Many have read the FOMC statement as virtually guaranteeing that the Fed will hold the funds rate near zero for at least another two years, but Lacker said that is not a valid interpretation. “I would note that it’s a fairly mild statement in the sense that it’s highly contingent,” he said... “I think that if the economic data come in differently than the Committee expected then I think that will provide the opportunity to alter the terms of that statement.” 

 “That statement isn’t so much a commitment as it is a forecast,” he added.

...

Lacker said his main objection to the extended zero rate policy is directed elsewhere: “For me predominantly, it’s a matter of money creation and inflation.”

 “We operate monetary policy by moving short-term interest rates around over the business cycle,” he explained. “We do that because what’s required to get the money supply right, to keep inflation low and stable, a lower interest rate is required when the economy is soft, and a higher interest rate is required when the economy is strong.” “If we get the interest rate wrong we’re going to get the money supply wrong, and that’s going to get inflation wrong,” he continued. “And that’s why we vary interest rates with economic conditions the way we do. People confuse that with providing stimulus and working to offset shocks to growth, positive or negative.” 

 “So for me the chief risk is that it creates the ingredients for an acceleration of inflation.”

If additional actions are required, I can assure you the Federal Reserve is not out of bullets. If the anemic growth in the first half of this year is a soft patch in an ongoing, moderately paced recovery, additional monetary stimulus is probably of limited marginal value. But saying this is not the same thing as saying that monetary policy would be ineffective if conditions deteriorate. Expansion of the balance sheet or changes in the composition of the Fed's asset portfolio are available, in my view. These could be quite effective, particularly if done in sufficient size, in the event that the economy retreats back into contractionary territory.

The statement issued by the FOMC earlier this week presents a sober assessment of the state of the U.S. economy...

In light of the current outlook, the FOMC in its statement noted that we now anticipate that we are likely to keep short-term interest rates exceptionally low at least through mid-2013. We also discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. Further details on the discussion at the meeting will be available when the minutes are published in three weeks time. I will not comment on monetary policy any further today.

I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular, personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November.

I can summarize my reasoning as follows. I believe that in November, the Committee judiciously chose a level of accommodation that was well calibrated for the prevailing economic conditions. Since November, inflation has risen and unemployment has fallen. I do not believe that providing more accommodation—easing monetary policy—is the appropriate response to these changes in the economy.

Going forward, my votes on monetary policy will continue to be based on the evolution of the data on PCE inflation and its components, medium-term PCE inflation expectations, and unemployment.

If, however, I come to conclude that we're in a world that portends a long period of very weak growth, high unemployment, and painful structural adjustment, the much-anticipated policy normalization may have to be rethought. The FOMC, in my view, may have to define a supportive policy stance that will be held in place for quite a long period while letting what are essentially nonmonetary policy fixes do their work. Among the nonmonetary fixes are policies to address labor market gaps and fiscal rebalancing implemented over a number of years.

Bullard noted that the Federal Open Market Committee (FOMC) has not taken action to reduce the size of the balance sheet and remove this inflationary threat. “I conclude that monetary policy remains ‘ultra-easy’ for now. This is an appropriate setting for monetary policy today,” he said.

“However, I expect that the economy will improve during the second half of the year and into 2012,” Bullard said. “As it does, the FOMC will have to monitor the situation closely in order to remove accommodation at an appropriate pace.”

“I don’t think you want to take any policy option off the table,” he said. At the same time, “There is a high bar to do another round of quantitative easing.”

"If inflation risks materialize, I think we would need to respond by initiating exit even if growth remained disappointing," Lacker told reporters following a speech. Lacker said the consensus is for the economy to rebound in the second half of the year and for inflation to trend down to around 2%. Lacker said he was pretty comfortable with the inflation outlook now but that there was an upside risk to the inflation outlook. "There is going to be a risk of a step-up in inflation trends. We have seen that over the last nine months. Whether that is finished playing out or not, we don't have the data yet," he said. "I am hoping and expecting inflation to stabilize at around a 2% trend but there is the risk that it would continue to accelerate," he said. Lacker said he was comfortable with the current stance of policy but added that "I think we are going to have to watch carefully."

“The reasons to withdraw policy accommodation seem to me weak at the moment,” said the bank chief, who is one of only two regional Fed presidents who vote every other year, along with Cleveland Fed President Sandra Pianalto. “So I would not be surprised if that doesn’t change until an event late in 2012.”

He also told CNBC the federal funds rate has to slowly be raised "over a period of time" to 1 percent from the current 0 percent so it doesn't "shock the economy," and then it should move back "toward a more normal level as the economy allows."

"I don't think zero is the right policy," Hoenig said. "You can't have any type of a market, whether a commodities or a services market, that will run efficiently at a price of zero."

Hoenig repeated his criticism of the central bank’s near- zero interest-rate policy. “I’ve lived through three crises now and I know the conditions that are right for bubbles and guess what? Zero interest rates create the conditions for bubbles,” he said today at an agriculture conference at the Kansas City Fed.

I think the important point to make is that the situation today is somewhat different than it was in August of 2010, when we began to initiate discussion of further purchases of securities. At that time, inflation was dropping. Inflation expectations were dropping. It looked like deflation was becoming a potential risk to the economy and a serious risk.

At the same time, over the summer the recovery looked like it was stalling. We were down to 80,000 jobs a month, private sector jobs a month. Growth was not sufficient to prevent what looked like a potentially significant increase in the unemployment rate. And so we felt that with both unemployment and inflation in, you know, being missed in the same direction, so to speak, that monetary policy accommodation was surely needed. And so we undertook that step.

Today the situation is more complex. Inflation is higher. Inflation expectations are close to our target. We are uncertain about the near-term developments in the economy. We'd like to see if, in fact, the economy does pick up, as we are projecting.

And so, you know, we're not prepared at this point to take further action.

In response to a question from Sen. Johnson

These asset purchases, I recognize they're unconventional, but they work more or less, in terms of their effects on the economy, they work more or less in the same way that ordinary monetary policy works by easing financial conditions, lowering interest rates, and providing stimulus through that mechanism.

Now, you -- you may be entirely correct, A, that it might not be needed; and B, that it might not be particularly effective given the configuration of -- of problems that we have, for example if credit is not being extended and, you know, for example, or if the problems really arise from other sectors that don't -- are not responsive to interest rates.

So those are certainly things we'll take into account, Senator. You know, we're not proposing anything today. We're going to -- the main message I want to leave is that this is a serious situation. It involves a significant loss of human and economic potential. The Federal Reserve has a mandate and we want to meet that mandate, and to do that we just want to make sure that we have the options when they become necessary. But at this point, we're not proposing to undertake that {QE3} option.

In response to a question from Sen. Toomey.  See also his response to Sen. Johnson.

“We’ve exhausted our ammunition, in my view” and expanding the Fed’s balance sheet from about $2.7 trillion to more than $3 trillion “might spook the marketplace,” he said.

“I do not personally see the benefit of more monetary accommodation even if the economy weakens further,” Fisher said. “Again, there’s so much liquidity out there, the question is, ‘What is the trigger to put it to work?’”

 Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.

This largely paralleled Bernanke's comments in his June 22 press conference.  Bernanke dampened expectations of further asset purchases in the short run in his follow-up testimony to the Senate the following day.