Three percent might seem low, but I would remind you that it cuts the value of a dollar in half over a single generation. There is wide agreement among professional economists that persistent and variable inflation is costly for society. It is not difficult to list some of the reasons for this conclusion. Inflation distorts the important signaling role of relative prices in the economy, so that people have difficulty distinguishing price changes caused by inflation from those caused by changes in supply or demand. Consequently, people can get the wrong signals and make the wrong economic decisions.
Inflation also interacts with the tax code to create large distortions in economic decision making.
In other words, they waste real resources in managing money balances. And, a stable price environment does the most that monetary policy can do to foster the maximum sustainable rate of real output growth. All told, I think the benefits of price stability are clear. And since inflation is the only outcome the Fed can control in the long run, price stability should be the sole long-run objective of monetary policy. Adopting this stance would put all policymakers as well as the public, Congress and financial market participants on the same page with respect to Fed objectives.