Why would the FOMC want to use price level targeting? There are two reasonsand they are closely related to the concerns about low inflation that I raised earlier.

The first reason is that price level targeting makes long-term contracts safer for borrowers and lenders. For example, suppose a family took out a 30-year mortgage in 2012, under the expectation that the FOMC would deliver on its commitment to keep inflation at 2 percent. Because inflation has been so low over the past two years, the borrowers current repayments are now surprisingly expensive in real terms In contrast, if the FOMC uses price level targeting, the borrowers repayments in 2042 are likely to be close, in real terms, to what the borrower expected when originally taking on the loan.

The second reason that the FOMC might want to use price level targeting is that it would serve as an automatic stabilizer for the economy... [I]f the FOMC were to decide today to follow price level targeting, then businesses would anticipate more stimulative future monetary policy and, consequently, higher future demand. That expectation of higher demand would provide an additional incentive for them to hire and invest today. In this way, the FOMCs decision about price level targetinga decision about choices to be made several years from nowhas the potential to affect the near-term speed of the economys recovery.

I believe, certainly, that {the indicator threshold approach} is superior. I’m not saying it’s the best possible approach, there may be other things we can do in the future. We’re always looking to find ways to improve our communication but I do think it’s more transparent and will allow the markets to respond quickly and promptly to changes in the outlook by adjusting when they think rate increases will begin, and therefore, it’ll act, to some extent, like an automatic stabilizer. So if the outlook worsens and that leads markets to think that the increase in rates is further out in the future, that will tend to lower longer-term rates and that would tend to be supportive of the economy. So that has an automatic stabilizer type effect. It kind of offsets adverse shocks. So it’s a better form of communication. As I said, we discussed it quite extensively at the last meeting. And so—and frankly, given that it’s a relatively complex change, it seemed like it would be a good idea to do it at a meeting where there was a press conference. So, we decided since we’re ready to go why not make the change earlier and get the benefit earlier.

The Federal Reserve could “sit back” and let the bond market play the role of automatic stabiliser in the economy, even amid concern over the housing slowdown, Bill Poole, president of the St Louis Fed, has told the Financial Times...

“The decline in long rates is working as a built-in stabiliser for the economy,” he said, noting that the fall in bond market rates “will tend to bring down mortgage rates” as well...

"The FOMC can some of the time -- maybe even much of the time -- sit back and do relatively little, relying on the stabilising effect of market reactions to current data," he said.  "We don't have to do it all."