The Federal Open Market Committee, last month repeated its statement that it expects low interest rates to continue for an extended period. I agree with this assessment. At some point though, as the economy continues to expand, the Fed will have to pull back some of this extraordinary stimulus.

[The pace of the US economic recovery will be] moderate right now [but will be] strong by next year.

[While there has been some encouraging economic news,] it still seems likely the economic recovery will be more muted.

Significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments.

Fortunately, today the financial crisis looks to be mostly behind us, and the economy seems to have stabilized and is beginning to grow again. But we are far from being out of the woods. Many Americans are still grappling with unemployment or foreclosure, or both. Cities and states are struggling to maintain essential services. And, although much of the financial system is functioning more or less normally, bank lending remains very weak, threatening the ability of small businesses to finance expansion and new hiring.

My own forecast calls for about 3 percent growth per year over the next two years, as opposed to the consensus view among economists, which is 3.5 percent. This pessimism derives from two sources. First, our statistical forecasting model at the Federal Reserve Bank of Minneapolis is predicting that GDP growth over this period will be around 2.5 percent per year. The model is a simple one in many ways, but its forecasting track record is surprisingly good.

I think that what will happen is that short-term interest rates go up because the economy strengthens and then long term rates might go up as well.

I expect real GDP growth from fourth quarter to fourth quarter to be between 3 and 3½ percent this year and in 2011. These rates of growth are slightly above what I believe is the underlying trend growth rate of the economy of about 2¾ percent.

I think we can grow at an above trend pace in the first half of 2010. And I think we’ll see the jobs numbers start to turn positive in the first half of 2010. If you talk to business leaders, they’re very reluctant to hire. They’re very cautious. They’re very cautious about their capital expenditures. But I think as they see the economy improving they’ll be caught without enough workers and without enough capital expenditure and they’ll have to revise up their plans.

I suppose {the extended period language} is in play right now. Everybody is thinking about when the appropriate time to raise interest rates is. Right now would be too early. The recovery is just getting started and jobs growth hasn’t even turned positive yet. So it is a little bit too early to be talking about raising rates. That’s why I like to talk about other instruments that we can use and other margins that we can adjust on while we’re waiting for the conditions to be right to raise rates.

In attempting to explain why he signed an open letter opposing the 2009 stimulus package

A No, in fact I didn't sign that with a view of being opposed to the stimulus. I viewed signing that as stating my opposition to the idea that we all agree that the stimulus was good.

Q You mean, you were opposed to this assumption that, "we're all Keynesians" now that we're in a severe recession?

A Yes. The idea that there is some kind of uniform agreement among economists that the stimulus was a good thing, or more specifically, would lead to higher output, I didn't view that as being a settled question within the academe.

Though we have begun to see some improvement in economic activity, we still have some way to go before we can be assured that the recovery will be self-sustaining. Also at issue is whether the recovery will be strong enough to create the large number of jobs that will be needed to materially bring down the unemployment rate. Economic forecasts are subject to great uncertainty, but my best guess at this point is that we will continue to see modest economic growth next year--sufficient to bring down the unemployment rate, but at a pace slower than we would like.

Economic conditions have certainly improved since the beginning of this year, but resource utilization levels still remain low, bank lending is restrained, and credit terms are tight. I expect our recovery to be a gradual and bumpy one. 

Inflation has been running about 1.5 percent recently, and from my point of view, that's ideal. Earlier this year some economists were highlighting the risk that the low level of economic activity could push the rate of inflation down, perhaps even below zero. I think the risk of a substantial further reduction in inflation has diminished substantially since then. The historical record suggests that the early years of a recovery are when the risk is greatest that confidence in the stability of inflation erodes and we see an upward drift in inflation and inflation expectations. This risk could be particularly pertinent to the current recovery, given the massive and unprecedented expansion in bank reserves that has occurred, and the widespread market commentary expressing uncertainty over whether the Federal Reserve is willing and able to promptly reverse that expansion.

As a technical matter, I do not see any problem – we do have the tools to remove as much monetary stimulus as necessary to keep inflation low and stable. The harder problem is the same one that we face after every recession, which is choosing when and how rapidly to remove monetary stimulus. There is no doubt that we must be aware of the danger of aborting a weak, uneven recovery if we tighten too soon. But if we hope to keep inflation in check, we cannot be paralyzed by patches of lingering weakness, which could persist well into the recovery. In assessing when we will need to begin taking monetary stimulus out, I will be looking for the time at which economic growth is strong enough and well-enough established, even if it is not yet especially vigorous.

My outlook is for roughly 3 percent (GDP growth) over the next 18 months. That’s positive but modest after this downturn. Unemployment will be high. The combination of very large slack with stable inflation expectations leads me to an inflation outlook which is on the order of 1.5 percent core for the next few years, for the next two years at least.

With that environment, I’m underlying what my own guideline is for price stability. I’d say that’s 2 percent.  With that, policy is likely to continue to be appropriate for 2010 and most likely beyond.

Unless there are unusual developments, I think the policy is going to be highly accommodative, as it is now, for quite some period of time.

From comments to the press, as reported by Bloomberg News