I've given you the broad strokes of a pretty optimistic outlook...

As confirming evidence, I'll be paying attention to consumer spending and consumer confidence. Data on both have been, on balance, encouraging. I'll be monitoring industrial activity closely. While the manufacturing production numbers stepped down in April following very strong gains in February and March, the April report from purchasing managers on production and orders was quite positive. And I'll be looking for sustained employment gains...

At any given juncture, absolute certainty of the economy's direction is not achievable. As I've suggested, I feel the need to see confirming evidence in the data validating the view that above-trend growth is occurring and is sustainable, and that the FOMC is closing in on its policy objectives. One quarter's data isn't enough. I expect it will take a number of months for me to arrive at conviction on that account.

When the first move to tighten policy is taken, I would expect it to begin a cycle of gradually rising rates. This will be a significant, even historic, transition that must be executed skillfully, with tools sufficient to the task, and with clear communication that fosters orderly market adjustment, to the extent possible. The discussion of so-called policy normalization documented in the latest minutes of the FOMC was just a first step, in my opinion.

It bears repeating that a discussion of policy normalization does not necessarily imply that a shift in policy is imminent. For the reasons I have discussed, I, as one policymaker, am not in a rush to get to liftoff. I continue to be comfortable with a projection of the second half of next year (2015) as likely timing.

Now, thankfully, the extraordinary is turning back into the ordinary, and we are starting down a path towards normalization, both for the economy and monetary policy. Well venture down this path slowly, and monetary policy will remain highly accommodative for some time. But I am happy to say that we are on the road back to normal.

Despite all this good news, there is one area of concern, which is housing. Historically, most recessions have been followed by housing revivals, which significantly boosted the early stages of recovery. I therefore expected housing to be a much stronger tailwind by now. While home construction and sales showed substantial momentum in 2012 and the first half of 2013, the wind has been taken out of the sails since then. Much of the slowdown in housing-market activity appears to be due to last years jump in mortgage interest rates. Although that is unlikely to reverse, other factors driving this sector should improve and I remain cautiously optimistic about the outlook for housing over the next few years.

As I said, employment has been growing at a good clip. In fact, the number of private-sector jobs is back above its pre-recession peak. Overall employment, which includes the public sector, will probably reach its previous peak in another month or so. But thats the number of jobs. In the interim, the population has been growing, bringing more potential workers into the fold. At the same time, the first round of baby boomers is headed into retirement, which means people being taken out of the labor pool.

Its hard to know precisely what the natural rate is, but I put it around 5 to 5 percent. To put things in perspective, the current unemployment rate of 6.3 percent is still well above the natural rate. My forecast is for the unemployment rate to gradually decline over the next two years, reaching the natural rate sometime in 2016.

One indication that unemployment is still higher than its natural rate is that growth in workers pay has been pretty modest. In fact, wage growth has averaged only about 2 percent over the past few years, and there are few signs of any acceleration in wages. That said, I expect that once the unemployment rate gets even closer to its natural rate, wage growth should pick up.

Personally, I expect that, over the long run, the unemployment rate will converge to just over 5 percent. Basically, an unemployment rate of 6.3 percent means that the U.S. labor market is not healthy

The weakening demand during recessions forces firms to look for new ways to be more efficient to cope with hard times. These adjustments do not affect all workers equally. Indeed, its what we typically think of as middle-skilled workersfor example, construction workers, machine operators and administrative support personnelthat are hardest hit during recessions. Further, a feature of the Great Recession and indeed the prior two recessions, is that the middle-skill jobs that were lost dont all come back during the recoveries that follow. Instead, job opportunities have tended to shift toward higher- and lower-skilled workers.

Turning first to economic activity, the trajectory of economic growth continues to disappoint… This performance reflects three major factors—the significant headwinds resulting from the bursting of the housing bubble, the shift of fiscal policy from expansion toward restraint, especially in 2012 and 2013, and a series of shocks from abroad—most notably the European crisis.
The good news is that all three of these factors have abated. With respect to the headwinds resulting from the financial crisis, they are gradually becoming less severe. In particular, the sharp decline in household wealth due to the decline in housing prices and the weakness in equity prices has been largely reversed…[T]he financial obligation ratio, which measures the debt servicing cost of households, has declined from a peak of 18.1 percent of disposable income in the fourth quarter of 2007 to 15.4 percent in the fourth quarter of 2013. This is a level not seen since the early 1980s.
On the fiscal side, the amount of restraint has diminished sharply. For 2014, the projected drag is about ½ percent of GDP, roughly half the level of 2013. Moreover, much of this restraint was frontloaded into the beginning of the year, with the cessation of long-term unemployment compensation, the expiration of the bonus depreciation provisions and the higher tax rates that applied to final tax settlements for the 2013 tax year. For the remainder of this year and next, the degree of fiscal restraint should be very modest.
In terms of the outlook abroad, the circumstances are more mixed… When all these cross-currents are considered, the impetus to growth from abroad appears little changed from last year.

Recently, some economists have argued that the amount of slack in the labor market may be smaller than suggested by the official unemployment rate of 6.3 percent. They focus on the level of short-term unemployment—those workers unemployed for less than 27 weeks—which has returned close to its average long-term level—and argue that it is the short-term unemployed that are critical in driving compensation trends.
My own reading of this research suggests that one should not jump to such a conclusion. Instead, I conclude:
The relative impact of each type of unemployment on wages depends on whether long-term unemployment reflects primarily structural or cyclical force. I suspect that a much greater proportion of those who are currently long-term unemployed have simply been very unlucky compared to historical averages. This blunts somewhat the distinction between being short- versus long-term unemployed.
If the long-term unemployed are simply unlucky as opposed to not having the appropriate skills, then their impact on wages presumably depends on whether or not there is an excess supply of short-term unemployed. If there are plentiful short-term unemployed, they may get the best job opportunities first… But, once the short-term unemployed pool is depleted, then the long-term unemployed will become more relevant to the labor market supply, so their impact on wages and the labor market will likely increase as the labor market tightens.

With respect to the trajectory of rates after lift-off, this also is highly dependent on how the economy evolves. My current thinking is that the pace of tightening will probably be relatively slow. This depends, however, in large part, not only on the economy’s performance, but also on how financial conditions respond to tightening. After all, monetary policy works through financial conditions to affect aggregate demand and supply. If the response of financial conditions to tightening is very mild—say similar to how the bond and equity markets have responded to the tapering of asset purchases since last December—this might encourage a somewhat faster pace. In contrast, if bond yields were to move sharply higher, as was the case last spring, then a more cautious approach might be warranted.
In terms of the level of rates over the longer-term, I would expect them to be lower than historical averages for three reasons. First, economic headwinds seem likely to persist for several more years. While the wealth loss following the financial crisis has largely been reversed, the Great Recession has scarred households and businesses­—this is likely to lead to greater precautionary saving and less investment for a long time. Also, as noted earlier, headwinds in the housing area seem likely to dissipate only slowly.
Second, slower growth of the labor force due to the aging of the population and moderate productivity growth imply a lower potential real GDP growth rate as compared to the 1990s and 2000s. Because the level of real equilibrium interest rates appears to be positively related to potential real GDP growth, this slower trend implies lower real equilibrium interest rates even after all the current headwinds fully dissipate.
Third, changes in bank regulation may also imply a somewhat lower long-term equilibrium rate. Consider that, all else equal, higher capital requirements for banks imply somewhat wider intermediation margins. While higher capital requirements are essential in order to make the financial system more robust, this is likely to push down the long-term equilibrium federal funds rate somewhat.
Putting all these factors together, I expect that the level of the federal funds rate consistent with 2 percent PCE inflation over the long run is likely to be well below the 4¼ percent average level that has applied historically when inflation was around 2 percent. Precisely how much lower is difficult to say at this point in time.

The FOMC also noted, based on its assessment of these factors, that it likely will be appropriate to keep its target federal funds rate near zero for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the 2 percent goal and longer-term inflation expectations remain well anchored. My own view is that, as we continue to move closer to our 2 percent inflation goal and the labor market improves, we must be prepared to adjust policy appropriately. That may well require us to begin raising interest rates sooner rather than later.

With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity--a sector that has been recovering since 2011--have remained disappointing so far this year and will bear watching.

Inflation has been quite low even as the economy has continued to expand. Some of the factors contributing to the softness in inflation over the past year, such as the declines seen in non-oil import prices, will probably be transitory. Importantly, measures of longer-run inflation expectations have remained stable. That said, the Federal Open Market Committee (FOMC) recognizes that inflation persistently below 2 percent--the rate that the Committee judges to be most consistent with its dual mandate--could pose risks to economic performance, and we are monitoring inflation developments closely.

“While first-quarter GDP growth was weak, growth in coming quarters is still predicted to be robust,” Bullard said, referring to gross domestic product. “The average quarterly pace of growth in 2014 may still be an improvement relative to 2013,” he said. The average pace of quarterly growth in 2013 was 2.6 percent.
The St. Louis Fed official told reporters after his speech the recent pickup in U.S. employment is “very encouraging.” Unemployment will probably fall below 6 percent by year’s end, setting the stage for the first Fed tightening at the end of the first quarter in 2015, he said.
“Inflation may be moving back to target as the committee has been predicting,” Bullard said. The Fed’s preferred measure for price increases may rise to 1.6 percent by the fourth quarter, he said.

It is a sign of how far the economy has come that a return to full employment is, for the first time since the crisis, in the medium-term outlooks of many forecasters. It is a reminder of how far we have to go, however, that this long-awaited outcome is projected to be more than two years away.

Today I will discuss how my colleagues on the Federal Open Market Committee (FOMC) and I view the state of the economy and how this view is likely to shape our efforts to promote a return to maximum employment in a context of price stability. I will start with the FOMC's outlook, which foresees a gradual return over the next two to three years of economic conditions consistent with its mandate.

One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of "partly unemployed" workers is a sign that labor conditions are worse than indicated by the unemployment rate. Statistics on job turnover also point to considerable slack in the labor market. Although firms are now laying off fewer workers, they have been reluctant to increase the pace of hiring. Likewise, the number of people who voluntarily quit their jobs is noticeably below levels before the recession; that is an indicator that people are reluctant to risk leaving their jobs because they worry that it will be hard to find another. It is also a sign that firms may not be recruiting very aggressively to hire workers away from their competitors.

A second form of evidence for slack is that the decline in unemployment has not helped raise wages for workers as in past recoveries. Workers in a slack market have little leverage to demand raises. Labor compensation has increased an average of only a little more than 2 percent per year since the recession, which is very low by historical standards.

A third form of evidence related to slack concerns the characteristics of the extraordinarily large share of the unemployed who have been out of work for six months or more. These workers find it exceptionally hard to find steady, regular work, and they appear to be at a severe competitive disadvantage when trying to find a job. The concern is that the long-term unemployed may remain on the sidelines, ultimately dropping out of the workforce. But the data suggest that the long-term unemployed look basically the same as other unemployed people in terms of their occupations, educational attainment, and other characteristics. And, although they find jobs with lower frequency than the short-term jobless do, the rate at which job seekers are finding jobs has only marginally improved for both groups. That is, we have not yet seen clear indications that the short-term unemployed are finding it increasingly easier to find work relative to the long-term unemployed. This fact gives me hope that a significant share of the long-term unemployed will ultimately benefit from a stronger labor market.

A final piece of evidence of slack in the labor market has been the behavior of the participation rate--the proportion of working-age adults that hold or are seeking jobs. Participation falls in a slack job market when people who want a job give up trying to find one. When the recession began, 66 percent of the working-age population was part of the labor force. Participation dropped, as it normally does in a recession, but then kept dropping in the recovery. It now stands at 63 percent, the same level as in 1978, when a much smaller share of women were in the workforce. Lower participation could mean that the 6.7 percent unemployment rate is overstating the progress in the labor market.

One factor lowering participation is the aging of the population, which means that an increasing share of the population is retired. If demographics were the only or overwhelming reason for falling participation, then declining participation would not be a sign of labor market slack. But some "retirements" are not voluntary, and some of these workers may rejoin the labor force in a stronger economy. Participation rates have been falling broadly for workers of different ages, including many in the prime of their working lives. Based on the evidence, my own view is that a significant amount of the decline in participation during the recovery is due to slack, another sign that help from the Fed can still be effective.

The U.S. unemployment rate will fall below 6 percent by the end of this year, a Federal Reserve official said on Wednesday, offering a bullish view on the country's economy after central bank comments sent shock waves through financial markets last week.

James Bullard, president of the Federal Reserve Bank of St. Louis, said that the outlook for the U.S. economy is "quite good," despite data from early in the year. "The biggest thing is that unemployment has come down more quickly than expected," said Bullard, speaking on a panel at the annual Credit Suisse investor conference in Hong Kong.

He added later during a question and answer session that more progress is needed in the labor market before U.S. policymakers can consider raising interest rates.

Bullard is known to be one of the Fed's more hawkish policymakers. He previously advocated for a rate hike as early as 2014, a stance he appears to have backed away from.
…
Bullard was asked about where he saw interest rates in 2016, at which point he referred to his "dot."… "I'm here to tell you that my dot has not changed," Bullard said.