In measuring the stance of policy, it's common to look at the real federal funds rate—the nominal rate less a measure of the rate of inflation that is likely to prevail over the period ahead. For inflation, I have tended to use core PCE price inflation, that is, without the effects of food and energy prices...

Doing the math leaves us with a slightly negative real federal funds rate. Does this mean that policy is highly accommodative? Normally, a negative real funds rate would imply that the answer is "yes" because it is typically associated with low borrowing costs and easy credit terms—that is, easy overall financial conditions. But, as I discussed, overall financial conditions are probably more restrictive now than when the financial crisis struck a year ago, so the slightly negative real funds rate does not imply a highly accommodative policy stance. In other words, policy must be calibrated to push through the substantial headwinds the economy faces. While the economy did well in the second quarter, that strength, as I indicated, is likely to prove ephemeral. My forecast is for sluggish growth in the second half of this year, with substantial downside risks—especially emanating from the financial system.

Overall inflation over the past year has been unacceptably high. But, the prognosis going forward is favorable. Inflation expectations remain relatively well contained, reducing the chance that a wage-price spiral will develop. Moreover, if new lower commodity prices hold, even at today's high levels, we are likely to see improvements in overall and core consumer inflation coming through the pipeline soon.

My belief is that the Fed has undertaken tactically prudent actions to help move the economy through a difficult transition in line with the larger strategic goals of sustainable growth, low and stable inflation over the long term, and financial stability. Also, let me emphasize that I am mindful of today's elevated risks and am prepared at any point to change tactics to ensure inflation expectations do not become unanchored.

"Growth will taper down...to a snail's pace in the second half," and it "may be anemic for a while," Mr. Fisher said, adding that he "could see us approaching" zero growth during the latter half of the year due to the "enormous stress" created by financial markets, which remain strained.
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"The real concern I have as a central banker is whether or not [inflation] begins to affect the...spending patterns by consumers [and] pricing patterns by producers," Mr. Fisher said.

"I don't know the answer to that question," he said, adding that the odds are even whether inflation gains prove a "one-off event" or more persistent. He fears the latter scenario may be more likely.

"I have been most concerned" that expectations of further price increases will become embedded in the economy.

And while the recent pullback in energy and commodity prices is encouraging, Mr. Fisher said "it's too early to take comfort in these reversals."
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Mr. Fisher said he is confident the committee "won't do what is required" to bring price pressures back in line.

[T]he recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year. Nevertheless, the inflation outlook remains highly uncertain, not least because of the difficulty of predicting the future course of commodity prices, and we will continue to monitor inflation and inflation expectations closely. The FOMC is committed to achieving medium-term price stability and will act as necessary to attain that objective.

We'll probably have to move ahead of what everybody else perceives to be the turn, assuming that we still see some pressure on the cost front. The question is when is that turn, and I don't have an answer to that.

As reported by Bloomberg.

The current monetary policy environment is even more complicated than usual. If we were using battlefield language to describe our situation, this would be a "three-front conflict." Although real activity is weak, we also are simultaneously experiencing bad news on the inflation front in the form of higher energy and commodity prices. This creates the challenge of facilitating the economy's return toward more favorable growth rates without igniting greater inflationary pressures. The financial turmoil and subsequent tightening of credit conditions add another dimension of difficulty to the problem.

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I think the risks for growth have increased and the risks for inflation remain elevated and a concern....I see real GDP growth returning near potential by 2010—somewhere in the range of 2-1/2 to 3 percent....I think inflation should moderate over the medium term, with PCE headline inflation declining to around 2 percent by 2010.
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Our 325-basis-point cumulative cut in the funds rate was larger than we otherwise might have done in order to insure against the unlikely event of a severe downturn. That said, even though I think the current 2 percent funds rate is accommodative, it is not especially stimulative. This is because the financial market turmoil has meant that our funds rate reductions have led to less credit expansion to households and businesses than typically would be the case.

I would not rule out any action {on interest rates}.  I think we have to react to circumstances.

My guess is, it's going to pay to be patient at this point, especially with the developments we've seen on the energy side, where, at least from my perception, some of the concerns about inflation and some inflation expectations seem to have diminished.

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I think it will be some time before we see growth at or above trend in this economy.

Although widely used economic barometers haven't yet signaled the formal beginning of a recession, there is a chance one lies ahead, Federal Reserve Bank of Richmond President Jeffrey Lacker said Tuesday.
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"Even if we get through this energy price bulge and inflation moderates, I'm still concerned of the overall pattern we've set," he said.
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Although risks to economic growth persist, Lacker said, "For us to lose substantial ground on inflation would be much more costly for us to remedy than for us to have to face a more substantial slowdown in growth than we've seen so far."
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"A 2% federal-funds rate with overall inflation running at 4% is an exceptionally low real interest rate - lower than we've had in the post-war record," he said. "Monetary policy seems quite stimulative to me on that basis."

Keeping policy too accommodative for too long worsens our inflation problem. Inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. We will need to reverse course — the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later. And I believe it will likely need to begin before either the labor market or the financial markets have completely turned around.
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I am more optimistic about the outlook for 2009 and I expect we will see economic growth return to near its longer-term trend. But to prevent recent inflation from continuing to plague the economy and to avoid a rise in inflation expectations, I believe the current very accommodative stance of monetary policy will need to be reversed, and depending on how economic conditions evolve, I anticipate that this reversal will likely need to begin sooner rather than later.

As policymakers, we must remember that the path of inflation over some intermediate term is not independent of our policy decisions. While monetary policy cannot control relative price movements, sustained inflation is not something that is imposed on us. As policymakers we have a choice. If we remain overly accommodative in the face of these large relative price shocks to energy and other commodities, we will ensure that they will translate into more broad-based inflation that — once ingrained in expectations — will be very difficult to undo. I believe we must and will take the appropriate steps to ensure that does not happen.

"We can't wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course,'' Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview today.  ``Our actions will affect the economy in the future, not at the moment.''

As quoted by Bloomberg News

It will be important for the Federal Reserve to monitor inflation developments and inflation expectations closely, and to move to a less accommodative stance in a timely fashion.  When to begin this process, and how fast to move, will be difficult decisions for the Federal Open Market Committee in the period ahead.  I can assure you, however, that the Federal Reserve takes both parts of its "dual mandate" seriously and will walk that fine line to maintain stable economic activity and low inflation.

Healthy economic growth depends on well-functioning financial markets.  Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve.

Part of the rationale for the speed with which the FOMC brought down the funds rate was the risk that the slowdown we are experiencing would prove to be more severe. While that uncertainty has not entirely disappeared, my sense is that such downside risks have diminished appreciably. And just as easing policy aggressively in response to emerging downside risks made sense, withdrawing some of that stimulus as those risks diminish makes eminent sense as well. Moreover, our attention to risks needs to be two-sided, I believe. As we move through this period of low growth, we need to be attuned to the risk that we emerge from the slowdown with inflation following a higher trend than when we went in. This danger associated with the persistence of elevated inflation warrants an additional measure of vigilance.

We're approaching a crossroads. The FOMC responded to the difficult economic conditions that emerged last year by easing monetary policy substantially. ... I am somewhat reassured by the recent data, which suggest that my biggest fears on the downside have, so far, been avoided. Of course, the underlying housing, credit, and commodity-price issues are far from fully resolved. My discussion of those issues makes clear that a lot of uncertainty surrounds my outlook. A lot could still go wrong.

But maximum sustainable employment is only one of our mandates. The other is low and stable inflation. In the wake of rapid increases in prices for gasoline and food, consumer survey measures of longer term inflation expectations have turned up. In contrast, other surveys, such as the Survey of Professional Forecasters, show little erosion in long-term inflation expectations. In addition, the anecdotes I hear are more consistent with credibility than with an upward wage-price spiral. In particular, my contacts uniformly report that they see no signs of general wage pressures.

On balance, I still see inflation expectations as reasonably well anchored and I anticipate that consumer survey measures will come down once oil and food prices stop rising. But the risks to inflation are likely not symmetric and they have definitely increased. We cannot and will not allow a wage-price spiral to develop.

As I began with a reference to Shakespeare, let me end with one as well: For monetary policymakers, "readiness is all." By this I mean that, in the face of these competing risks, we will monitor developments carefully and be prepared to act as needed to fulfill our mandate for sustainable economic growth and price stability.