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.

Why would the FOMC want to use price level targeting? There are two reasonsand they are closely related to the concerns about low inflation that I raised earlier.

The first reason is that price level targeting makes long-term contracts safer for borrowers and lenders. For example, suppose a family took out a 30-year mortgage in 2012, under the expectation that the FOMC would deliver on its commitment to keep inflation at 2 percent. Because inflation has been so low over the past two years, the borrowers current repayments are now surprisingly expensive in real terms In contrast, if the FOMC uses price level targeting, the borrowers repayments in 2042 are likely to be close, in real terms, to what the borrower expected when originally taking on the loan.

The second reason that the FOMC might want to use price level targeting is that it would serve as an automatic stabilizer for the economy... [I]f the FOMC were to decide today to follow price level targeting, then businesses would anticipate more stimulative future monetary policy and, consequently, higher future demand. That expectation of higher demand would provide an additional incentive for them to hire and invest today. In this way, the FOMCs decision about price level targetinga decision about choices to be made several years from nowhas the potential to affect the near-term speed of the economys recovery.

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 purpose of it is not to push down the dollar. This should not be regarded as some sort of chapter in a currency war."

"We have no desire to see inflation higher than the 2%,-or-slightly-below range. We're not doing price level targeting or raising our inflation goal."

"If I were to continue to be concerned about the outlook and thought that further purchases could work, then I would have to seriously consider that step."

Excerpts from a Wall Street Journal interview

Given that we operate under a dual mandate, Congress might insist we also have an employment-level target [in addition to price-level targeting]. Personally, I would be happy with an inflation target, but I don’t think Congress would tolerate it.

These rare occasions of liquidity traps are very different from typical economic recessions. Consequently, they require a unique monetary policy response. Economic theory tells us that in such circumstances monetary policy should aim to lower the real, or inflation-adjusted, rate of interest by temporarily allowing inflation to rise above its long-run path. My preferred way of doing so is to implement an approach called price-level targeting. Simply stated, under this approach, the central bank strives to hit a particular price-level path within a reasonable period of time. For example, if the rate of change of the price-path is 2 percent and inflation has been under-running the path for some time, monetary policy would strive to “catch-up” so that inflation would be higher than the inflation target for a time until the path was regained. This higher inflation rate would decrease the real interest rate, raising the opportunity cost of holding money. This would provide an incentive for banks and corporations to release funds for investment, and in the process spur job creation.

In my opinion, such a strategy is entirely appropriate.