I think there are a number of reasons to expect core inflation to trend gradually lower in the future. However, I am keenly aware that this pattern has yet to show up in the data on any sort of a sustained basis. The inflation outlook remains highly uncertain, and until we actually see inflation begin to slow down, I will be focused on the upside risks in the outlook.

We do believe that inflation is going to be coming down gradually over time, but it is something that we have to watch very carefully to make sure that it doesn't rise or even remain where it is.

From the Q&A session, as reported by Bloomberg News

Speaking to journalists at an educational seminar, Plosser said "almost anyone" can predict a low headline consumer price index number because of the recent oil price slide. Oil prices, however, are volatile, he said, and "it would be dangerous to interpret low inflation numbers" as a lasting trend or a predictor of Fed policy.

 "I wouldn't be so confident" that low inflation for September means "the Fed was right" when it left the benchmark interest rate unchanged at its last meeting, he said.

From a DJ Newswires report

I am not comfortable that we have got a downward trend that I can be that confident in at the present. And I am worried about the danger of inflation staying, remaining, about where it's been.

The question is how are we going to bring about restoring price stability.  My colleagues' views differed from mine. I thought that we needed another policy move to ensure that we had a high enough probability of getting back (to lower inflation levels).

Growth doesn't slow inflation, central banks slow inflation. It has to do with what really drives inflation dynamics.

We are still seeing some continued potential for inflation pressure.  There has been some mitigation of these pressures with recent declines in energy.

In remarks to reporters after an appearance at the Forecasters Club of New York

'The outlook for the U.S. economy is for some slowing as we move through the fourth quarter' amid 'adjustments' in a housing sector that's clearly been cooling off, Hoenig told a local group in Lincoln, Neb. He added that falling energy prices are 'favorable for the outlook' and will aid what is likely to be a 'move back towards our potential as we move into 2007,' he said. 

Hoenig also said a drop in resource utilization means that inflation will 'systemically ratchet down...to lower levels this year and into next.' The bank president said his projection is a 'fairly optimistic outlook, and it's a reasonable outlook.' 

From a Dow Jones Newswire report

I'm a little bit more worried about inflation than Mr. Corrigan, I mean, although he's best to worry. Not that it's high, not that it's going to go running away, but it's kind of creeping up.

And I am impressed by the degree of pressure, if that's the right word, psychological pressure, political pressure there is not to do anything about it. A lot of people out there on Wall Street and on Main Street are operating on the assumption that nothing very startling will happen in terms of the strength. And that's reflected in attitudes pretty globally. But once people are convinced that that's the case, it can creep up on you. And the more it creeps up on you, the more difficult it becomes to do something about it.

The Bank’s baseline forecast assumes that if energy prices stabilize as indicated in the futures market, core inflation will gradually subside.  That is my best guess at this point and, based on inflation expectations measured in a variety of ways, private-sector individuals, businesses, and financial markets appear to agree.  But, as others have said repeatedly, monetary policy is about risk management.  A key risk is that inflation will continue to rise or persist at high levels and embed itself in consumer and business plans.  Managing that risk is clearly important, and a matter about which central banks need to be quite vigilant – as I believe the FOMC has been and will continue to be.

The inflation outlook remains highly uncertain, and until we actually see inflation begin to slow down, I will be focused on the notable upside risks in the outlook...

The bottom line is this.  With inflation too high, policy must have a bias toward further firming.  However, our past actions have already put a lot of firming in the pipeline. With the lags in policy we haven't yet seen the full effect of our past actions. These will unfold gradually over time. By pausing, we allowed ourselves more time to observe the data and more time to gauge how much, if any, additional firming is needed to pursue our dual mandate.

[B]y a variety of measures, it appears that the current stance of policy will move inflation gradually back to the comfort zone while giving due consideration to the risks to economic activity. By a variety measures, I'm referring to my forecast that I have outlined today, as well as the recommendations from commonly used monetary policy rules that are used to gauge the stance of policy. Taken as a whole, these rules indicate that the funds rate is currently within the range that appears appropriate, given the current condition of the labor market and the position of inflation relative to my comfort zone.

When I say that policy should be responsive to the data, I mean that any additional firming should depend on how emerging developments affect the economic outlook. And when I say data, I don't just mean data on inflation, output, and employment. I also mean data on factors that might affect those variables in the future—such as energy prices, the dollar, the stock market, long-term interest rates, housing prices and inflation expectations.

"If inflation turns out to exceed . . . our target range, I do not believe we can count on a slowing economy to bring inflation down, by itself, quickly," William Poole, president of the Federal Reserve Bank of St. Louis, said in an interview. If inflation expectations rose in "a persistent way . . . we could expect to see that show up in measured inflation in fairly short order." 

In a Wall Street Journal interview

What are the prospects for inflation over the next year or two? When I look at all of the elements that influence inflation, it seems that the most likely outcome over the next year or so is that inflation will remain contained, although there are risks, and I think they are tilted slightly to the upside. First, there is the possibility that inflation could intensify if labor and product markets continue to tighten. Next, there are risks relating to energy and commodity prices. Apparently, we haven't had much in the way of pass-through from past increases in energy and commodity prices to core inflation yet, but I wouldn't be surprised if some modest amount were evident in the next couple of quarters. Assuming, however, that energy and commodity prices level out, and, importantly, that longer-term inflation expectations remain stable, I would expect any pass-through of earlier increases to boost core inflation only temporarily.

Solid growth in economic activity, higher prices in some sectors, and hints of the stabilization of overall inflation, along with perceptions by businesses that "pricing power" may be returning, are marking a transition from asymmetric risks of additional disinflation to more nearly balanced risks of rising and falling inflation. This transition is another key piece of the backdrop for monetary policy.

We do know that as the rate of growth has slowed down, unit labor costs have gone up as they invariably do in such a period. But we've seen no evidence that those costs are being passed through into final prices in any material way. Similarly, we see a fairly extraordinary increase in energy costs. And here again, separating corporations into non-energy, non-financial, we've tried to trace the movement of energy costs into prices, and we've found that almost all does not going to final goods prices, but is squeezing profit margins, which is the same thing as unit labor costs.

From Q&A session, as reported by Bloomberg News