Much of my thinking over the past 10 years has been devoted to this subject. What is the right policy? That is, how should individual policy actions be fit into a general policy and not be, or appear to be, drawn at random? I have given a number of speeches on this theme. We clearly have made progress in thinking about policy actions in this general way, although there is a long way to go to make the policy reaction function more precise both to guide policy actions themselves and to make those actions more predictable to the markets.

When I came to the St. Louis Fed, I was well prepared for my FOMC responsibilities in most respects. I knew a lot about monetary economics and monetary history. What I did not know was the art of communicating with the press and general public. The professional literature in economics was full of insights into the importance of private-sector expectations about monetary policy but essentially silent on how those expectations were formed, except for the assumption that expectations would not be systematically wrong and would converge to being correct eventually. Once I started fielding questions from the press after my speeches and talking informally before a wide range of audiences, I was part of the process of trying to establish correct expectations.

My general approach has been to speak primarily about the policy process rather than the specific situation facing the FOMC at its next meeting. I try to think of myself as speaking to portfolio managers who have a medium-term horizon rather than to traders who have a horizon measured in hours or a few days. I do not disparage traders—they perform an important function. Obviously, I have had internal information that would be of interest to traders but it would be entirely inappropriate—indeed illegal—to disclose confidential FOMC information.

Traders, portfolio managers and many others always want to know my forecast of what will happen at the upcoming FOMC meeting. My standard answer is that I do not forecast monetary policy decisions—my job is to participate in making those decisions. I confess that, initially, this response was something of a dodge, because I usually had a pretty good idea weeks in advance of what my own position at a meeting would be. However, over the years I have become impressed by how often my own position would change even in the days just before a meeting as a consequence of the arrival of new information, including staff analysis and sound arguments by my FOMC colleagues

Lacker said he hasn't noticed a change in the way dissents are viewed under Bernanke, compared to previous Fed chief Alan Greenspan. "I haven't sensed any shift in that regard," Lacker said.

Because the Fed faces significant inflation risks as well as economic weakness, FOMC members may have differences of opinion about the best policy response. Lacker said the Fed's discussions tackle those considerations responsibly. "A lot of people have remarked he [Bernanke] has a very collegial style. I think the committee's quite cohesive in its functioning," Lacker said.

From press Q&A, as reported by Market News International

For most of our history, the Federal Reserve did not announce any policy moves, choosing instead to let the world guess at our policies by carefully reading the financial market indicators. But gone are the days when central banks find it advantageous to operate in secret.

My job is not to second guess the markets or even to think about letting the markets drive policy decisions. From audience Q&A session as reported by Market News International. 

At this juncture, the times present even greater uncertainty than usual. The negatives in our economy may be gaining momentum. I think these circumstances call for policymakers to be prepared to respond pragmatically to whatever developments arise. 

The Federal Reserve Act gives us broad authority to act in response to these types of conditions. We will continue to examine ways to adapt our instruments as market conditions evolve.  We will do so in close cooperation with other central banks, as indeed we have since August.  And we will do so in the tradition of pragmatism and flexibility that has been one of the defining features of the central bank of the United States.

As the mortgage industry has diversified, increasing coordination among regulators has been helpful. In particular, our need to cooperate with state bank regulators has increased in importance, and we have responded to that need.

A second issue is the possible imposition of civil money penalties when the enforcement agencies find that there is a pattern or practice of violations. ... We would recommend that the amount of such civil money penalties, if imposed, be given a ceiling as well as a floor because of the market uncertainty that can be introduced by open-ended liability. We would also suggest that some discretion in the actual amount of the penalty, within such a range, be given to the enforcing agencies. This sort of flexibility in enforcement would help the agencies adjust the punishment to fit the infraction.

Finally, our most powerful tool for addressing a liquidity crisis is monetary policy. In setting the stance of monetary policy, the Fed has a dual mandate: to help foster maximum employment and price stability. Monetary policy is concerned with mitigating financial market stress to the extent that the stress impedes fulfillment of this dual mandate. Broadly speaking, I see our response to a financial shock as similar to our approach for responding to other shocks to the economy: We gauge the most likely effects of the shock on the future paths for economic activity and inflation; we discuss less likely but more costly alternative outcomes that we may want to insure against; and, based on this analysis, we adjust policy to best fulfill our dual mandate.

In my view, the Federal Reserve has two related, but distinct, responsibilities. The first and primary responsibility is monetary policy, which involves ensuring price stability, which contributes to sustainable economic growth. The primary tool of monetary policy is the federal funds rate, and the FOMC meets about every six weeks to determine an appropriate target for the funds rate consistent with these longer-term goals. The Fed’s second responsibility involves promoting financial stability by ensuring that the payment system and financial system function effectively.

When the Fed cuts its target for the federal funds rate, market participants know that the FOMCs decision at its next meeting will be either to leave the rate unchanged or to cut further. Barring unusual circumstances, the FOMC would not consider a rate increase just after cutting its fed funds rate target. This approach to policy is appropriate when market conditions are fragile because market participants must be confident that they can take positions without the risk that the Fed might raise rates, which would reduce asset values, in the near term.

 But my reading of the evidence is that the episode was less about liquidity than it was simply about a dramatic change in the valuation of a class of credit exposures. Even with the Fed's reduction in the spread between its federal funds target and its primary credit discount window rates, and its encouragement to banks to come to the window, the amount of borrowing did not rise very much. So I think there's a good chance that, when all is said and done, we will be able to say that the Fed did the right thing. We stood ready to lend — on good collateral at a penalty rate — but did not interfere with the market's assessment of risks. 

I noted a moment ago that periods of financial instability are characterized by valuation risk and macroeconomic risk. Monetary policy cannot have much influence on the former, but it can certainly address the latter--macroeconomic risk. By cutting interest rates to offset the negative effects of financial turmoil on aggregate economic activity, monetary policy can reduce the likelihood that a financial disruption might set off an adverse feedback loop. The resulting reduction in uncertainty can then make it easier for the markets to collect the information that enables price discovery and to hasten the return to normal market functioning. To achieve this result most effectively, monetary policy needs to be timely, decisive, and flexible. Quick action is important for a central bank once it realizes that an episode of financial instability has the potential to set off a perverse sequence of events that pose a threat to its core objectives. Waiting too long to ease policy in such a situation would only risk a further deterioration in macroeconomic conditions and thus would arguably only increase the amount of easing that would eventually be needed.

In voting to ease policy, I carefully considered the effect of that decision on our other objective--price stability. I reasoned that the anticipated softening of economic growth and perhaps the emergence of some slack in the labor market might reduce those pressures, and I judged that a cut of 25 basis points in the target federal funds rate would not materially alter that modal outlook. However, I recognized the risk that, even if readings on core inflation have improved modestly this year, recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. Consequently, in considering appropriate future adjustments to policy, I will monitor inflation developments carefully.

Overall, I think that the cumulative policy easing the FOMC put in place at its past two meetings reduced significantly the downside risks to growth so that those risks are now balanced by the upside risks to inflation. In these circumstances, I will want to carefully assess incoming data and gauge the effects of financial and other developments on economic prospects before considering further policy action. As always, my colleagues on the FOMC and I will act to foster our dual objectives of price stability and sustainable economic growth.