We will have to be careful not to leave monetary accommodation in place longer than it's needed to put upward pressure on inflation, or to conceivably touch off a bubble in some other area of the economy

From press Q&A as reported by Market News International

There is no evidence that is occurring, "but that's a danger," she said, noting that inflation is due to negative supply shocks to the economy, not the result of "everyone drinking the punch."

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She said she continues to view core CPI as a better "forward-looking" measure of inflation, but only if one believes, as futures markets are predicting, that food and energy prices will eventually stabilize. And on that score futures markets in recent years have been "wrong, wrong and wrong." However, policymakers cannot claim to have achieved price stability "unless it shows up in the headline number," she said.

From Q&A as reported by Market News International

Consistent with our dual mandate of promoting maximum employment and stable prices, we also need to be alert to risks to price stability. Increases in food and energy prices have pushed up overall consumer prices and are putting upward pressure on core inflation and inflation expectations. We will continue to monitor the inflation situation closely. And, more broadly, in my view, as financial intermediation channels reset, monetary policy will become still more efficacious.

Fed policy--both with respect to liquidity tools and monetary policy--is partially offsetting the consequences of the liquidity and credit pullback on real activity. But we must be careful to not ask policy to do more than it is rightly capable of accomplishing. The problems afflicting our financial markets are indeed long-in-the-making. Correspondingly, the curative process is unlikely to be swift or smooth. Time is an oft-forgotten, yet equally essential, tool of our policy response.

Inflation tends to fall noticeably during recessions, and that provides a downside risk for my inflation forecast.

The Federal Reserve cannot, however, be complacent about inflation. Most survey measures of long-run inflation expectations have remained well behaved. But some measures of inflation compensation derived from the differential between nominal and real Treasury yields have moved up. Such measures are an imperfect indicator of inflation expectations, because they are affected by inflation risk and illiquidity. Nevertheless, these movements highlight the risk that our attempts to deal with problems in the real economy could lead to higher inflation expectations and an erosion of our credibility.

Overall, I expect PCE price inflation to fall below 2 percent next year based on futures markets’ expectations of a leveling out of energy and other commodity prices, and the projected weakening of labor and product markets.

Inflation is a very real phenomenon out there. It is there. We have to protect our credibility.

From audience Q&A as reported by Reuters.

Even if policymakers are relatively indifferent about the level of inflation within a comfort zone, research on the optimal design of monetary policy indicates that they shouldn't be: The central bank should actively seek to bring inflation back to the midpoint of its comfort zone, thereby minimizing the probability that inflation wanders outside the boundaries of that zone. In effect, the optimal policy strategy takes into account the benefits of insurance, and hence the midpoint of the zone becomes the point objective for inflation

If we again begin to grow, at a time when inflation is still at a very high base level, then we could (create) conditions for sustainable inflation over the long term.

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Consumer price inflation is rising, and the personal consumption expenditure basket is rising to uncomfortable levels. ... What we are trying to do ... is condition expectations of where we go, going forward, to make sure that inflation doesn't get out of control. Because we know that there is a lag in monetary policy

As reported by Reuters

The issue that is extremely important is the preservation and commitment to a nominal [inflation] anchor. ... I see no tendency from central banks to want to deviate from this world of price stability ... A commitment to keeping inflation low and stable is something I don't see any wavering from in the world, which is the key. But we have to be vigilant.

From audience Q&A as reported by Reuters and Market News International

The empirical evidence also indicates that pass-through from exchange rates to import prices is low and has declined markedly over the past two decades. This evidence suggests that there may be a weaker relationship between exchange rate fluctuations and nominal demand than prevailed in the past, which may make it easier for monetary policy to stabilize inflation and real activity. Nevertheless, exchange rate fluctuations can still have an effect on inflation and economic activity; hence, monetary policy must continue to take these fluctuations into account to ensure that inflation expectations remain well anchored and that fluctuations in economic activity are minimized.

I agree that the Fed certainly cannot afford to take for granted that inflation expectations will remain well-anchored.

At the same time, there are downside inflationary pressures relating to the slowdown in the U.S. economy. ... [T]he U.S. economy is particularly exposed to downside risks from the unwinding of the housing bubble and disruptions in financial markets. There is some slack now in the U.S. labor market and, if these downside economic risks materialize, quite a bit more slack could emerge. Even with a flatter Phillips curve, such a development would place some downward pressure on inflation. It is this unpleasant combination of risks to both inflation and employment that the FOMC must balance as it assesses the appropriate path for monetary policy going forward.

Credibility accounts for why inflation appears generally to have become less persistent. Households and firms believe that such shocks will not be allowed to feed into further increases in inflation, so inflation expectations have become better anchored. Indeed, much research documents that movements in energy prices have had far smaller effects on core inflation since the mid- 1980s, and the most compelling reason for this shift is the credibility of monetary policy.

With respect to globalization, I agree with Bill that, through its effect on relative prices, globalization has created both tailwinds and headwinds for central banks in their quest for price stability. Such shocks do not, in my view, alter in the least the ability of a central bank to attain its desired inflation objective over the medium term in a flexible exchange rate regime. But they do affect inflation in the short run, and they can make the attainment of a particular inflation goal easier or more painful by impacting NAIRU, at least for a time.

[G]lobalization does not undermine the ability of the Fed, or any other central bank for that matter, to control inflation over an appropriate time horizon, but it does challenge us—you might say it disciplines us—to conduct monetary policy more prudently. In today’s world, where investors can move their funds instantly from one currency to another to avoid depreciation, the price central bankers pay for high inflation is much higher than in the past. Understanding this, you can see why I am a steadfast inflation-fighting owl.

Globalization does matter for inflation, but not in the ways that are often suggested in the media. The most common fallacy is, of course, the confusion of relative price with price level changes, the idea that a flood of cheap imports from China must of necessity lower the price level and the inflation rate. The channels whereby globalization affects inflation are much more subtle and not always necessarily benign. Furthermore, I believe that different dimensions of globalization affect the dynamics of inflation in fundamentally different ways.

Let’s start with trade. The availability of cheap imports from China and other countries does have a direct and indirect impact on domestic prices and inflation. There has been a significant amount of work in recent years trying to document the size of this effect. The estimates vary, but they are generally significant. But the mechanism whereby the price changes are realized is subtle.

The fourth dimension is the least understood. That is the global assignment of tasks through nontraditional channels. The U.S. is a high-value-added, services-driven economy; services represent over 80 percent of our economy. The growth of service sector trade, particularly through fiber optic cable and satellite connections, poses significant measurement issues. It is not as if we can just go down to the docks and count containers coming and going to quantify the impact of service sector trade. And what implication does the increasing trade in tasks with cheap labor pools around the globe pose for pricing of services and, in turn, for inflation?