The trimmed main which we calculated in Dallas which is a trim main on the PCE has been very steady at 1.6-1.7% for several months, so that tells me that there is no slide to the down side nor pressure on the upside. Whether were exactly at 2% in terms of the way I look at policy it doesnt make much difference the point is we have price stability and thats the important factor.

Of course, my forecast is only a forecast. I am extremely confident that the actual path of inflation over the next four years will turn out to be higher or lower than what I currently expect it to be! What you should take away, though, is that I currently see the probability of inflations averaging more than 2 percent over the next four years as being considerably lower than the probability of inflations averaging less than 2 percent over the next four years. And thats why I conclude my discussion of inflation by saying that the FOMC is undershooting its price stability goal.

“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

[T]he Fed should adopt an explicit numerical inflation objective. Moreover, in my view, now is an opportune time to do so. The apparent strengthening of the U.S. economy suggests that, in the not-too-distant future, monetary policy will have to begin reversing course from a very accommodative policy stance. As we choreograph that exit, I believe that the Fed should do all it can to underscore its commitment to maintaining price stability.

...

Some people may argue that there is no need to articulate a numerical inflation objective because the Fed has established a strong record of maintaining low and stable inflation over the last two decades. But this is not an argument against an explicit target. It is an argument against commitment.

I’ve argued that even if the fiscal authority borrows exclusively in its country’s own currency, the central bank can have a large amount of control over the price level. But the central bank can only achieve that control if it is willing to commit to letting the fiscal authority default. Such a commitment may expose the country to risks of short-term and medium-term output losses. How this trade-off should best be resolved awaits future research. But I suspect that it may be optimal for central banks to guarantee fiscal authority debts in some situations. If so, we again have to think of price level determination as something that is done jointly by the fiscal authority and the central bank.

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, in particular, to maintaining inflation at a level consistent with the Federal Reserve's mandate from the Congress.

[T]he current circumstances are really extraordinary. It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment needs is lowered, that would be one channel for stimulating the economy. That could be done through communication. I take our price stability mandate to be 2% inflation. We’re not at 2%. I foresee 2012 inflation as 1%. If we could indicate to the public that we want inflation to increase toward that price stability goal, that would serve to lower real interest rates given that short-term nominal interest rates are close to zero. Thinking about the fact that we’re running below our inflation objective and what it might mean to make up some part of that somewhere along the line, that would also give rise to lower real interest rates. Convincing the public that this is what we intend to do, that could be a useful tool.

Question:  New York Fed President William Dudley talked about making up lost ground on inflation later. You support that?

Evans: That is a potentially useful policy tool at this point and I definitely think we should study that more. That comes out of the literature.

If one examines the inflation record of the United States, and of many other industrial economies for that matter, since the early 1980s, it appears that central banks have largely succeeded in delivering diminishing and, ultimately, low inflation. I can think of no reason why this cannot continue.

“I don’t get it,” Volcker said, leading to a lively back and forth between the two central-bank heavyweights.

By setting 2% as an inflation objective, the Fed is “telling people in a generation they’re going to be losing half their purchasing power,” Volcker said. And if 2% is the best inflation rate, and the economic recovery lags, does that mean that 3% becomes the ideal rate, he asked.

Kohn responded that by aiming at 2%, “you have a little more room in nominal interest rates … to react to an adverse shock to the economy.”

“Your problem is two [percent] becomes three becomes four,” Kohn told Volcker. But other central banks with a roughly 2% target haven’t had that problem, Kohn said.

Fed officials, Kohn added, “need to be clear about why we’re choosing the number we’re choosing.” He also said that while he doesn’t think deflation is much of a risk, “I can’t say the risk is zero” and the Fed must be mindful of the possibility that inflation expectations fall to the point that real interest rates rise.

...

Kohn and Volcker fought to a rhetorical draw, with each conceding that he wasn’t going to persuade the other.

As reported by Wall Street Journal's Real Time Economics Blog.

At a time of great concern about financial turmoil, we should keep in mind that instability in the general level of prices — whether inflation or deflation — is itself a significant source of financial instability. Federal Reserve officials, myself included, have spoken of the importance of keeping inflation expectations well anchored. When the public's inflation expectations begin to rise, that can contribute to higher actual inflation. It is therefore important for the Fed to maintain its credibility to keep inflation low and stable when large relative price movements in energy and food commodities led to large increases in the consumer price index.

Price stability has multiple interpretations. In the late 19th and early 20th centuries, price stability meant that variations in the general level of prices would be transitory: the price index would revert to a mean. In recent policy discussions, price stability generally is interpreted as a small positive rate of inflation. Under these conditions, the level of prices does not revert to a constant, but trends upward. I accept this latter definition of price stability. There may be theoretical and practical reasons to believe that the best price indexes we have available are subject to upward biases. While I am not a big fan of the upward-bias argument—after all, the best-available adjustments are already made to the indexes—I admit that I do not have better measures myself. My preferred definition of price stability is that trend inflation, correctly measured, is zero. In practice, this likely converts into a trend in measured inflation on the order of ½ to 1½ percent, depending on the particular price index referenced.

 Much of the recent data have been disappointing. Over the past twelve months, the personal consumption expenditures (PCE) price index rose 3.2 percent, up from 2.5 percent over the prior year. An important reason for these disappointing numbers, of course, is the rise in commodity prices that I have discussed. Some of this increase has probably also passed through to core PCE price inflation, which excludes food and energy. This measure has averaged 2.1 percent over the past twelve months, and it is slightly above the range that I consider consistent with price stability.

There is no evidence that is occurring, "but that's a danger," she said, noting that inflation is due to negative supply shocks to the economy, not the result of "everyone drinking the punch."

...

She said she continues to view core CPI as a better "forward-looking" measure of inflation, but only if one believes, as futures markets are predicting, that food and energy prices will eventually stabilize. And on that score futures markets in recent years have been "wrong, wrong and wrong." However, policymakers cannot claim to have achieved price stability "unless it shows up in the headline number," she said.

From Q&A as reported by Market News International

What do we mean by price stability?  A widely cited definition is that the inflation rate is sufficiently low so that households and businesses do not need to take inflation into account in making everyday decisions.³  Broadly speaking, I believe this definition of price stability is a reasonable one, and in practice, central banks around the world have chosen average levels of inflation between 0 and 3 percent as consistent with this criterion. However, this range can be narrowed a bit further by considering the implications of economic theory and empirical evidence about the average inflation rate that produces the best economic outcomes...

In contrast, given shocks like those seen over the past several decades, an average inflation rate higher than about 1 percent substantially reduces the frequency with which the economy hits the zero lower bound. An inflation objective of about 2 percent implies that monetary policy is rarely constrained by the zero lower bound and thereby minimizes the adverse consequences for macroeconomic stability.