What the Fed would have to do with the target to achieve its inflation objective depends both on how strongly people believe the Fed is committed to price stability and on what sort of economic disturbances occur. Economic disturbances, such as droughts and oil price shocks, will cause temporary fluctuations in price indexes. Policy-makers cannot prevent such fluctuations, nor should they want to. What they should do is prevent these temporary events from changing people's longer-term inflation expectations. Like the physician whose first responsibility is to do no harm, the FOMC should avoid destabilizing the economy by allowing erratic changes in expected inflation.
Credibility is an asset that pays high dividends.
In another era, the Fed might not have lowered the fed funds target in such a situation for fear that many might have interpreted the action as an indication that the Fed was softening its resolve to control inflation. Low inflation and high credibility enhance the Fed's range of options in taking policy actions in the face of unusual circumstances. The gains to the economy of a sustained Fed policy to foster low inflation are manifest. The task remaining is for the Fed to make its inflation objective more precise.