If the economy begins to grow more quickly and the sustainability of this recovery continues to gain traction, then the purchase program will need to be reconsidered along with other aspects of our very accommodative policy stance. We are a year and a half into a recovery, although a modest one. The aggressiveness of our accommodative policy may soon backfire on us if we don’t begin to gradually reverse course. On the other hand, if serious risks of deflation or deflationary expectations emerge, then we would need to take that into account as we adjust our policy stance.

Evans said that, even if it was only charged with maintaining price stability, the fact that the Fed is "undershooting" its inflation target "dictates a highly accommodative policy." Arguing that "substantial accommodation" is warranted, he said the so-called Taylor Rule would call for the federal funds rate to be cut to minus 4% under current circumstances were it possible.

[I]n a 2006 speech about the historic use of monetary aggregates in setting Federal Reserve policy, Chairman Bernanke pointed out that, "in practice, the difficulty has been that, in the United States, deregulation, financial innovation, and other factors have led to recurrent instability in the relationships between various monetary aggregates and other nominal variables." Still, my colleagues and I will be monitoring a wide range of financial and economic developments very closely -- including the growth of the money supply, inflation, and many other financial and nonfinancial variables -- and, based on a full assessment of those developments, the FOMC will withdraw monetary accommodation at the appropriate time. My view is that the elevated reserve balances would be inflationary only if they prevented the FOMC from effectively removing monetary accommodation by raising interest rates when the time comes to remove such accommodation, and I am convinced that that will not be the case.

In essence, the Federal Open Market Committee has maintained an emergency monetary policy stance in a recovering economy and has continued to ease into the recovery. I believe these actions risk creating a new set of imbalances, or bubbles. Importantly, such actions as they continue are demanding the saving public and those on fixed incomes subsidize the borrowing public.

60 Minutes: Do you anticipate a scenario in which you would commit to more than $600 billion?

Bernanke: Oh, it's certainly possible. And again, it depends on the efficacy of the program. It depends on inflation. And finally it depends on how the economy looks.

The Federal Reserve would reduce its planned purchases of $600 billion in Treasuries only after a substantial improvement in the U.S. economy, St. Louis Fed President James Bullard said.

“The economy would have to improve a fair amount before the whole committee would pull back on that,” Bullard said today in an interview on Bloomberg Radio’s “The Hays Advantage,” with Kathleen Hays. “I think that is a possibility, but it would depend on hard data that would force us to reassess where the economy is going in the future.”

Bullard said he favored a rule, similar to the Taylor rule for setting the federal funds rate, that would adapt the level of the Fed’s easing to incoming data on the economy and inflation. He said he didn’t favor setting a $600 billion asset purchase target, preferring a smaller number that would be adjusted at each Fed meeting, although he voted for the policy.

As reported by Bloomberg News

St. Louis Federal Reserve Bank President James Bullard said Wednesday he considers the central bank's planned purchase of $600 billion in U.S. Treasurys as a "form of forward guidance" that can change based on incoming economic data.  However, Bullard suggested the Fed could be doing a better job explaining reasons for the latest stimulus measures.

As reported by Dow Jones News

You know, I think there's sorta two sort of critiques of the large scale asset purchase program. One, it won't be effective. It doesn't do that much. And-- and we agree with that, that we don't think that this large scale asset purchase program's going to have a huge, powerful effect on-- on the U.S. economy.

And two, I think there's a lotta concern about exit. Once-- when the time comes and the U.S. economy finally does pick up speed and inflation starts to rise, will we-- will we be-- will-- will-- will we be able to exit from this program smoothly without a long term inflation problem? And I think the answer to that second question is really critical. And our answer to that question is very much yes.

It concerns me that liquidity is omnipresent on bank and corporate balance sheets, and yet it is not being used to hire American workers.

It also concerns me that the most recent Lipper/AMG financial market data show year-to-date flows into virtually all asset classes except money market funds. The flows are strong into every category: high-risk to low-risk bond vehicles, taxable and nontaxable, domestic and external, fixed and floating rate, and, of course, commodities. Margin debt remains shy of 2007 highs but is fast approaching levels that prevailed before the NASDAQ implosion in 2001; in fact, margin-account debit balances as a percentage of the market capitalization of the S&P 500 now exceed the precrash level of 1987 and 2001.

Junk yields are at their lowest levels since October 2007. And the leveraged buyout market is back to paying 2006 levels of EBITDA (earnings before interest, taxes, depreciation and amortization) of 6 to 8.5 times, with the recent announcement of Carlyle Group’s reported 11 times EBITDA purchase of Syniverse Holdings echoing the peak of the precrash craze. As you know, buyout people do not typically acquire companies with a plan to expand the workforce, but instead with an eye to tighten operations, drive productivity, rejigger balance sheets and provide an attractive payback, usually in shorter time than under normal corporate horizons. And the corporations I talk to that are eyeing possible acquisitions with their surplus cash and ready access to the credit markets are not given to thinking of strategic acquisitions as a way to expand payrolls.

In sum, scanning the business landscape and the conditions of the financial markets, I concluded as a golfer that the greens are playing very fast and must be approached with great caution. At a minimum, I concluded, the committee would need to be very careful in how we calibrated our next strokes, lest we overplay it.

I fully understand the theoretical impulse to drive long-term interest rates to lower levels in hopes of stimulating loan demand and challenging the propensity for economic actors to hoard rather than invest. Given that foreign exchange markets react to interest rate differentials between countries, one effect of engineering lower rates would be to devalue the dollar, presumably to create demand for exports. The ultimate objective would be to advance final demand, generate employment for American workers and revive output.

This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it's just an unanticipated, unpredictable policy—quite the contrary. This is just monetary policy.

As reported by the Wall Street Journal

In a recent speech, I said that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. I said that I thought further Fed action was likely to be warranted unless the economic outlook were to evolve in a way that made me more confident we would see better outcomes for both employment and inflation before too long.

Just as bookies in Vegas adjust their lines for the playoffs, the oddsmakers on the Street are constantly reassessing their positions regarding monetary policy. They change with new developments in the economy (the Fed’s Beige Book, for example, will be released tomorrow); with every public pronouncement of individual FOMC members; with insights proffered by the daily wire services and editorials in the Sunday editions of the nation’s finest newspapers (and good regional ones like your New York Times); and with the insights of consultants and analysts, some of whom even claim, spuriously, to have access to the internal deliberations of Federal Reserve policymakers. But until the committee meets, nothing is decided.

I am leaning in favor of additional monetary stimulus while acknowledging the longer-term risks the policy may present. At this juncture, and given the circumstances of sluggish growth and measured inflation that is too low, I give greater weight to the risk of further disinflation leading to deflation. In my mind, QE2 is a form of risk management—an insurance policy that is prudent to put in place at this time.

Today I will talk about an economic policy issue that, similarly, has been reduced to shorthand: QE2. This is not the famous luxury ocean liner; QE stands for quantitative easing, and the "2" denotes a second round of this policy activity.

...

Today I will walk you through the thicket of considerations that lead me, at this moment, to be sympathetic to more monetary stimulus in the near future. I take this view with a measure of tentativeness. Some more economic data will be posted before the next meetings of the FOMC in early November and mid December, and, as I always do, I would factor in the deliberations of the committee in the meeting before arriving at a final view.

In my opinion, much more policy accommodation is appropriate today.

[A]nother round of monetary stimulus at least would provide some certainty that the central bank is on the job and intends to take the necessary action to avoid [possible deflation].