The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
Just this week Justin Wolfers noted that the PCE deflator declined this past quarter. He wondered how the Fed could allow this to happen if it had a 2% inflation target. The answer, it seems, is the Fed is targeting an inflation band with 2% as the upper bound.
This is a point Ryan Avent has been making for some time. Here he is back in April 2012:
The Fed's second failure is to treat the 2% figure as a ceiling rather than a target...The Fed's preferred inflation measure—core PCE inflation—remains below 2%; core PCE was 1.9% year-on-year in February, in which month it increased at a 1.6% annual rate. Inflation expectations have been stable to falling since then.
Perhaps more telling, the Fed gives a range for projected inflation over the next three years with 2% as the upper extent. If the Fed does indeed have a symmetric approach to the target, as Mr Bernanke asserted yesterday, one would expect 2% to be at the middle of the range, not the top. This is particularly damning as the Fed's estimate of the natural rate of unemployment doesn't appear at all in the projected unemployment-rate range over the next three years; the closest the Fed comes to meeting that side of the mandate is in 2014, when the bottom end of the projected unemployment-rate range gets within 0.7 percentage points of the top end of the natural-rate range.
The Fed isn't just failing on the guideposts set by economists like Paul Krugman, Kenneth Rogoff, Greg Mankiw and, yes, Ben Bernanke. It's failing on the terms it sets for itself. Consistently.