There would be many more complications in the United States [than in other inflation-targeting countries]--the Federal Reserve would have to coordinate with the Treasury secretary, representing the executive branch, and members of the Congress...All political actors might recognize the value of price stability and might appreciate inflation targeting, at least in its softer form. But at a minimum, political issues are much more complicated in congressional systems than in parliamentary systems.

Although academic economists and many others have for years been urging the Federal Reserve to adopt inflation targeting, legislators have shown very little interest in the issue.

Administration and congressional support [for an inflation target] has ranged from weak to non-existent. This lack of support could well change as the Administration and the Congress became more familiar with inflation targeting and, in particular, the possible flexibility of the regime. But if it does not change, or if it takes the form of inappropriate targets for other macroeconomic objectives, it becomes a definite impediment to the adoption of inflation targeting by the United States.

For the Fed to interpret the broad language of the Full Employment and Balanced Growth Act as an invitation to write rules instituting a strict form of inflation targeting would be an extreme stretch, though perhaps not for a soft form of inflation targeting.

Congress probably will not move ahead on the Saxton bill or anything like it. But what if the Fed were actually to propose a soft form of inflation targeting? Such a proposal might change the dynamics and raise the possibility that the Congress could at least tacitly endorse inflation targeting.

[A] potential political cost of inflation targeting involves loss of flexibility...Specific goals for inflation are important, yes, but not under any and all circumstances. Real-world economies are subject to unanticipated shocks and unanticipated financial crises. Sometimes monetary authorities, even under inflation targeting, must respond to these shocks by going outside the price stability band for a short period.

Given the already good inflation performance in the United States, the benefits of adopting inflation targeting are likely to be modest. But in an inappropriately constrained system, the costs could be enormous.

Were the inflation rate temporarily outside the target band, even for good economic reasons, the mere existence of inflation targets could be another excuse for tension between the Fed and the Congress. There is almost always at least potential tension between the Fed and the Congress, and both sides have learned how to handle it. But at least some danger lies in introducing new possibilities for tension.

The step I have in mind would have the FOMC provide an additional three- to five-year projection for inflation. This would be based on the participants' working definitions of price stability and policies that support them. The ranges and central tendencies of these extended projections would be made public, perhaps in an expanded discussion in the Monetary Policy Report. I would not be surprised to discover that the extended three- to five-year inflation projections of the individual FOMC participants converge to a fairly narrow range. This convergence could provide the foundation for a more formal inflation objective at some point in the future.

I think that being more explicit about our inflation objective could help us to be successful in maintaining price stability, but my expectations are modest. I do not regard an explicit numerical price objective as a panacea. We might gain some additional credibility with the public by simply being clearer than we are today and, at the same time, greater clarity might impose some extra self-discipline when we really need it.

Increasing the degree of central bank transparency is one reason I and some of my colleagues have spoken in favor of an explicit inflation-targeting program. I believe we have reached a point where institutionalizing inflation targeting simply makes good sense from an economic perspective. In short, it is a reasonable next step in the evolution of U.S. monetary policy, and it would help secure full and lasting benefits from our current stable price environment

Evolving to explicit inflation targeting from our current implicit target has significant potential benefits, and the costs may be minimal if we can implement it in a constructive manner.

We need to continue to examine the case for a measured further evolution in the U.S. monetary policy framework—evolution in the direction of finding ways to provide more clarity about our long term inflation objective.

The actions of the Fed over the last 25 years have helped to produce a sustained period of low inflation, less variability in inflation, more stable inflation expectations, and a substantial reduction in output volatility. These are the best measures of credibility, and they look very good against the record of other central banks that now occupy the spectrum between the soft and flexible and pure and harder inflation targeters.

The U.S. monetary policy framework that exists today has proven reasonably good at laying the foundation for price stability that is a necessary condition for sustaining growth at full employment over time.