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

The Committee’s statement also altered the “forward guidance” regarding future monetary policy, stating for the first time that it expected a highly accommodative stance of monetary policy for “a considerable period after the economic recovery strengthens.” I disagreed with this statement because I believe a commitment to provide stimulus beyond the point at which the recovery strengthens and growth increases implies too great a willingness to tolerate higher inflation and would be inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates.

Finally, I strongly opposed purchasing additional agency mortgage-backed securities. These purchases are intended to reduce borrowing rates for conforming home mortgages. Such purchases, as compared to purchases of an equivalent amount of U.S. Treasury securities, distort investment allocations and raise interest rates for other borrowers. Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve. Central banks abuse their independence when they promote some borrowers at the expense of others. This principle was recognized in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009: “Government decisions to influence the allocation of credit are the province of the fiscal authorities,” that is, Congress and the administration.

In response to a question about the tools available to the Fed,  Fed Chairman Bernanke said, "There are a range of possibilities. And I -- and I don't want to, you know, give any signal that we're choosing one among... The logical range includes different types of purchase programs. That could include treasuries or include treasuries and mortgage-backed securities. Those are the two things we're allowed to buy. We could also use our discount window for -- for lending purposes, but, you know, that's another possibility. We could use communications to talk about our future plans regarding rates or our balance sheet. And a possibility that we have discussed in the past is cutting the interest we pay on excess reserves."
 

“One threshold [for another round of asset purchases] for me, in my own thinking, would be if we see economic growth slow to the point where we’re not seeing further progress in bringing the unemployment rate down,” Williams said today on a panel in Beverly Hills, California. Stimulus might also be needed if inflation dropped “significantly” below the Fed’s 2 percent goal, he said. 

Those aren’t “the circumstances I currently expect,” said Williams, who votes on the policy-setting Federal Open Market Committee this year. If additional rounds of bond buying are warranted, the Fed may purchase more mortgage-debt, or extend its program to push out the average-maturity of its holdings, dubbed Operation Twist, he said.

I might add that I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation—the so-called QE3, or third round of quantitative easing. The Federal Reserve has over $1.6 trillion of U.S. Treasury securities and almost $848 billion in mortgage-backed securities on its balance sheet. When we purchased those securities, we injected money into the system. Most of that money and more has accumulated on the sidelines: More than $1.5 trillion in excess reserves sit on deposit at the 12 Federal Reserve banks, including the Dallas Fed, for which we pay private banks a measly 25 basis points in interest. A copious amount is being harbored by nondepository financial institutions, and another $2 trillion is sitting in the cash coffers of nonfinancial businesses.

Trillions of dollars are lying fallow, not being employed in the real economy.

Bullard said if the Fed undertakes another round of bond buying, he’d prefer the U.S. central bank stick to buying Treasuries, instead of mortgage debt, because the Fed aims to get back to a Treasuries-only portfolio.

Well, I think QE is [an option] but at this point I think it should only be deployed if the economy deteriorates significantly. We've already got a very easy policy on the table. We're already taking a lot of risk with that balance sheet and I think the economic news and the economic data could indicate that it's been surprising to the upside so I think we're in a situation where we should keep QE3 in reserve.

I think [the criterion for QE] is much more of a deflation side as I think it is - one thing about QE2 is that inflation was running at a very low rate in the fall of 2010. We did turn that around and now inflation is running higher - I think PC headline was about 4.2 percent - as measured from a year earlier, in the fall of 2010. Now it's running 2.4 percent or so, as measured from a year earlier. So, it's quite a significant move up in inflation and so I do think it does help us on that dimension.

As I've said in my statement and as we have in fact in the FOMC statement, you know, we continue to review our holdings -- our portfolio holdings, securities, and we are prepared to take further steps in that direction if we see that the recovery is faltering or if inflation is not -- is not moving toward target.

So that's something -- that's an option that's certainly on the table. I think it would be premature to say definitively one way or the other, but we continue to look at that option, and if conditions warrant, we will certainly consider using it.

In response to a question about additional asset purchases.

I don't accept the premise that we've been passive. We've been actually quite active in our policy. And in one respect, the low level of inflation is a validation in the following sense, that there were some who were very concerned that our balance sheet policies and the like would lead to high inflation. There's certainly no sign of that yet. And it hasn't shown up either in financial markets or in outside forecasters' expectations.

    Now, that being said, as I -- as I mentioned earlier, if the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then more -- our framework, the logic of our framework says we should be looking for ways to do more.

    It's not completely straightforward, because, of course, we're now dealing with a variety of nonstandard policy tools. We can't just lower the federal funds rate 25 basis points like in the good old days.

    But -- but your basic point is right, that, you know, we need to adopt policies that will both achieve our inflation objectives and help the economy recover as quickly as is feasible.     And I would say that your question actually, and the earlier question, shows a benefit of explaining this framework. Because the framework makes very clear that we need to be thinking about ways in which we can provide further stimulus if we don't get some improvement in the pace of recovery and -- and -- and a normalization of inflation.

We will be providing in our minutes and in our survey of economic projections, which will be released in three weeks, will be providing some additional qualitative information about people's -- participants' views of the balance sheet going forward.

The reason that I can't provide all that information now is basically that we received, you know, a whole range of qualitative comments and we had further discussion during the meeting yesterday and today. And so, you know, we need -- we need a little time to -- to summarize that and to have it approved. You know, the minutes, of course, in the MPC are approved by the entire committee. And so in that respect, it will be a definitive statement about what we currently know about -- about the balance sheet.

I can say a few things. I know, you know, one is that it certainly remains -- expanding the balance sheet certainly remains an option, one that we would consider very seriously if -- in particular if progress towards full employment was -- continued or became more inadequate, or if inflation remained exceptionally low.

So we'll continue to look at that. As we say in our statement, we're prepared to take additional measures in general, and that would be certainly one class of measures we would want to consider.

I can make one additional point, which maybe wasn't obvious, which is that, in June, we provided some principles relating the -- the sales of assets, ultimate sales of assets, to the path of interest rates.

And those remain -- those principles remain in force. And so one implication of our extension of our expected point of takeoff to late 2014 is to imply that the initial sales from our balance sheet, which, again, are far down the road, but that begins, that will be later than previously thought. That will be presumably in 2015.

So we do expect to hold our balance sheet at a high level for a longer period.

Additional sales, again -- I'm sorry -- additional purchases remains a topic that we are still debating, and it will depend both on our assessment of the efficacy and risks of that particular tool but also of how the economy's evolving.

Further purchases of mortgage-backed securities would in my view help provide a more rapid recovery in housing, by reducing the costs of refinancing or purchasing new homes. Of course, these Fed actions would be even more effective if accompanied by fiscal policies designed to speed the recovery in housing.

"Asset purchases ... we have done in these big lumps," Williams said. "The way I guess I prefer to think about it is where do we need financial conditions to be" and "how, given how much additional stimulus you may need what's appropriate amount of additional asset purchases to make."

"It would be beneficial to have an asset purchase program, if we were to do one, that had more consistency over time" and that would "allow us to adjust as the outlook changes ... as opposed to announcing an amount."

The financial crisis of 2007 and 2008 was a watershed event for the Federal Reserve and other central banks. The extraordinary actions they took have been described, alternatively, as a natural extension of monetary policy to extreme circumstances, or as a problematic exercise in credit allocation. I have expressed my view elsewhere that much of the Fed's response to the crisis falls in the latter category rather than the former.

...

Like the Fed, the European Central Bank and other central banks have pursued credit allocation in response to the crisis.

The impulse to reallocate credit certainly reflects an earnest desire to fix perceived credit market problems that seem within the central bank's power to fix. My sense is that Federal Reserve credit policy was motivated by a sincere belief that central banks have a civic duty to alleviate significant ex post inefficiencies in credit markets. But credit allocation can redirect resources from taxpayers to financial market investors and, over time, can expand moral hazard and distort the allocation of capital. This implies a difficult and contentious cost-benefit calculation. But no matter how the net benefits are assessed, central bank intervention in credit markets will have distributional consequences.

... 

This tension is a classic time consistency problem. Central bank rescues serve the short-term goal of protecting investors from the pain of unanticipated credit market losses, but dilute market discipline and distort future risk-taking incentives. Over time, small "one-off" interventions set precedents that encourage greater risk taking and increase the odds of future distress. Policymakers then feel boxed in and obligated to intervene in ever larger ways, perpetuating a vicious cycle of government safety net expansion.

The conundrum facing central banks, then, is that the balance sheet independence that proved crucial in the fight to tame inflation is itself a handicap in the pursuit of financial market stability. The latitude the typical central bank has to intervene in credit markets weakens its ability to discourage expectations of future rescues and thereby enhance market discipline.

You were absolutely correct, first, that ultimately we would like to return our portfolio to Treasuries-only. That may be some time down the road at this point.

You're also correct that, as part of our policy action at the last meeting, we began to reinvest mortgage-backed securities and agency debt back into mortgage-backed securities, thereby providing some additional support for the mortgage market.

The housing sector's a very important sector. It's -- the problems in that sector are clearly a big reason why our economy is not recovering more quickly.

So I do think that purchases of mortgage-backed securities is a viable option. It's certainly something we would consider if conditions were appropriate. So the answer is, yes, we would certainly look at that.

MBS purchases and treasury securities purchases are one set of tools that we have. The other set of tools that we have are communication tools which essentially tie interest rate decisions to economic conditions or to time.

Those are, with interest rates close to zero, those are basically the two tools that we have, and we need to continue to work on how best to use them and in what combination to use them to achieve our objectives.