In a speech delivered to the National Association of Business Economists today, Philly Fed Prez Anthony Santomero makes his pitch for formal inflation targeting by the Fed. In his view
... any inflation proposal must address at least three distinct but interrelated questions: Should the target be a single number or a range? Over what time interval should the target be set? And what measure of inflation should be targeted?
Good as his word, here's the Santomero proposal:
The Fed should establish a target band of 1 to 3 percent for annual inflation, as measured by the 12-month moving average rate of change in the core PCE deflator.
Why a target range?
... it is unlikely, and even unreasonable, to expect that the FOMC members could agree to a single number for an inflation target. Nonetheless, the FOMC members could presumably be comfortable with a target band for inflation....
and
An annual target band gives the public a clear criterion by which they can monitor and assess the Fed's performance against its stated inflation objective on a continuous basis. Recognizing this, the Fed would always have the incentive to keep inflation in the target band and would weigh seriously any policy actions that risked pushing inflation outside the band. Public monitoring would not be brought to bear in the same way if the Fed had a single-value long-run inflation target.
Why an annual target?
Taking the 12-month moving average eliminates the "noise" of highly transitory movements in prices.
At the same time, it strengthens the "signal" of a change in trend inflation that a longer term moving average might obscure.
Why 1 to 3 percent?
I think there is general consensus that an annual inflation rate of more than 3 percent does not represent price stability and that annual inflation below 1 percent provides too little cushion against the risk of deflation in times of economic weakness. So a band of 1 to 3 percent seems to be a reasonable starting point.
As I've noted before, there are three elements to a monetary policy decision. Objectives, knowledge of the economic environment in which the decision is being made, and an understanding of how the federal funds rate choice (or policy instrument more generally) helps toward meeting the objectives given the environment. Here is one member's straightforward statement of what he thinks those objectives should be. It'll be interesting to see what others say.
(For a start, you might check out this speech by Governor Bernanke.)