Slow progress in closing resource gaps and a medium-term outlook for inflation that is too low lead me to conclude that substantial policy accommodation continues to be appropriate.

Fisher, who has been a vocal critic of the current course of monetary policy, also said the Federal Reserve has not agreed yet on a sequence of events in which it would start its exit strategy from hyper-loose monetary policy. He said there have been discussions on several options. "We really didn't lay out a sequence, we are having a discussion on an exit strategy and we have been having those discussions for quite some time," he said.

“It is important for us not to overreact to this inflation, raise interest rates dramatically, to snuff this inflation out because if we did we would have a very bad consequence for economic activity and employment,” Dudley said today in response to questions in Middletown, New York. “We are trying to strike the appropriate balance.”

“I still think it is reasonable” to expect tightening by year end, Bullard said today in a Bloomberg Television interview in New York. “I like a balance-sheet-first policy and I think the Fed will take a balance-sheet-first policy."

If the economy continues to make progress, then monetary policy will need to exit from its extraordinary accommodation in the not-too-distant future. As always, we will study the incoming information on the state of the economy. While my expectation is that oil price increases will level off and that the currently elevated inflation measures will reverse, the risks to the inflation outlook are tilted to the upside. In this environment, we must have a plan in place to begin normalization of monetary policy. Depending on how economic conditions evolve, we must be prepared to act as aggressively as necessary if we are to promote effectively our long-run goals of price stability and maximum employment.

Speaking to reporters after the speech, Plosser said the Fed is “actively discussing” its next steps and that a third round of quantitative easing, or QE3, is unlikely. Plosser said that the FOMC may “go on hold” to assess the economy.

“We’ve made pretty clear there’s no QE3 on the table right now,” he said, “unless something dramatic happens.”

I have been describing how monetary policy should react to one particular scenario, my baseline forecast. As I noted, my baseline forecast about inflation was wrong last year, and could well be again this year... If core PCE inflation were to fall over the course of 2011 relative to 2010, then it would be desirable for the FOMC to ease further in response to that decline. I imagine that easing would take place through the purchase of more long-term government securities.

Given my outlook, I think that the current stance of monetary policy, with short-term interest rates close to zero, is appropriate and supports the FOMC's dual mandate of price stability and maximum employment. In fact, my outlook for the economy that I have been discussing is based on the Committee keeping the federal funds rate close to zero for an extended period of time.

Nevertheless, monetary policy will eventually have to become less accommodative, and we have been developing the tools that we will use to exit from our current policy stance. I am confident that we will be ready to use them when the time is right.

The standard response to {a projected 0.7% increase} in core PCE inflation would be to raise the target interest rate by a larger amount—that is, by at least 70 basis points. For example, the widely known rules associated with John Taylor of Stanford University would recommend that the response should be to raise the target interest rate by 1.5 times the increase in core inflation—that is, by 105 basis points...

Barring significant unexpected developments, this should be the high-water mark for monetary stimulus in this cycle, with the focus going forward on the timing and pace of stimulus withdrawal. While timing and pace will depend upon how the economy behaves, I believe it will be important to remember the lesson of the last recovery – namely, that inflation is capable of rising even if the level of economic activity has not returned to its pre-recession trend. To prevent that, it may be necessary to initiate policy tightening well before the unemployment rate has fallen to a rate we would expect to see over the long run.

Speaking to reporters after the speech, Lacker declined to outline a timeline for the withdrawal of stimulus, saying it depends on how the economy unfolds.

“This is the point in the business cycle when the risk of losing a bit of credibility and risk of losing ground on inflation is highest,” he said. It’s “far better to act preemptively than get behind the curve on inflation and have to catch up,” he said.

[W]e still have a considerable way to go to meet the Fed’s dual mandate of full employment and price stability.

[U]nder my baseline forecast, it would be desirable for the FOMC to raise the fed funds target interest rate by a modest amount toward the end of 2011. Of course, the FOMC could also reduce accommodation by shrinking the Fed's holdings of long-term government securities... However, based on what I know now, I would prefer to reduce accommodation by raising the fed funds target interest rate. I have more confidence in that instrument of policy, based on our many years of experience with it. I suspect that this confidence is shared by the public at large.

Asked whether a third round of so-called quantitative easing was still under consideration, Rosengren said that “nothing’s off the table, it depends on economic conditions, so we have to do whatever makes sense given our outlook for the economy.”

Until we make more progress on both elements of the Federal Reserve’s mandate – employment and inflation – the current, accommodative stance of monetary policy is appropriate.