"Seven percent is an indicative goal," Mr. Stein said to the Council on Foreign Relations in New York. "On the one hand, we'd like some ability to have some specificity, and to do that you have to pick a number ... but it's an attempt to provide clarity. It doesn't mean we're going to shut out other relevant data on the labor market."

As the Chairman made clear, there is no "predetermined" pace of reductions in the asset purchases, nor is the stopping point fixed.

The pace of purchases, the composition of purchases, and the ultimate size of the Fed's balance sheet still depend on how economic conditions evolve. All elements of the asset purchase program will be considered on a meeting-by-meeting basis in light of the incoming data and economic outlook.

In my view, the comments by the Chairman do not constitute an enormous shift in policy. The asset purchase program is best thought of as a supplement to the FOMC's interest rate policy, designed to add a little more heft to efforts in support of ongoing recovery. As I said a moment ago, I still anticipate that the very low interest rate policy will remain in place for a considerable time after the end of asset purchases, and thus policy will remain highly accommodative.

...

If the broad economy evolves close to the outlook I laid out—which itself is close to the composite forecast of the 19 FOMC participants—then the economy will be on track to a better place. In that circumstance, I think the position that the economy does not need quite as much stimulus is fully supportable.

In my view, the Committee could better achieve its goals by augmenting its communications to provide the missing clarity. For example, the Committee has not described how it will set its fed funds rate target when the unemployment rate has fallen below 6.5 percent but remains above 5.5 percent—a period of time that I currently expect to last about two years. In contrast, the policy strategy that I described above says specifically that the FOMC will keep the fed funds rate extraordinarily low over that time frame (as long as the inflation conditions are satisfied).

Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013.  In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings...

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.  The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store.  President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy...

[L]et me say a few words about the Federal Reserve's strategy for normalizing policy in the long run. In the minutes of its June 2011 meeting, the committee set forth principles that it intended to follow when the time came to normalize policy and the size and the structure of the Federal Reserve's balance sheet. As part of prudent planning, we've been reviewing these principles in recent meetings. We expect those discussions to continue and intend to provide further information at an appropriate time.

     For today, I will note that, in the view of most participants, the broad principles set out in June 2011 remain applicable. One difference is worth mentioning. While participants continue to think that in the long run the Federal Reserve's portfolio should consist predominantly of Treasury securities, a strong majority now expects that the committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy, although in the longer run limited sales could be used to reduce or eliminate residual MBS holdings. I emphasize that given the outlook in the committee's policy guidance, these matters are unlikely to be relevant to actual policy for quite a while.

Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame.

Given these dynamics, and in light of improving economic conditions, I support slowing the pace of asset purchases as an appropriate next step for monetary policy. Moreover, such actions would not constitute an outright tightening of monetary policy, but rather, it would slow policy easing. History suggests that waiting too long to acknowledge the economy’s progress and prepare markets for more-normal policy settings carries no less risk than tightening too soon.

In other words, a slowing in the pace of purchases could be viewed as applying less pressure to the gas pedal, rather than stepping on the brake. Adjustments today can take a measured pace as the economy’s progress unfolds. It would importantly begin to lay the groundwork for a period when markets can prepare to function in a way that is far less dependent on central bank actions and allow them to resume their most essential roles of price discovery and resource allocation.

I think we are approaching a period in which {asset purchase cutbacks} can be considered... Thats not to say June meeting, but we are approaching a period in which it can be seriously considered based upon sort of the momentum of the economy which is not great but nonetheless is moving forward.

There is indeed little doubt that the economy is on the mend. The clearest evidence can be found in housing, by far the sector hit hardest during the recession. Mortgage rates have fallen to levels rarely, if ever, seen before. Typical fixed-rate mortgages are around 3.5 percent, putting them in reach of millions of households. Affordable mortgages fuel demand for homes, and that pushes up sales and prices. Year-over-year, house prices are rising at around a double-digit rate.

The recovery in home prices has all sorts of beneficial effects. Increasing numbers of underwater homeowners are finding themselves on dry land again. Their properties are now worth more than their mortgages, making them less likely to default. Meanwhile, other homeowners find their mortgages have dropped below the critical 80-percent-of-home-value barrier. That makes it easier to refinance at today’s low rates, freeing money to spend on other things.

...

I expect the unemployment rate to decline gradually over the next few years. My forecast is that it will be just below 7½ percent at the end of this year, and a shade below 7 percent at the end of 2014. I don’t see it falling below 6½ percent until mid-2015. This forecast of a gradual downward trend in the unemployment rate reflects the combined effects of expected solid job gains and a return of discouraged workers to the labor force.

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It’s clear that the labor market has improved since September. But have we yet seen convincing evidence of substantial improvement in the outlook for the labor market, our standard for discontinuing our securities purchases? In considering this question, I look not only at the unemployment rate, but also a wide range of economic indicators that signal the direction the labor market is likely to take...  [M]ost of these indicators look healthier than they did in September. What’s more, nearly all of them are signaling that the labor market will continue to improve over the next six months. This is good news. But it will take further gains to convince me that the “substantial improvement” test for ending our asset purchases has been met. However, assuming my economic forecast holds true and various labor market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime late this year. Of course, my forecast could be wrong, and we will adjust our purchases as appropriate depending on how the economy performs.

Let me close by reiterating that a long-term sustainable solution for fiscal balance is absolutely in the country’s interest. But timing is an issue. We have suffered a severe financial crisis, a deep recession, and a painfully slow recovery. Fiscal policy is obviously the jurisdiction of the legislative and executive branches of government, but given the economic realities I would urge policymakers to consider scenarios where some elements of fiscal rebalancing take effect only after the economy has more fully improved, and the possibility of a less restrictive fiscal stance until that time.

The United States could be doing better. The U.S. fiscal policy program, for example, does not appear well-calibrated to the current set of economic circumstances. We have too much fiscal restraint in the short term, and too little consolidation in the long term.

“I have not seen enough evidence yet to convince me that 2013 is going to break out of that pattern that we’ve seen, really over the last four years,” Lockhart said. He predicts “a modest pace of growth, inflation that is pretty well contained and a very gradual reduction in unemployment.”

I’m looking for convincing evidence of sustained, ongoing improvement in the labor market and economy. The latest economic news has been encouraging. But it will take more solid evidence to convince me that it’s time to trim our asset purchases. An important rule in both forecasting and policymaking is not to overreact to what may turn out to be just a blip in the data. But, assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.

It’s important to note that tapering our purchases and even ending the purchase program doesn’t mean that we are removing all the monetary stimulus that comes from our longer-term securities holdings. Instead, even as we cut back our purchases, we’re still adding monetary accommodation and exerting greater downward pressure on interest rates. Economic theory and real-world evidence indicate that it’s not the pace at which we buy securities that matters for influencing financial conditions. Rather, it’s the size and composition of the assets we hold on our balance sheet. So, even when we stop adding to our portfolio, it doesn’t mean we’re tightening policy.

“It is full steam ahead right now,” Bullard said today on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays. “That is exactly what the committee is doing.”

“What I’d like to see is some good healthy peaks that have job creation well above the rate of new entrants into the labor market, followed not by valleys that take back some of that progress but at the very least by a nice plateau that can be the basis for some more peaks later,” he said.

“I don’t think we have to be in any hurry” to cut stimulus, Bullard said. “The committee has more comfort in a situation in which inflation is low.”

“If inflation drifted down in conjunction with renewed economic weakness,” the committee may consider increasing its monthly bond buying, he said.

The St. Louis Fed chief said when it comes time to slow purchases, he favors reducing the pace by small increments in response to changes in the economy. “I would be very comfortable moving in small amounts -- $10-or-$15 billion at a time,” Bullard said in the interview at the St. Louis Fed. “We are getting much closer” to the committee agreeing to a tapering approach, as indicated by Bernanke’s comments last month.

“There’s still work to do,” Evans said today in a speech in Richmond, Virginia. “The committee currently thinks that at the end of 2014 we’re still going to be below the inflation objective and unemployment is still going to be above 5.5 percent” he said, referring to the central bank’s dual mandate for stable prices and maximum employment.

“In about two years, we are still going to be missing.”