The Fed could sharpen its forward guidance in two directions by implementing a state-contingent policy. The first part of such a policy would be to communicate that we will keep the funds rate at exceptionally low levels as long as unemployment is somewhat above its natural rate. The second part of the policy is to have an essential safeguard — that is, a commitment to pull back on accommodation if inflation rises above a particular threshold. This inflation safeguard would insure us against the risks that the supply constraints central to the structural impediments scenario are stronger than I think. Rates would remain low as long as the conditions were unmet.

 Furthermore, I believe the inflation-safeguard threshold needs to be above our current 2 percent inflation objective — perhaps something like 3 percent...

“The sooner the economy returns to full employment, the sooner we’re going to be able to normalize interest rates,” Rosengren said. “Our goal is to have a normalized economy, and the reason we’re keeping rates so low at this time is to try to get that normalized economy.”

These changes in the dashboard readings suggest that, in the scenario that the economy evolves in 2012 as the Committee expects, the Committee should reduce the level of monetary accommodation over the course of 2012.

How would the Committee accomplish this reduction? Right now, the Committee is projecting that it will keep its target short-term interest rate extraordinarily low for at least six to seven quarters. In my view, it would be simplest to reduce the level of accommodation by changing that estimate to a shorter period of time.

Two months earlier, Kocherlakota had rejected the idea of changing the guidance because it undermine future precommitment efforts.

"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 FOMC should do more than simply decide at each meeting whether or not to buy more assets or to keep interest rates low for longer. Any current decision is based on the FOMC’s forecast of the future, and no forecast can be perfect. The Committee should provide a public contingency plan—that is, provide clear guidance on how it will respond to a variety of relevant scenarios.

I believe that public contingency planning will have many benefits. Let me mention two. First, in recent statements and speeches, I have described why the FOMC actions in August and September seemed inconsistent with the evolution of the macroeconomic data in 2011. This kind of inconsistency is much less likely to occur once the FOMC has formulated an explicit public contingency plan. Second, I’ve heard from businesses that policy uncertainty is curbing their incentive to hire or invest. Similarly, I’ve heard from consumers that policy uncertainty is curbing their incentive to spend. A public FOMC contingency plan can help reduce the level of policy uncertainty being created by the Fed.

“One of the difficult things with President Evans’ proposals is that it only gives a little bit of information about our reaction,” Williams told reporters after his speech. “Personally I would like to see -- if we can and this is hard -- a fuller description of our policy reaction function.”

“I would be favorably inclined if we could communicate our future path of where we think interest rates are going and what factors influence that,” he said.

It is time for the Fed to explicitly adopt the flexible inflation targeting framework and in doing so take three steps to strengthen its approach to policymaking. First, clarify and make explicit that our long-run inflation objective is 2 percent year-over-year PCE inflation. Second, publish information about the individual FOMC participants’ assessments of the appropriate monetary policy that underlie their economic projections in the FOMC’s Summary of Economic Projections. Third, provide information on the FOMC’s reaction function. That is, communicate policy decisions in terms of changes in the economic conditions that the FOMC is using to formulate policy.

The Committee should provide a public contingency plan—that is, provide clear guidance on how it will respond to a variety of relevant scenarios.

I believe that this kind of public contingency planning will have many benefits. Let me mention two. First, in recent statements and speeches, I have described why the FOMC actions in August and September seemed inconsistent with the evolution of the macroeconomic data in 2011. This kind of inconsistency is much less likely to occur once the FOMC has formulated an explicit public contingency plan. Second, I’ve heard from businesses that policy uncertainty is curbing their incentive to hire or invest. Similarly, I’ve heard from consumers that policy uncertainty is curbing their incentive to spend. A public FOMC contingency plan can help reduce the level of policy uncertainty being created by the Fed.

No contingency plan can ever be definitive. Inevitably, the FOMC will learn things that it did not expect to learn, and events will occur that it did not expect to occur. And so there may be conditions that force the FOMC to deviate from a chosen plan. However, having a public plan, and couching its decisions against the backdrop of that plan, will enhance Federal Reserve transparency, credibility, accountability and consistency.

As I noted in my opening remarks, no decisions have been made. So I want to be very clear that no final outcome here in this discussion.

But clearly there's a range of things that we can do. We can provide more information about our objectives, for example. We could provide information about where we want inflation to be in the long term, for example.  We could also provide information about the future path of interest rates, which we've done to some extent via our mid-2013 language in the statement.

An alternative approach, which Charlie Evans (ph) and others have suggested, is to tie that to economic conditions and to provide more information about under what circumstances we would raise rates. That is certainly something that we have discussed and I think is an interesting alternative.

There's a lot of interest in using the survey of economic projections in constructive ways as we have up till now to provide information to the public about our plans.  And in particular, using the SEP as a way of giving information about our future policy decisions is something that's on the table. There's no decision made about that, but that's one direction that we might find productive.

At our August meeting, the Committee decided to provide more-specific information about the likely time horizon by substituting the phrase "at least through mid-2013" for the phrase "for an extended period." This clarification appears to have reduced market uncertainty about the Committee's current policy expectations.

The Committee's guidance refers to a specific calendar date, which could be periodically revised by the Committee if appropriate. However, it is explicitly framed as contingent on economic conditions, including "low rates of resource utilization and a subdued outlook for inflation over the medium run." Importantly, it is not stated as an unconditional commitment to a specific course for the federal funds rate. Market participants are naturally interested in gaining greater insight into how shifts in the economic outlook would affect the likely timing and pace of policy firming. As noted in the minutes of the August and September FOMC meetings, the Committee has discussed possible approaches to enhance its forward guidance along these lines--that is, to provide greater insight concerning its "reaction function."

One potentially promising way to clarify the dependence of policy on economic conditions would be for the FOMC to frame the forward guidance in terms of specific numerical thresholds for unemployment and inflation. Such an approach was discussed by my colleague Charles Evans, president of the Federal Reserve Bank of Chicago, in a recent speech.

The approach of numerically specifying the values of unemployment and inflation that could prompt policy tightening is not without potential pitfalls, however. For example, such thresholds could potentially be misunderstood as conveying the Committee's longer-run objectives rather than the conditions surrounding the likely onset of policy firming. Thus, in addition to giving careful consideration to this particular approach, it seems sensible to explore other potential enhancements to FOMC communications--a topic to which I will return shortly.

"I like [Evans'] framing of the problem very much," Kocherlakota told reporters after a speech to the Harvard Club of Minnesota, although he stopped short of embracing Evans' call for more easing.

Once the central bank's policy-setting Federal Open Market Committee makes its goals clear, Kocherlakota said, it could safely allow inflation to temporarily rise above its long-term 2-percent target to help bring down unemployment.

I believe that we can substantially ease the public’s concern that monetary policy will become restrictive in the near to medium term and, hence, reduce the restraint in expanding economic activity. This can be done by clearly spelling out in our policy statements the conditionality of our dual mandate responsibilities. What should such a statement look like? I think we should consider committing to keep short-term rates at zero until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent. Such policies should enable us to make progress toward our mandated goals. But if this progress is too slow, then we should move forward with increased purchases of longer-term securities. We might even consider a regime in which we reevaluate our progress toward our policy goals and the rate of purchase of such assets at every FOMC meeting.

Asked if he would push at the Sept. 20-21 policy meeting for clarity on how long the Fed will leave interest rates unchanged, he said that “would be a welcome addition to our current conditional forward guidance.”

“At the moment we added mid-2013 to the statement and there’s some conditionality associated with that,” he said. “I would prefer to be extraordinarily clear in the conditioning to that. That would be truly clarifying.”

The Fed’s current commitment to record-low interest rates should be made contingent on pushing the unemployment rate to around 7 percent or 7.5 percent, as long as inflation stays below 3 percent in the medium term, the 53-year-old regional bank chief said today in a speech in London.

“Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation,” he said. “Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2 percent.”

QUESTION: Do you and your colleagues have a statistical trigger of any sorts, say, a particular level of unemployment or inflation at which you would begin the exit process? If you do, wouldn’t it make sense to announce it? If not, why not?

CHAIRMAN BERNANKE. Well, it’s pretty impossible to create a statistical trigger because we have currently 17 independent members of the FOMC. Each has his or her own view on the outlook, on the efficacy of monetary policy, and on the risks to inflation and unemployment. So we don’t have any such formula.