While other countries have suffered sluggish growth to achieve lower inflation, the US did not.  This is because our disinflationary monetary policy could be made against the backdrop of a step up in productivity growth.  We were also successful because monetary policy did not adhere to a rigid mechanical rule, but adapted to the incoming evidence on inflation and output.

In some instances, the injection of liquidity ran counter to the inflation risks that the Committee perceived just before the crisis.  But as events bore out, such flexible monetary policy responses did not jeopardize the pursuit of our long-run goal of price stability.  An important element in this disciplined approach to flexibility is that our long-run policy goals generally have been clearly articulated and are understood by the public.

The Fed thinks that the price index for personal consumption expenditures excluding food and energy is the best measure of underlying trends in consumer inflation.  But does that mean it's the best index for a guideline?  For example. the total CPI is used in many pricate contracts as well as the inflation adjustments in many tax and transfer programs.  So should we be concerned about the CPI as well?  Also, in a period of rapidly rising energy costs--such as the present--will the public have confidence in an inflation guideline that excludes energy prices?  Would such a guideline achieve its claimed advantage of reducing risk premia?

Suppose a central bank successfully adopted a formal inflation guideline that respects a dual mandate by flexibly adjusting the time horizons for achieving the guidelines.  Would this policy look any different from current Fed policy?

I remain unpersuaded that explicit numerical inflation targets are a key characteristic that distinguishes behavior among the world's central banks.

Future chairmen will address the issue of whether the Federal Reserve should adopt a formal inflation target, which many economists and a number of members of the FOMC, including me, have espoused.

I find myself still pretty comfortable with the numerical objective I had recommended almost a decade ago. More specifically, I would now favor a 1.5 percent numerical objective for inflation as measured using the core personal consumption expenditures (PCE) price index, which, given the recent average differences in measurement bias, corresponds to a 2 percent objective for the core CPI.

Overall, while I am mindful of the potential costs of announcing an inflation objective, I conclude that the benefits outweigh the costs. Such a step could enhance the effectiveness of monetary policy not only for controlling inflation but also for stabilizing the economy.

One concern, which I share, is that some may misinterpret the enunciation of a long run inflation objective as a down-weighting of the Committee’s mandate to foster maximum employment. To reduce the risk of such an outcome, the announcement of any numerical inflation objective should be made in the context of clear and effective communication of the Fed’s multiple goals.

I strongly believe that all of these [recent] measures to increase transparency have improved the effectiveness of policy.  A natural next step for the FOMC is to contemplate providing even clearer guidance to markets by announcing an explicit numerical long-run inflation objective.

Indeed, some economists take this position to an extreme, believing that uncertainty, both about the current and likely state of the economy and about the effects of monetary policy on the economy, is so overwhelming that policymakers should be humble and focus on only one thing: inflation—which is what the Fed can undeniably control in the long run. This approach is often referred to as “strict inflation targeting.” But I, for one, am not a strict inflation targeter... And—as far as policymakers go—I do not think I’m in the minority.

One important advantage of well-anchored inflation expectations is that it can give the central bank the freedom to react to other developments...without raising concerns about its commitment to price stability. Indeed, well anchored inflation expectations are likely to give the Fed greater freedom to accomplish the other part of its mandate: maximizing employment.

Of course, there are potential costs to [inflation targeting]...One is the possibility of miscommunication regarding our dual objectives...Some may misinterpret the enunciation of a long run inflation objective as a down-weighting of the Committee’s mandate to foster maximum employment...The announcement of any numerical inflation objective should be made in the context of clear and effective communication of the Fed’s multiple goals.

[An explicit numerical inflation objective or range] would be helpful for the FOMC because it would facilitate both internal discussions and external communication. More importantly, it could help anchor the public’s expectations.

Given the good inflationary performance of the American economy in the past decade, the question of whether to adopt inflation targeting has never been an all-out do-or-die issue. The most that pro-targeters have been able to claim is some possible benefits; and anti-targeters, some possible costs.