. Payroll employment fell by 8.7 million jobs in the recession and its immediate aftermath... The scale and scope of the loss in income and wealth experienced by Americans was far greater than anything seen in the previous 20 years. Given that experience, lenders are bound to re-evaluate the riskiness associated with extending credit to a typical household. Indeed, consumers themselves appear to be re-evaluating the riskiness associated with indebtedness, no doubt reflecting a sense that their income and asset returns may be substantially riskier than they had come to believe during the Great Moderation. Under these conditions, it's no surprise that credit is no longer available on the same terms. And it's no surprise that consumers have been paying off debt and building up savings in order to restore some sense of balance to their household finances... Businesses also appear to be quite reticent to hire and invest. A widely followed index of small business optimism fell sharply during the recession and has only partially recovered since then. Interestingly, when small business owners were asked about the single most important problem they face, the most frequent answer in the latest survey was "government regulations and red tape..." Adding to the uncertainty is the continuing cloud over our nation's fiscal policy. The most recent round of budget deliberations has certainly been a welcome relief from the recurrent legislative cliffhangers of the last several years. The lower odds of an imminent budget showdown may ease some business and consumer concerns, and that may aid growth. But overall government spending has been declining lately, and, given continuing fiscal pressures, that category is likely to make little, if any, contribution to GDP growth in coming years.

Federal Reserve Bank of Dallas President Richard Fisher, who will be a voting member of the policy-setting committee next year, said he argued for a $20 billion reduction in the Feds monthly bond purchasing pace instead of the $10 billion announced last week. The market could have digested that, he said in an interview with Fox Business Network today.

The Federal Reserve's decision to slow its monthly bond purchases was justified by an improving labor market but the central bank could still adjust the pace of tapering based on incoming data, a top Fed official said on Monday. "I think the time was right," Richmond Fed President Jeffrey Lacker, a long-time critic of the Fed's monthly bond purchases, said in an interview on CNBC-TV. "Given the data....this decision was kind of a slam dunk." Lacker acknowledged that the Fed could still speed up or slow down the pace of stimulus withdrawal as needed. "You have to consider the door open to us pausing if the data comes in weaker than thought or accelerating if the data comes in stronger," he said, though he added that he would want to see a substantial change in current trends before pausing. "You don't want to over-react to a little swing" in the jobless rate, Lacker said.

With fiscal restraint likely diminishing, with signs that household spending is picking up, we expect economic growth to be strong enough to support further job gains. Further, FOMC participants now see the risks around their forecasts of growth and unemployment as having become more nearly balanced rather than tilted in an unfavorable direction as they were at the inception of the asset purchase program.

In an interview with Reuters, John Williams, president of the San Francisco Federal Reserve Bank, said the central bank needed to do more to convince investors that rates will stay low long after the Fed stops buying bonds. It should not wait to twin that message with a decision on cutting back its bond-buying stimulus, he said.

But once the Fed decides the economy is strong enough for the Fed to reduce its $85 billion in monthly bond purchases, it should announce an end date and a purchase total for the program, Williams said.

For now, he said, the Fed must drive the message of continued support for the economy.

"My view would be that we would not be raising the funds rate even if the unemployment rate was below 6.5 percent as long as inflation continued to be low, for some time," Williams said. "We need to be communicating more about the post-6.5-percent world now, because it could be with us much sooner than we expect, and I don't want market participants to be surprised."…

The goal, he said, is that people understand the Fed is "not in a rush" to raise interest rates. For his part, he said, he does not expect rates to rise until the latter part of 2015.

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Williams first publicly embraced the idea of capping bond buys in early November as a way to give investors clarity on the Fed's next steps, and the idea may be gaining traction. Philadelphia Fed President Charles Plosser, a hawk who opposed the Fed's current round of bond buys from the start, has also floated the idea of capping QE in order to shore up the Fed's credibility.

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

In the short run, it is possible that employment growth will be above 0.8 percent as we continue to recover from the recession. But we should also recognize some impediments to rapid employment growth. When the Affordable Care Act is fully implemented, it is likely to add to the cost of hiring an additional worker for many businesses, and firms are still trying to figure out just how costly that will be. Also, I've been struck by the large number of accounts I've heard recently about firms having difficulty finding workers with the appropriate skills, in many cases constraining production.


To summarize then, I think that in the short run, we are likely to see real GDP growth of 2 percent, or perhaps a bit higher. Over the longer run, we are likely to see growth average a bit below 2 percent.

Financial market movements are often difficult to account for, even after the fact, but three main reasons seem to explain the rise in interest rates over the summer. First, improvements in the economic outlook warranted somewhat higher yields--a natural and healthy development. Second, some of the rise in rates reportedly reflected an unwinding of levered positions--positions that appear to have been premised on an essentially indefinite continuation of asset purchases--together with some knock-on liquidations of other positions in response to investor losses and the rise in volatility. Although it brought with it some tightening of financial conditions, this unwinding and the associated rise in term premiums may have had the benefit of reducing future risks to financial stability and, in particular, of lowering the probability of an even sharper market correction at some later point. Third, market participants may have taken the communication in June as indicating a general lessening of the Committee's commitment to maintain a highly accommodative stance of policy in pursuit of its objectives. In particular, it appeared that the FOMC's forward guidance for the federal funds rate had become less effective after June, with market participants pulling forward the time at which they expected the Committee to start raising rates, in a manner inconsistent with the guidance.

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At its September 2013 meeting, the FOMC applied the framework communicated in June. The Committee's decision at that meeting to maintain the pace of asset purchases was appropriate and fully consistent with the earlier guidance… Although the FOMC's decision came as a surprise to some market participants, it appears to have strengthened the credibility of the Committee's forward rate guidance; in particular, following the decision, longer-term rates fell and expectations of short-term rates derived from financial market prices showed, and continue to show, a pattern more consistent with the guidance.

In coming meetings, in evaluating the outlook for the labor market, we will continue to consider both the cumulative progress since September 2012 and the prospect for continued gains. We have seen meaningful improvement in the labor market since the latest asset purchase program was announced in September 2012… Looking forward, we will of course continue to monitor the incoming data. As reflected in the latest Summary of Economic Projections and the October FOMC statement, the FOMC still expects that labor market conditions will continue to improve and that inflation will move toward the 2 percent objective over the medium term. If these views are supported by incoming information, the FOMC will likely begin to moderate the pace of purchases. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook. As before, the Committee will also continue to take into account its assessment of the likely efficacy and costs of the program.

When, ultimately, asset purchases do slow, it will likely be because the economy has progressed sufficiently for the Committee to rely more heavily on its rate policies, the associated forward guidance, and its substantial continued holdings of securities to maintain progress toward maximum employment and to achieve price stability.18 In particular, the target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the unemployment threshold is crossed and at least until the preponderance of the data supports the beginning of the removal of policy accommodation.

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.

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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

But, I have to admit that I am getting more hopeful. Not only do we have some better data in hand, but also the fiscal drag, which has been holding the economy back, is likely to abate considerably over the next few years at the same time that the fundamental underpinnings of the economy are improving.

To begin to taper, I have two tests that must be passed: (1) evidence that the labor market has shown improvement, and (2) information about the economy’s forward momentum that makes me confident that labor market improvement will continue in the future. So far, I think we have made progress with respect to these metrics, but have not yet achieved success.

With respect to the first metric, {the} decline in the unemployment rate overstates the degree of improvement.

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With respect to the second metric, …—confidence that the economic recovery is strong enough to generate sustained labor market improvement—I don’t think we have yet passed that test. The economy has not picked up forward momentum and a 2 percent growth rate—even if sustained—might not be sufficient to generate further improvement in labor market conditions. Moreover, fiscal uncertainties loom very large right now as Congress considers the issues of funding the government and raising the debt limit ceiling. Assuming no change in my assessment of the efficacy and costs associated with the purchase program, I’d like to see economic news that makes me more confident that we will see continued improvement in the labor market. Then I would feel comfortable that the time had come to cut the pace of asset purchases.

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I do believe that we are making progress towards our objectives of maximum sustainable employment in the context of price stability. The economic fundamentals are improving and I expect that the healing process will continue in the coming months and years. At the same time, it is important to recognize that the financial crisis generated significant headwinds that are only slowly abating. We must push against these headwinds forcefully to best achieve our objectives.