The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market. In addition, federal fiscal policy continues to be an important restraint on growth and a source of downside risk.

The general framework in which we’re operating is still the same. We have a three-part baseline projection, which involves increasing growth that’s picking up over time as fiscal drag is reduced, continuing gains in the labor market, and inflation moving back towards objective. We are looking to see—in the coming meetings, we’ll be looking to see if the data confirm that basic outlook. If it does, we’ll take a first step at some point—possibly later this year—and then continue so long as the data are consistent with that continued progress. And so that basic structure is still in place.

But what I want to emphasize is really two things. First, as I’ve said, asset purchases are not on a preset course, they are conditional on the data. They’ve always been conditional on the data. And, secondly, that even as we move from asset purchases to rate policy as the principal tool of monetary policy, it’s our intent to maintain a highly accommodative policy and to provide the support necessary for our economy to recover and to provide jobs for our citizens.

Well, I think part of the {financial market} reaction we've seen, I mean, comes from a number of sources. Part of it comes from improved economic news. And that's part of the reason why rates have gone up in other countries, as well as in the United States. And that -- to the extent that tighter financial conditions reflect a better outlook, that's a good thing. That's not a problem at all.

Part of it reflects views about monetary policy, in that -- that we want to make sure we get straight. And that's why -- to answer the earlier question again -- it's why communication is so important. We need to explain as best we can how we're going to move and on what basis we're going to move. It's much more difficult today than it was 20 years ago, because the tools are more complex, they're less familiar. But that's still very important.

I think the other factor which was at play was an unwinding of excessively risky and leveraged positions in the markets, and insufficiencies of liquidity in some cases meant that those unwindings led to larger reactions in prices and rates than might otherwise have occurred.

Now, the tightening associated with that is to some extent unwelcome, but on the other hand, to the extent that some of the riskier, more levered positions have been eliminated, I think that makes the situation more sustainable and reduces, at least, the risk that there will be an over-strong reaction to further announcements.

So we will do our best to communicate clearly. That is our goal and our objective. The more clearly we communicate, the better the chance that markets will understand our intentions and that we can avoid any -- any sharp movements. But, again, we're dealing with tools that are less familiar, harder to quantify, and harder to communicate about then the traditional funds rate.

In terms of press conferences, I think it's important to say that there's an understanding in the committee that we've had for a while that there are eight, quote, "real" meetings every year, that every meeting is a meeting in which any policy decision can be taken. And should anything occur at a -- at a meeting without a scheduled press conference that requires additional explanation, we certainly could arrange a public, on-the-record conference call or some other way of answering the media's questions.

I think we can be very patient in -- in raising the federal funds rate, since we have not seen any inflation pressure.

On having an inflation floor, that would be in addition to the guidance. We are discussing how we might clarify the guidance on the federal funds rate. That is certainly one possibility.

I guess an interesting question there is whether we need additional guidance on that, given that we do have a target. And, of course, implicit in our policy strategy is trying to reach that target for inflation. But that -- an inflation floor is certainly something that, you know, could be a sensible modification or addition to the guidance.

Clearly, the unemployment rate plays an important role in our thinking and communication about future policy. Therefore, an important issue is whether it is giving an accurate read on where things stand relative to our maximum employment mandate. The unemployment rate measures the percent of the labor force that is out of work and looking for a job. It has a number of advantages as a measure for summarizing the state of the labor market. For one thing, over time it has proven to be a reasonably stable and predictable barometer of whether labor market conditions are too hot, too cold, or just right in terms of creating inflationary pressures. Although structural changes in the labor market affect the unemployment rate, most of the variation in unemployment over time reflects cyclical factors, that is, whether the economy is too hot or too cold. And, second, the rate closely tracks other indicators of how much slack there is in the labor market, such as data from surveys on the share of households that finds jobs hard to get and the share of businesses that say it’s hard to fill openings. This adds to our confidence in its reliability.

All the same, there are reasons to worry that the unemployment rate could now be understating just how weak the labor market is. In particular, during the recovery, the share of the working-age population that is employed has increased very little, even as the unemployment rate has fallen. Taken at face value, the very low ratio of employment to population suggests that the labor market has improved far less than what’s implied by the decline in the unemployment rate.

So should we stop using the unemployment rate as our primary yardstick of the state of the labor market in favor of the employment-to-population ratio? My answer is no. Although the unemployment rate is by no means a perfect measure of labor market conditions, the employment-to-population ratio blurs structural and cyclical influences. That makes it a problematic gauge of the state of the labor market for monetary policy purposes…

…

What does that mean for monetary policy? First, the unemployment rate and a number of other labor market indicators, such as payroll job gains, point to continued progress in the labor market. Clearly, we are getting closer to meeting our test of substantial improvement in the labor market.

Second, any changes in policy will depend not only on labor market conditions, but also on inflation. In our July statement, the FOMC noted that inflation persistently below 2 percent could pose risks to economic performance. That means we will also take into consideration whether inflation is moving closer to our target. Third, any adjustments to our purchases are likely to be part of a multistep gradual process, reflecting the pace of improvement in the economy.

As I noted earlier, Chairman Bernanke has laid out a timetable for our securities purchases, which includes reducing them later this year and ending them around the middle of next year, assuming our forecasts for the economy hold true. I haven’t significantly changed my forecast since then, and I view Chairman Bernanke’s timetable to still be the best course forward. However, I can’t emphasize enough that when and how we adjust our purchases will depend crucially on what the incoming data tell us about the outlooks for the pace of improvement in the labor market and movement towards our inflation goal.

“If we see the growth pick up in the second half and if we see job gains ... at a higher range, say 180-200,000 – I think with other fundamentals improving we probably are in a position to remove ... the extraordinary policy program over the medium term,” Mr Lockhart said in an interview with Market News International.

But Mr Lockhart noted that the timing of slower asset purchases would depend on the incoming economic data. “[With a] kind of ambiguous picture of mixed data that signal neither accelerating strength nor necessarily deterioration, but that kind of moping along in the middle, then I think it’s not a foregone conclusion that the asset purchase programme should be removed or be removed rapidly,” Mr Lockhart added.

As reported by The Financial Times.

Mr. Bullard noted that inflation is “low” and “near the lower edge of acceptable outcomes.” He added “on balance, inflation expectations have declined since March,” and said the Fed “would not normally remove policy accommodation in an environment where inflation is below target and is projected to remain there.”

The central banker said it is also challenging to determine the health of the labor market. Based on the unemployment rate alone, declines in joblessness suggest improvement, while other measures indicate the labor market might not be as healthy as the unemployment rate indicates. But he also said “payroll employment growth has generally been strong.”

On the growth front, recent data have been “weak,” but there are reasons to be hopeful for the future. “Real estate markets are improving, equity markets have rallied, the European sovereign debt crisis remains subdued for now, U.S. fiscal brinkmanship has been less of a problem, and household deleveraging is further along,” he explained.

That said, Mr. Bullard said “I have generally been too optimistic” about the economy’s outlook, and because of this, “I think caution is warranted in taking policy action based on forecasts alone.”

In other comments, the central banker noted the Fed’s balance sheet, while very large in absolute terms, “is not particularly large when scaled by GDP and compared to other major central banks, or when compared to historical data on the Fed’s balance sheet.”

As reported by WSJ.

I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions--which have tightened recently--were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer. Indeed, if needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.

…

As I have observed on several occasions, the phrase "at least as long as" is a key component of the policy rate guidance. These words indicate that the specific numbers for unemployment and inflation in the guidance are thresholds, not triggers.. For example, if a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the Committee would be unlikely to view a decline in unemployment to 6-1/2 percent as a sufficient reason to raise its target for the federal funds rate. Likewise, the Committee would be unlikely to raise the funds rate if inflation remained persistently below our longer-run objective. Moreover, so long as the economy remains short of maximum employment, inflation remains near our longer-run objective, and inflation expectations remain well anchored, increases in the target for the federal funds rate, once they begin, are likely to be gradual.

“Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” Bernanke said today in response to a question after a speech in Cambridge, Massachusetts.

[T]he case for continued support for our economy from monetary policy remains strong...   [A]s our economy has gradually improved, it has become possible, and appropriate, for the Federal Reserve to provide clearer guidance on the path of monetary policy. In all likelihood, this path will involve continued support from accommodative monetary policy for quite some time.

"Seven percent is an indicative goal," Mr. Stein said to the Council on Foreign Relations in New York. "On the one hand, we'd like some ability to have some specificity, and to do that you have to pick a number ... but it's an attempt to provide clarity. It doesn't mean we're going to shut out other relevant data on the labor market."

As the Chairman made clear, there is no "predetermined" pace of reductions in the asset purchases, nor is the stopping point fixed.

The pace of purchases, the composition of purchases, and the ultimate size of the Fed's balance sheet still depend on how economic conditions evolve. All elements of the asset purchase program will be considered on a meeting-by-meeting basis in light of the incoming data and economic outlook.

In my view, the comments by the Chairman do not constitute an enormous shift in policy. The asset purchase program is best thought of as a supplement to the FOMC's interest rate policy, designed to add a little more heft to efforts in support of ongoing recovery. As I said a moment ago, I still anticipate that the very low interest rate policy will remain in place for a considerable time after the end of asset purchases, and thus policy will remain highly accommodative.

...

If the broad economy evolves close to the outlook I laid out—which itself is close to the composite forecast of the 19 FOMC participants—then the economy will be on track to a better place. In that circumstance, I think the position that the economy does not need quite as much stimulus is fully supportable.

If the economic data over the next year turn out to be broadly consistent with the outlooks that the FOMC sees as most likely, the FOMC anticipates that it would be appropriate to begin to moderate the pace of purchases later this year. Under such a scenario, subsequent reductions might occur in measured steps through the first half of next year, and an end to purchases around mid-2014. Under this scenario, at the time that asset purchases came to an end, the unemployment rate likely would be near 7 percent and the economy’s momentum strengthening, supporting further robust job gains in the future.

“This asset-purchase tapering is just slowing the rate at which we’re increasing the balance sheet,” Lacker, who doesn’t vote on the Federal Open Market Committee this year, said today in a Bloomberg Television interview with Peter Cook. “We’re not anywhere near decreasing the balance sheet yet.”