These potential benefits of price-level and nominal income targeting are worthy of further careful study and discussion. It is too early to judge whether one approach or the other would provide a better framework than inflation targeting. In contemplating a shift away from inflation targeting, it is crucial to consider what unintended negative consequences these approaches might entail. For example, nominal income targeting could generate persistent deviations of inflation from target, which may interfere with the credible communication of the price stability objective. There are also practical considerations in the communication of policy decisions and goals that need to be fully analyzed. In weighing all the potential advantages, disadvantages, and risks of these and other alternative approaches, it is absolutely essential that any modification of approach not undermine the hard-fought achievement of price stability and well-anchored inflation expectations that have been of great benefit, especially during the recent challenging economic times.

My point is simply to highlight the longer-term consequences of what might appear to be smallish, shorter-term deviations from the norm. Business operators plan capital expenditure and payrolls not in one- or two- or even three-year increments; they plan and budget over longer-term horizons. The nominal stability that people need if they are going to negotiate multiyear contracts is a multiyear nominal stability. A policy that “lets bygones be bygones” from year to year may not achieve this kind of stability, especially when policy options can become constrained, in the short term, by the zero bound. A policy that takes a longer-term perspective and is properly communicated and executed—so as to instill confidence that monetary policy will hew to a 2 percent inflation target rather than fixate on the run-rate of the past four quarters or the outlook for the next four—may better supply the longer-term comfort that households and businesses need to plan and budget. Such a policy would reduce the uncertainty that monetary policy as it is currently conducted spawns and would be more effective in doing its part to assist in economic expansion.[9]

[For more information about tightening control of inflation expectations by putting a five-year inflation rate, in place of the usual four-quarter inflation rate, in the Taylor rule, see “All in the Family: The Close Connection Between Nominal-GDP Targeting and the Taylor Rule,” by Evan Koenig, Federal Reserve Bank of Dallas Staff Papers, No. 17, March 2012.]

I want to be clear about the economic mechanism by which the proposed liftoff plan generates stimulus. First, it does not generate stimulus by having the FOMC tolerate higher rates of inflation, as has been espoused by many observers. I am doubtful about the efficacy of the inflation-based approach. I suspect that many households would believe that their wage increases would not keep up with the higher anticipated inflation rates. Those households would save more and spend less—exactly the opposite of the policy’s aim. In any event, I think that this approach is a risky one for central banks to use, because it requires them to raise inflation expectations—but not too much.

The Fed's mandate is, of course, a dual mandate. We have a mandate for both employment and for price stability. And we have a framework in place that allows us to communicate and to think about the two sides of that mandate.

We talked today -- or yesterday actually -- about nominal GDP as an indicator, as an information variable, as something to add to the list of variables that we think about, and it was a very interesting discussion.

However, we think that within the existing framework that we have, which looks at both sides of the mandate, not just some combination of the two, we can communicate whatever we need to communicate about future monetary policy.

So we are not contemplating at this time any radical change in the framework. We're going to stay within the dual mandate approach that we've been using until this point.

Another risk to output growth is the current low savings rate in the United States. For the last three quarters of 2005, the personal savings rate was negative. That means that personal consumption spending exceeded disposable income. So while businesses have be en improving their balance sheets as a result of strong earnings growth, consumer debt has been increasing. The picture for government savings is not any better due to the current large federal budget deficit. Combined, strong consumer and government demand have caused imports to exceed exports, resulting over time in the large U.S. trade deficit, now approaching 7 percent of nominal GDP. To finance this trade deficit, foreigners have acquired large holdings of U.S. securities.  At some point, the domestic savings rate will need to increase to reduce this trade imbalance. Many economists expect that the transition to a higher savings rate will occur smoothly, but with an imbalance of this magnitude, there is a chance that a rapid transition could lead to a downturn in the economy through a sharp falloff in consumption.

Is price stability really what we are after or are we after financial stability? Even more generally, going back over time we have tended to argue, I think correctly, that the objective of monetary policy is to create maximum sustainable economic growth, and we have argued, again I think quite correctly, that price stability is a necessary condition to reach that goal. But price stability may indeed be a proxy for something else, which I suspect is financial stability...It is by no means clear exactly how we should measure price stability, given the prospect that it will become increasingly difficult over time to define what constitutes output and prices...When we move into the 21st century, what we will try to stabilize may in effect be the purchasing power of money, however that is measured...While I am not saying that these involve issues that we need to  resolve today, I suspect that we will start to confront them in 5 years or certainly within 10 years, and they may very well affect our projections going out to, say, the year 2006. I also suspect that by around the year 2006, this very tricky question may involve what we are endeavoring to stabilize and may be the focus of our policy actions. My own guess is that we are going to be dealing with asset prices, the question of nominal long-term interest rates, and probably the outlook for nominal GDP as well.