Let me just remind everyone that inflation falling below our target of 2 percent is costly. If inflation is lower than expected, then debt financing is more burdensome than borrowers expected. Problems of debt overhang become that much worse for the economy. Conversely, if inflation is higher than expected, lenders are disadvantaged. So, that is why it is important for the Fed to provide for inflation that averages over time to our 2 percent long-run objective.

In response to a question about what he expects his legacy to be perceived to be:

Well, of course, that’s going to be for others to determine. I guess what I would hope to be able to say is several things. First, I came into the Federal Reserve as a governor now some 11 years ago; quite a long time — with a lot of interest in communication and transparency. And I think, you know, in the last 11 years or eight years, however you want to count, the Federal Reserve has made some significant strides in that area, including, for example, as I mentioned in the press conference, the stating of a numerical objective for medium-term inflation and other communications innovations as well.

So I think that’s something that I think is quite — has changed over the last decade. For better or worse, of course, I was at the Fed during the crisis and the aftermath. We have — you know, the future, again, will judge the response to that. But what is certainly true is that the Federal Reserve, as an institution, has changed very sharply in terms of its structure and the resources being devoted to financial stability questions.

And I would say that this relates both to the actions we took at the height of the crisis, which I viewed as bringing Bagehot’s wisdom, the lender-of-last-resort wisdom, back into the modern context, but also the work we’re doing now to try to reduce the risk that another financial crisis will hit someday. That includes our monitoring, our oversight of systemically important firms, our stress tests, which I think is an important development in financial regulation, and more generally our macroprudential approach to financial stability, which, again, means that we look not only at individual firms, as important as that is, but we also try to identify risks and vulnerabilities to the financial system more broadly.

In monetary policy, you know, we’ve confronted the zero lower bound. Again, people have to judge whether we confronted it successfully, but we’ve used new policies to do that. And I think we have in fact changed, to some extent, our approach to one that is more tied to the forecast and tries to lay out in more detail how monetary policy will react over time to changing economic conditions. So there are some changes in monetary policy.

But finally, I think the Federal Reserve is a remarkable institution. It has a superb staff, a great deal of expertise. And I hope that during the time that I’ve been there that we have succeeded in preserving those strengths and adding to those strengths, increasing the amount of expertise we have in critical areas like some of the financial stability areas, increasing interdisciplinary cooperation and work and just making the institution stronger as an institution going forward, because I think one of the lessons — I mean, we had a very fascinating day today talking about a hundred years of the Federal Reserve.

It’s a central institution in the United States. It has a very, very important role in the economy and in the lives of ordinary Americans. And it’s critical that it be a strong, well-managed, well- staffed institution. And these internal management issues, which are pretty invisible I think to outsiders, are very important because they’re the factors that determine how strong an institution this will be over the next hundred years.

"People have been focusing on unemployment a lot but maybe are a little bit blinded that the inflation numbers have come in very low," St. Louis Federal Reserve Bank James Bullard told reporters on the sidelines of the Minsky conference hosted by the Levy Institute in New York

...

"I'm getting concerned by that," Bullard said, adding that inflation running below the policy-setting Federal Open Market Committee's price stability target gives the group "room to maneuver."

Pressed by reporters to indicate exactly what "room to maneuver" means, Bullard - a voter on the FOMC this year - said, "I think if inflation continued to go down I'd be willing to increase the pace of (asset) purchases.

"As it stands right now inflation has drifted lower on a PCE basis. This is not what I expected and I think inflation should be closer to target than it is."

In terms of the targets, or, more generally, the objectives of policy, I see continuity in the abiding importance of a framework of flexible inflation targeting. By one authoritative account, about 27 countries now operate full-fledged inflation-targeting regimes. The United States is not on this list, but the Federal Reserve has embraced most of the key features of flexible inflation targeting: a commitment to promote low and stable inflation over a longer-term horizon, a predictable monetary policy, and clear and transparent communication. The Federal Open Market Committee (FOMC) struggled for years to formulate an inflation goal that would not seem to give preference to price stability over maximum employment. In January 2012, the Committee adopted a "Statement on Longer-Run Goals and Monetary Policy Strategy," which includes a 2 percent longer-run inflation goal along with numerical estimates of what the Committee views as the longer-run normal rate of unemployment. The statement also makes clear that the FOMC will take a "balanced approach" in seeking to mitigate deviations of inflation from 2 percent and employment from estimates of its maximum sustainable level. I see this language as entirely consistent with modern descriptions of flexible inflation targeting.

Bullard said that inflation is sometimes seen as a way to partially default on existing nominal debts; if actual inflation is higher than anticipated, the debtor ends up paying less to the lender in real terms. In this scenario, he said, “The partial default would occur against savers, mostly older U.S. households, and against foreign creditors.”

Such a policy would not be without future costs, Bullard emphasized. “A partial default today through higher inflation would be paid for via higher inflation premiums in future borrowing,” he said. “Creditors would want to protect themselves against the unpredictable central bank that might surprise them with a burst of inflation. Nominal interest rates would be higher than otherwise into the distant future.”

"I'm just opposed to a pure inflation-only mandate in which the only thing a central bank cares about is inflation and not employment," Yellen says now. "I've never been opposed to having a numerical objective. I don't think the committee can operate intelligently unless people can agree on what we're trying to accomplish."

"Certainly an important part of what I try to do in my role on the committee is take my personal point of view and try to explain it as clearly as I possibly can and advocate for it," she said. "But it's not just 100 percent that. I do absolutely understand that the committee needs to make a decision and we need to find something to do that can command sufficient support."

"But monetary policy is not a panacea," she said. "There are questions about the efficacy of unconventional policy tools and their use may entail some cost."

"We failed completely to understand the complexity of what the impact of the decline - the national decline - in housing prices would be in the financial system," she said at her confirmation hearings

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.

Federal Reserve Bank of St. Louis President James Bullard said policy makers’ interest rate forecasts may be misinterpreted by markets as a commitment for the future path of policy.

“There is some risk of that,” Bullard said on a conference call with reporters today. “Although I think markets will soon discover that there’s one projection at some point in time, and if the economic situation changes dramatically,” then the forecasts will change, he said.

I do not believe that establishing an inflation target is inconsistent with a commitment to both parts of the dual mandate. On the contrary, it can help with thinking about and achieving both of our mandated objectives. For example, if having an explicit numerical target for inflation helps anchor inflation expectations over the longer run, then monetary policy will have greater flexibility to pursue the goal of maximum employment in the shorter term.

“I think we’re very close to having inflation targeting in the U.S.,” Bullard said in a Bloomberg Radio interview today.

“This may be the opportunity to get something done that everyone on the committee can rally around.” “I think it would come in the form of some kind of statement from the committee that would name a target but would also reiterate some of the things we’ve said over the years about how keeping inflation low and stable contributes to great economic performance overall,”

Inflation is terribly important as a central bank goal and I think we owe the public a commitment to an announced objective for inflation.

“Greater transparency should be achievable for us,” Lacker said in response to a question about the Fed’s internal deliberations on communication policy. “For a long time I have advocated an explicit numerical inflation objective.”

It is time for the Fed to explicitly adopt the flexible inflation targeting framework and in doing so take three steps to strengthen its approach to policymaking. First, clarify and make explicit that our long-run inflation objective is 2 percent year-over-year PCE inflation. Second, publish information about the individual FOMC participants’ assessments of the appropriate monetary policy that underlie their economic projections in the FOMC’s Summary of Economic Projections. Third, provide information on the FOMC’s reaction function. That is, communicate policy decisions in terms of changes in the economic conditions that the FOMC is using to formulate policy.

How does the Federal Reserve fit into this range of policy frameworks? The Federal Reserve is accountable to the Congress for two objectives--maximum employment and price stability, on an equal footing--and it does not have a formal, numerical inflation target. But, as a practical matter, the Federal Reserve's policy framework has many of the elements of flexible inflation targeting. In particular, like flexible inflation targeters, the Federal Open Market Committee (FOMC) is committed to stabilizing inflation over the medium run while retaining the flexibility to help offset cyclical fluctuations in economic activity and employment.

But I do not think that a temporary period of inflation above 2% is something to regard with horror. I do not see our 2% goal as a cap on inflation. Rather, it is a goal for the average rate of inflation over some period of time. To average 2%, inflation could be above 2% in some periods and below 2% in others. If a 2% goal was meant to be a cap on inflation, then policy would result in inflation averaging below 2% over time. I do not think this would be a good implementation of a 2% goal.