As I see it, such a balanced approach has two important implications that deserve emphasis. The first is that, if the FOMC is doing its best to minimize deviations from its objectives, then, over long periods, both unemployment and inflation will be about equally likely to fall on either side of those objectives. To put it simply, if 2 percent inflation is the Committee's goal, 2 percent cannot be viewed as a ceiling for inflation because that would result in deviations that are more frequently below 2 percent than above and thus not properly balanced with the goal of maximum employment. Instead, to balance the chances that inflation will sometimes deviate a bit above and a bit below the goal, 2 percent must be treated as a central tendency around which inflation fluctuates. The same holds true for fluctuations of unemployment around its longer-run normal rate.

The second property, which to me is the essence of the balanced approach, is that reducing the deviation of one variable from its objective must at times involve allowing the other variable to move away from its objective. In particular, reducing inflation may sometimes require a monetary tightening that will lead to a temporary rise in unemployment. And a policy that reduces unemployment may, at times, result in inflation that could temporarily rise above its target.

In closing, I’d like to make a point about the Fed’s dual mandate. We are unusual among central banks in that, since the 1970s, we’ve been charged with both employment and inflation goals. Both aspects of the mandate are important. But which is the most pressing concern has changed over time. From the late 1960s through the early 1990s, inflation was consistently running well above 2 percent. Naturally, during that period, much of the discussion about monetary policy centered on inflation and how to bring it down.

Today the situation is very different. Since the early 1990s, inflation has been consistently low, averaging right around 2 percent, and, most recently, even less than that. At the same time, the unemployment rate has remained far above the maximum employment level for over four years straight. Thus, unemployment is—and should be—a central focus of monetary policy right now. This concentration on getting unemployment down in no way represents a lessening of the importance of price stability. Quite the opposite. Consider that, if the recovery loses steam, inflation could fall too low—well below our 2 percent goal.

I first described the ideas [of my "liftoff plan"] about three weeks ago, in Ironwood, Michigan. It evinced mixed reactions. Some observers felt that the proposed liftoff plan was dovish, in the sense that it seemed to put a lot of weight on the employment mandate. Others argued that the plan was hawkish, in the sense that it put a lot of weight on the price stability mandate.

I think that this dispersion of views reflects a simple fact: The plan is neither hawkish nor dovish. The terms “hawkish” and “dovish” presume that the Committee faces a tension between its two mandates. But the Committee does not see any tension between its two mandates now.

[I]t is clear the Fed could be “missing on both sides of its mandate” during the entire time it takes the economy to return to normal, even when the monetary policy is sound. In fact, missing on both sides of the mandate is exactly what one would expect under an appropriate monetary policy. Furthermore, the literature suggests that the adjustment times are quite long, possibly many years.

"Actions such as our purchase of U.S. government securities are driven exclusively by our monetary policy goals,” Dudley said. He added “these policy actions will not continue beyond the moment they become inconsistent with our dual mandate objectives."

The dual objectives of price stability and maximum employment are generally complementary. Indeed, at present, with the unemployment rate elevated and the inflation outlook subdued, the Committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives. However, in cases where these objectives are not complementary, the Committee follows a balanced approach in promoting them, taking into account the magnitudes of the deviations of inflation and employment from levels judged to be consistent with the dual mandate, as well as the potentially different time horizons over which employment and inflation are projected to return to such levels.

This is a situation in which there’s no conflict between maximum employment and price stability. With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open.

Let me be clear about one thing. We're not going to seek higher inflation in order to advance unemployment. It's possible that because we don't control in the short run perfectly, obviously, inflation, unemployment, that you could have shocks that would drive both objectives away from their target, in which case, in a very symmetrical way we would be returning both parts of the mandate towards the target, but we'd have to take account of the other part of the mandate.

So, you know, it could affect the speed at which we return inflation to target, but by the same token, if inflation is high, it could affect the speed at which we return employment to the target. So there would have to be some interaction of those two things, and it's fully balanced and symmetrical in that respect.


From the Q&A Session

For me, explicitly acknowledging that monetary policy’s impact on employment is transitory and uncertain is a cardinal event. It signals to the markets that there are limits to the ultimate job-stoking efficacy of Federal Reserve policy. To the extent that inflation is running below 2 percent, the Federal Reserve may have somewhat greater latitude to pursue accommodation. However, the past few years have demonstrated, yet again, that allowing inflation to rise by no means guarantees faster job growth. The message to our nation’s fiscal authorities is that they cannot expect monetary policy to substitute for the need to get their act together, stop their shameful politicking, get on with putting their fiscal and regulatory house in order and do so in a manner that encourages rather than continually undermines job creation and economic expansion.

An important aspect of policy transparency is clarity about policy objectives. With respect to the objective of price stability, it is essential to recognize that the inflation rate over the longer run is primarily determined by monetary policy, and hence the committee has the ability to specific a longer-run goal for inflation.
The committee judges that inflation at the rate of 2 percent as measured by the annual change in the price index for personal consumption expenditures is most consistent over the longer run with our statutory mandate.
Over time, a higher inflation rate will reduced the public's ability to make accurate, longer-term economic and financial decisions whereas a lower inflation rate would be associated with an elevated probability of falling into deflation, which could lead to significant economic problems.
Clearly, communicating to the public this 2 percent goal for inflation over the longer run should help foster price stability and moderate long-term interest rates and will enhance the committee's ability to promote maximum employment in the face of significant economic disturbances.
Maximum employment stands on an equal footing with price stability as an objective of monetary policy.
A difference with price stability is that the maximum level of employment in a given economy is largely determined by non-monetary factors that affect the structure and dynamics of the labor market, including demographic trends, the pace of technological innovation and a variety of other influences, including a range of economic policies.
Because monetary policy does not determine the maximum level of employment that the economy can sustain in the longer term, and since many of the determinants of maximum employment may change over time or may not be directly measurable, it is not feasible for any central bank to specify a fixed goal for the longer-run level of employment.

Given the high unemployment rate and low job growth, I think it is clear that the Fed has fallen short in achieving its goal of maximum employment.

As for the price stability component of our dual mandate, the majority of FOMC participants—including me—judge that our objective is for overall inflation to average 2 percent over the medium term. With my own view that inflation is likely to run below this rate over the next few years, I believe we will miss on our inflation objective as well.

"Our progress against the maximum employment component of our mandate needs to be evaluated, with a realistic sense of what employment is actually achievable now," Lacker said. "I don't think it makes sense to hold us accountable for the employment that might have been achieved, had none of the shocks of the last 10 years occurred."

“Running the printing presses to pay today’s bills leads to much greater problems,” including a surge in inflation. “We will never let that happen at the Federal Reserve, never,” Fisher said. “Stable prices go hand in hand with achieving sustainable growth.”

In particular, the Committees actions in 2011 suggest that it is now more willing to tolerate higher-than-target inflation than it was in 2009. If this possible drift in inflation tolerance were to persist, or were expected to persist, it could give rise to a damaging increase in inflationary expectations.

The Fed's mandate is, of course, a dual mandate. We have a mandate for both employment and for price stability. And we have a framework in place that allows us to communicate and to think about the two sides of that mandate.

We talked today -- or yesterday actually -- about nominal GDP as an indicator, as an information variable, as something to add to the list of variables that we think about, and it was a very interesting discussion.

However, we think that within the existing framework that we have, which looks at both sides of the mandate, not just some combination of the two, we can communicate whatever we need to communicate about future monetary policy.

So we are not contemplating at this time any radical change in the framework. We're going to stay within the dual mandate approach that we've been using until this point.