I’d also like to stress the “above or below” part. Many people think that Fed policymakers’ concern lies disproportionately with inflation that’s too high. They think we view inflation lower than 2 percent as sort of “not great,” but see inflation above 2 percent as catastrophic. That’s not the case. In my view, inflation somewhat above 2 percent is just as bad as the same amount below.

[D]eflation is particularly problematic for debtors. The real value of their loan payments rises over time, making it more difficult to make repayment.

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.

But even if ignoring the risk of deflation, inflation that runs persistently at levels that are lower than our 2 percent objective also have economic costs. First of all, it raises the real or inflation-adjusted cost of capital, and it also redistributes debt burdens, in the sense that when individuals take on debt, they have an expectation for how rapidly prices and their own incomes, wages, will be rising. And when those expectations are frustrated by exceptionally low inflation, debtors find that the burden of their debts is really greater, and that's something that constrains their spending. So we want to avoid persistently having inflation both running higher than our objective, but also running lower than our objective on a persistent basis.

Persistently undershooting our 2 percent target is costly. When determining how much debt to take on, borrowers consider their ability to repay that debt. For example, households take on debt expecting that their income will be adequate to cover monthly payments. If inflation is surprisingly low, wage increases and other income gains are more likely to fall short of these expectations, and interest and principal payments will be more burdensome than what was planned for. A similar story will hold for business borrowing. When debt financing becomes more burdensome than borrowers originally expected, a period of deleveraging can occur, and the associated reduction in spending can weigh heavily on the overall pace of economic activity.