In particular, Congress could increase the size and scope of the automatic fiscal stabilizers that support economic activity and income during economic downturns. For example, Congress could enact legislation in which employment payroll taxes would be automatically reduced when the unemployment rate rose above a particular threshold. With such stabilizers in place, households and businesses would anticipate additional income support in the face of a cyclical downturn. This approach would be more powerful than discretionary fiscal actions that carry a greater degree of uncertainty. Another option to help better anchor inflation expectations around the current objective would be to move to a price-level targeting, or PLT, regime. Under the current inflation targeting regime, the FOMC follows a “bygones are bygones” policy: Misses of the inflation objective on one side are not deliberately offset by subsequent misses on the other. Therefore, when inflation runs persistently below the objective, policymakers do not strive to push inflation above the objective in the future. Under these conditions, the risk is that inflation expectations will become unanchored to the downside. In contrast, under a price-level targeting regime, the FOMC would commit to make up any shortfalls below its 2 percent objective by allowing inflation to climb above the objective for the time necessary to eliminate the shortfall. This commitment to offsetting the period of below-target inflation with a period of above-target inflation would, presumably, help keep inflation expectations from becoming unanchored to the downside.

However, a symmetric PLT regime—in which misses have to be made up on both sides of the inflation objective—has an important shortcoming. Compensating for inflation overshoots by deliberately keeping inflation below the FOMC’s 2 percent objective would increase the risk of getting pinned at the effective lower bound for interest rates. As a consequence, some—including former Chairman Ben Bernanke—have proposed adopting an asymmetric PLT regime. In such a system, misses below the objective would be offset by misses above only when the effective lower bound was binding. Under normal circumstances, misses above the objective would not be offset. Rather, they would be treated as “bygones,” as is currently the case.14 However, I suspect that establishing a modified PLT regime would present some challenges. First, for such a modified PLT to be effective in anchoring inflation expectations, households and businesses would have to understand how the regime would work, and view the Federal 5/7  BIS central bankers' speeches  Reserve’s commitment as credible. One can imagine that such credibility might be hard to sustain during a long spell of inflation misses to the downside. Second, while such a regime might be attractive in broad brush form, the devil lies in the details. If inflation undershot for a few years, what would the desired overshoot path look like? How high would the FOMC permit inflation to go above its objective, and for how long? What would happen if the Fed failed to fully offset past downside misses and cumulative undershoots became sizable?