Speaking on a panel titled "Monetary Policy Normalization: Graceful Exit or Bumpy Ride?" at the American Economic Association's annual meeting, Federal Reserve Bank of Boston President Eric Rosengren said that the economy has improved enough for the discussion to move from whether normalization will occur to when normalization will occur.

"I believe the continued very low core inflation and wage growth numbers provide ample justification for patience," Rosengren said. "A patient approach to policy is prudent until we can more confidently expect that inflation will return to the Fed's 2 percent target over the next several years. Such patience also provides support to labor markets."

"The timing of the initial tightening of short-term interest rates after a recession depends on several factors," Rosengren said. "Previous liftoffs can provide only an imperfect guide to likely future actions - but do provide some indication of factors that should be considered."

Rosengren observed that the last time the Federal Open Market Committee raised rates after a recession in June of 2004, the unemployment rate was at 5.6 percent, below the current 5.8 percent, and inflation was at 2.8 percent - well above its current reading of 1.2 percent.

"Some worry that patience will mean deferring the first rate increase until well past the arrival of economic conditions that historically result in tightening, but I would point out that we have some way to go before reaching those conditions, and so have not been unusually patient as yet."

"Clearly, an unusual set of conditions prevails as the Federal Reserve considers beginning a move toward more normal rates," said Rosengren. Three areas stand out as complicating current discussions of raising short-term interest rates. These include the fact that inflation is still well below the Fed's target, that compensation is so subdued at a time when raising rates is under discussion, and that nontraditional monetary policy has enlarged the Fed's balance sheet which will need to be normalized in conjunction with normalizing short term rates.

"The low inflation rates experienced globally may also allow for a more gradual normalization process than typically occurs," he added. "With so little wage and price pressure, and relatively slow productivity growth, it is possible that rates may not normalize at the same level they were prior to the financial crisis."

In conclusion, Rosengren noted that the complexity of monetary policy normalization is more pronounced than in 1994 and 2004. However, the fact that discussion of policy normalization is now appropriate is a welcome change from discussions of monetary policy over the past six years.

Rosengren also participated in a panel discussion on "Credit Availability 20 Years after Peek and Rosengren." Slides from that presentation are available here.