We have declared a 2 percent intermediate target for inflation, which seems to be standard for most central banks.

In my view, inflation below 2 percent is just as much of a problem as inflation above 2 percent

In particular, the Committees actions in 2011 suggest that it is now more willing to tolerate higher-than-target inflation than it was in 2009. If this possible drift in inflation tolerance were to persist, or were expected to persist, it could give rise to a damaging increase in inflationary expectations.

Looking ahead, I expect inflation to ease to about a 1½ percent annual pace next year. This is somewhat below the 2 percent level that I see as the appropriate medium-term goal. My expectation that inflation will fall reflects the fact that the economy is performing so far below its potential. Such economic slack tends to depress inflationary pressures. It means that workers have very limited ability to demand higher wages and businesses can’t push through price increases that will stick. For example, the latest report showed that wages grew around 2 percent over the past year, hardly a prescription for high inflation. In addition, surveys show that expectations for inflation remain stable.

Setting a formal inflation target would be appropriate to address concern over rising prices, Lacker said. While he has advocated an inflation target of 1.5 percent, he said he would back a Fed consensus that set the goal at 2 percent.

“I think now -- this point in the business cycle -- would be a relative good time” and “relatively useful to clarify what we mean by price stability,” Lacker said at a conference on manufacturing in the Southeast U.S. hosted by Virginia Governor Bob McDonnell.

At 1.7 percent to 2.0 percent, the mandate-consistent rate of inflation is greater than zero for a number of reasons. Perhaps most important, attempting to maintain inflation at zero would increase the risks of experiencing an extended bout of deflation or falling wages and prices, which in turn could lead employment to fall below its maximum sustainable level for a protracted period.

Hence, the goal of literally zero inflation is not consistent with the Federal Reserve's dual mandate. Indeed, most central banks around the world aim to set inflation above zero, usually at about 2 percent.

Well, as I've been saying, inflation in the mid -- between 1 and 2 seems fine to me; seems pretty close to price stability. There were those who were worried about inflation when it got down for several months below 1, and that was a legitimate concern. I think we've seen the bottom of core inflation. I think it's going to stabilize or head up from here.

Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less than that, which most FOMC participants see as consistent with the Federal Reserve's mandate.

Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve's mandate.

See similar comments by Vice Chairwoman Yellen earlier in the week.

The Fed’s price stability mandate is generally interpreted as maintaining an inflation rate of 2 percent, and 1 percent inflation is often considered to be too low relative to this stricture. I expect inflation to remain at about this level during the rest of this year. However, our Minneapolis forecasting model predicts that it will rise back into the more desirable 1.5-2 percent range in 2011.

Given my expectation of persistent and sizable slack in the economy, I expect both core and headline inflation rates to edge down further, falling to about 1 percent later this year and in 2011. This is below the 2 percent rate that I and most of my fellow Fed policymakers consider an appropriate long-term price stability objective.

      Well, his {Laurence Ball} argument is that at a higher inflation rate, then nominal interest rates would also be higher, on average, and that would give more space to cut during a recession, and perhaps more ability to create impetus.

      So that's not a logical argument, but it has substantial risks which are -- you know, we, the Federal Reserve, over a long period of time, has established a great deal of credibility in terms of keeping inflation low, around 2 percent, roughly speaking. And you can see that, for example, in inflation-indexed Treasury debt, which shows that people expect, over the next 10 years, about 2.2 percent inflation, on average, over that 10-year period. 

      If we were to go to 4 percent -- and, say, we're going to 4 percent, you know, we would risk, I think, losing a lot of that hard- won credibility, because folks would say, 'Well, if we go to 4, why not go to 6;' and you go to 6, 'why not go to 8?' It'd be very difficult to tie down, credibly, expectations at 4, beyond which, of course, in the longer-term low inflation is good for the economy, and 4 percent is already getting up there a bit, and would probably have detrimental effects on the functioning of our markets, and so on. 

      So I understand the argument, but that's not a way -- that's not a direction that we're interested in pursuing. We're going to keep our inflation objectives about where they are. We think about 2 percent is about appropriate, given biases and measurement of inflation, and given the need to have a little bit of space between the average inflation rate and the risk of having deflation or falling prices. So that's where we're going to be -- that's the path we're going to be following. 

Some suggest that central bankers themselves should choose to modify their definitions of price stability. If inflation persisted at higher levels during normal times, the theory goes, central bankers could cut rates more substantially in response to economic weakness. The theory, in my view, fails the real test of experience.

Central banks that desire just a little more inflation may well end up with a lot more. Some point to a strategy to accept a little more inflation for less unemployment as a primary basis for the great inflation of the 1970s in the United States.¹⁰ By definition, an increase in an implicit inflation target would lead to an upward shift in inflation expectations. And how would a central bank make credible its promise that such a shift would be only a one-time event?

For me, price stability is 2 percent inflation as measured by the Personal Consumption Expenditures (PCE) deflator over the medium term.

Inflation has been running about 1.5 percent recently, and from my point of view, that's ideal. Earlier this year some economists were highlighting the risk that the low level of economic activity could push the rate of inflation down, perhaps even below zero. I think the risk of a substantial further reduction in inflation has diminished substantially since then. In fact, we have seen that even in the early stage of a recovery, inflation and inflation expectations can drift higher. The perception of inflation risk could be particularly pertinent to the current recovery, given the massive and unprecedented expansion in bank reserves that has occurred, and the widespread market commentary expressing uncertainty over whether the Federal Reserve is willing and able to promptly reverse that expansion.