“Overshooting a little bit just to make sure you get to 2% strikes me as quite sensible,” Mr. Evans said during a panel discussion at CityWeek, a London financial-services conference.

Some overshoot for a limited period of time I think considering what other benefits that might have for the economy could be an acceptable situation. If we get above 2.5 percent, I would begin to start to get a little bit nervous.

And let me make another point that is important because the Committee has reiterated its position that our attitude towards inflation is symmetric. That is to say we think the cost to the economy of a shortfall inflation are equal to the costs to the economy or similar to the cost to the economy of an overshoot.

So we're not viewing two percent as a ceiling. And I think that suggests that some tolerance of overshooting two percent would be acceptable.

[Yellen said] that the committee is not aiming for a level that will drive inflation above the Fed’s 2 percent target.

“But it’s also the case that 2 percent is our goal, and it’s not a ceiling," she added.

Fischer seemed less keen on some other suggestions by economists for dealing with the zero lower bound, including raising the Fed’s inflation target from 2 percent.

“High levels of inflation may also be associated with higher inflation variability,” he said. The costs of that “could be substantial.”

We have declared a 2 percent intermediate target for inflation, which seems to be standard for most central banks.

Inflation at the current level is not enough to justify remaining at a near-zero policy rate. Low inflation can justify a policy rate somewhat lower than normal, but not zero.

I believe that the FOMC should consider articulating a benchmark two-year time horizon for returning inflation to the 2 percent goal. (Two years is a good choice for a benchmark because monetary policy is generally thought to affect inflation with about a two-year lag.) Right now, although the FOMC has a 2 percent inflation objective over the long run, it has not specified any time frame for achieving that objective. This lack of specificity suggests that appropriate monetary policy might engender inflation that is far from the 2 percent target for years at a time and thereby creates undue inflation (and related employment) uncertainty. Relatedly, the lack of a public timeline for a goal can sometimes lead to a lack of urgency in the pursuit of that goal. I believe that, if the FOMC publicly articulated a reasonable time benchmark for achieving the inflation goal, the Committee would be led to pursue its inflation target with even more alacrity.

[W]hen gauged by the behavior of inflation since the crisis, inflation targeting delivered on its promise. Columns 2 and 4 of Table 1 report the average inflation rates and their associated standard deviations, respectively, since the beginning of 2008. Inflation rates stayed remarkably low and stable during this otherwise turbulent period. The crisis and economic downturns left virtually no traces in terms of the ability of central banks to maintain price stability. This is an important achievement in and of itself, but also because the stability of inflation provided many central banks with room to take aggressive actions to foster economic recovery.

What explains this impressive performance with regard to price stability? The key is the anchoring of inflation expectations before the crisis and the actions taken to maintain price stability, and thereby hold the anchor in place, during and after the crisis. Figure 1 shows the net change in survey measures of longer-run inflation expectations from the start of the crisis until today for a number of countries. In most cases, the anchor held firmly (to put these numbers in perspective, the inflation targets are typically between 2 and 3 percent). In a few cases, such as Japan and New Zealand, the observed shift represented a desirable move back toward the announced target. In only two other cases, Norway and the United Kingdom, do we see a nontrivial shift in inflation expectations. I will return to the case of Norway later.

With inflation expectations firmly anchored and the public apparently confident that central banks would hold the line on price stability, the transmission of economic turmoil to inflation was muted. Inflation (and, on the downside, deflation) proved to be the dog that didnt bite.

It has become a mantra in central banking that robust micro- and macro-prudential regulatory and supervisory policies should provide the first and second lines of defense for financial stability. Still, some are concerned that is not enough and call for including a financial stability goal in the monetary policy mandate as well. Doing so, however, raises the important issue of how one commits to taking financial stability into account while simultaneously preserving the nominal anchor. If financial stability and price stability goals are in conflict, there is a risk that price stability will be subordinated to the financial stability goal, with serious long-run consequences for economic performance.

This issue of the appropriate role of monetary policy in fostering financial stability at the potential cost to inflation goals has been playing out in policy debates and decision in two Scandinavian countries: Norway and Sweden These examples illustrate the tradeoff between price and macroeconomic goals on one hand, and financial stability goals on the other, when using monetary policy to mitigate risks to financial stability.

So far, its unclear how durable a slippage in inflation expectations resulting from a focus on financial stability concerns will prove to be. Nonetheless, it is an apt reminder of the potential long-run costs of losing sight of the price stability mandate. The steadfastness of the nominal anchor in most advanced economies has been, and continues to be, a key factor in many central banks ability to maintain low and stable inflation during and after the global financial crisis. It was forged over many years of consistent commitment to price stability and successfully taming the inflation dragon. If the anchor were to slip, it would wreak lasting damage to a central banks control over both inflation and economic activity, at considerable cost to the economy. This applies equally to deviations above and below the target.

Prior to the global financial crisis, a rough consensus had emerged among academics and monetary policymakers that best-practice for monetary policy was flexible inflation targeting. In the U.S., flexible inflation targeting is implied by the dual mandate given to the Fed, under which monetary policy is required to take into account deviations of both output and inflation from their target levels. But even in countries where the central bank officially targets only inflation, monetary policymakers in practice also aim to stabilize the real economy around some normal level or path.

…

Another important question is whether monetary policymakers should alter their basic framework of flexible inflation targeting to take financial stability into account. My answer to that question is that the "flexible" part of flexible inflation targeting should include contributing to financial stability, provided that it aids in the attainment of the main goals of monetary policy. The main goals in the United States are those of the dual mandate, maximum employment and stable prices; in other countries the main goal is stable prices or low inflation.

I think there is some confusion as to whether the FOMC’s 2 percent inflation objective is a ceiling or not. My own view is that 2 percent is definitely not a ceiling. Once we reach 2 percent, I would expect that we would spend as much time slightly above 2 percent as below it, recognizing that we will hardly ever be exactly at 2 percent because of the inherent volatility in prices. If inflation were to drift above 2 percent, all else equal, then we would tend to resist such a rise. But, if inflation were slightly above 2 percent even as unemployment remained far above levels consistent with maximum employment, then the unemployment consideration would dominate because we would be further from the unemployment objective than we are from the inflation objective. This should not surprise anyone. This is what our “balanced approach” implies.

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.

“One of the big risks is that we withdraw our accommodative policies prematurely… I think it’s just human nature to start thinking we’ve been doing this for a long time.”

The Fed’s benchmark short-term interest rate has been pinned near zero since late 2008, which could prompt some policy-makers to think “that must have been long enough. Maybe it’s time to start the process of renormalizing,” Mr. Evans said.

“Well, let me just remind everybody inflation is 0.9% in the U.S.” in February... Mr. Evans also stressed that inflation around the world is low. “I think that’s a sign of weakness; I think that’s a sign of risk,” he said.

He said it would be fine for inflation to exceed the Fed’s target. “Overshooting would not be a problem as long as it’s done in a reasonable fashion,” he said.

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.

When I began my term I expected to build on the monetary policy framework I had inherited from Paul Volcker and Alan Greenspan I believed that a still more transparent approach would make monetary policy even more effective and further strengthen the Fed's institutional credibility. In particular, as an academic I had written favorably about the flexible inflation-targeting approach used by the Bank of England and a number of other central banks. [T]hese central banks provided a clear framework to help the public and market participants understand and anticipate policy actions I was confident that we could adapt this type of framework to the Federal Reserve's dual mandate to promote both maximum employment and price stability. Indeed, central banks using this framework were already, in practice, often pursuing economic objectives in addition to low and stable inflation--hence the term, "flexible" inflation targeting. Because the financial crisis and its aftermath naturally occupied so much of policymakers' attention, progress toward a more explicit policy framework at the Federal Reserve was slower than I had hoped. Nevertheless, progress was made. In the minutes of its October 2007 meeting, the FOMC introduced its quarterly Summary of Economic Projections (SEP), which included FOMC participants' projections of key macroeconomic variables such as inflation, gross domestic product (GDP) growth, and the unemployment rate. Over time, we added long-run projections of inflation, growth, and unemployment, as well as projections of the path of the target federal funds rate consistent with each individual's views of appropriate monetary policy We took another important step in January 2012, when the FOMC issued a statement laying out its longer-run goals and policy strategy.2 The statement established, for the first time, an explicit longer-run goal for inflation of 2 percent, and it pointed to the SEP to provide information about Committee participants' assessments of the longer-run normal unemployment rate, currently between 5.2 and 6 percent.