Evan Soltas sent me an important new WSJ piece by Frederic Mishkin and Michael Woodford:
The Fed also needs to clarify that the threshold of 2.5% for the inflation rate in no way suggests that it is weakening its commitment to its long-run inflation target of 2%. It would be dangerous to weaken this commitment, as it would lead to a permanent ratcheting up of inflationary expectations and inflation.
Instead, the Fed’s new approach is a temporary policy to keep interest rates low for longer, to make up for the inadequate nominal GDP growth that has occurred since 2008. Once the nominal GDP growth shortfall has been eliminated, it will be appropriate to again conduct policy much as was done before the crisis. That means ensuring a long-run inflation rate of 2% in terms of the PCE (personal consumption expenditure) deflator, and an average unemployment rate that is consistent with price stability.
It would have been better if the FOMC had explained its temporary policy by describing the size of the nominal growth shortfall that needed to be made up. A stated intention to “catch up” to a particular nominal GDP path would have clarified that how long interest rates will remain low will depend on economic outcomes, while emphasizing the central bank’s intention to return to a path consistent with its long-run inflation target.