“Financial stability should not be an explicit objective of monetary policy...”

“Price stability should be the number one objective of the central bank, and our record” over the central bank’s century of existence “has not been stellar,” Mr. Plosser said.

Instead, the Fed should deal with markets on a separate track, and promote a stable financial system by using “its regulatory and supervisory power,” the official said.

As reported by the Wall Street Journal

The Federal Reserve’s goals for monetary policy, as established by Congress, are to seek price stability, maximum sustainable economic growth, and moderate long-term interest rates.

From my perspective, price stability is and should be the primary focus of monetary policy. Sustained inflation is ultimately a monetary phenomenon, and the Federal Reserve is our nation’s central bank and monetary authority. Thus achieving and maintaining a stable price level is uniquely the Fed’s responsibility. There is no other agency or policy arm of the government that can deliver on this goal. In addition, achieving price stability supports the other two goals.

To begin, the Federal Reserve is charged by Congress with conducting monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Lofty and desirable goals all, yet most economists, myself included, agree that focusing on achieving one of them — stable prices — is the most effective way monetary policy can support the other two.

The Fed’s current mandate, set formally in an amendment to the Federal Reserve Act in 1977 and reaffirmed in 2000, requires the Federal Reserve to pursue three objectives through its conduct of monetary policy. They are “maximum employment, stable prices and moderate long-term interest rates.”  Economists recognize that long-term interest rates incorporate a premium for expected inflation. Thus, the objectives of price stability and low long-term interest rates are essentially the same objective.

The mandate of the Federal Reserve System has changed since the institution opened its doors in 1914. When the System was founded, its principal legal purpose was to provide "an elastic currency," by which was meant a supply of credit that could fluctuate as needed to meet seasonal and other changes in credit demand...  The Federal Reserve today retains important responsibilities for banking and financial stability, but its formal policy objectives have become much broader. Its current mandate, set formally in law in 1977 and reaffirmed in 2000, requires the Federal Reserve to pursue three objectives through its conduct of monetary policy: maximum employment, stable prices, and moderate long-term interest rates.

Similarly, the attainment of the statutory goal of moderate long-term interest rates requires price stability, because only then are the inflation premiums that investors demand for holding long-term instruments kept to a minimum.  In sum, achieving price stability is not only important in itself; it is also central to attaining the Federal Reserve's other mandated objectives of maximum sustainable employment and moderate long-term interest rates.