think of prices as a signal about how our economy is using its available resources. in 2012, i had an experience that brought home this intuition in a very clear way. i visited williston, on the western edge of north dakota. as it is today, when i visited williston, it was in the heart of a major oil boom. that boom was pushing hard on the physical resources – like roads, water, housing – available to williston and pushing hard on the human resources available to williston. the result was relatively high inflation. so, when inflation is high compared to the fed ’ s target, like it was in williston, we know that demand is pushing hard on available resources. the converse is also true : inflation is low compared to the fed ’ s target when the demand for goods and services is too low to fully use the available resources in society. the low inflation in the united states tells us that resources are being wasted. what exactly are these wasted resources? there are multiple answers to this question – when demand is too low, lots of resources are left unused. but the biggest and most disturbing answer is our fellow americans. there are many productive people in the united states available to work more hours, and our society is deprived of their production. this key point is generally underappreciated. i ’ ve said that the fomc is undershooting its price stability objective and is expected to continue to do so. but we should all keep in mind that this outcome – and especially the forecast for continued undershooting – typically means that the fomc is also underperforming on its other objective of promoting maximum employment. should the fomc make up for past inflation misses? i ’ ve described how i expect that the pce inflation rate will run below the fomc ’ s 2 percent target for several years – possibly until 2018. let ’ s assume that forecast turns out to be right. this outcome raises a key policy question : how should the fomc ’ s inflation goals in the years following 2018 be influenced by the undershooting of the inflation target in the preceding years? in addressing this question, i ’ ll compare two possible approaches : the standard approach of inflation targeting and the more novel approach of price level targeting. let me note before i begin that i won ’ t take a stand today on which of those approaches is better. my goal is bis central bankers ’ speeches simply to initiate a policy conversation about future –

indeed, possibly far - off future – monetary policy choices. the fomc announced its 2 percent inflation target in january 2012. since that date, inflation has averaged about 1. 3 percent per year. like the cbo, i anticipate that inflation will rise only slowly, returning to the fomc ’ s target in about 2018. as you know, the inflation rate is the growth rate of the price level – that is, how much people pay for a typical bundle of goods and services. hence, the downside misses with respect to inflation cumulate into a significantly lower price level. if my inflation forecast is right, the price level in 2018 will be about 2. 5 percent below what it would have been had the fomc hit its inflation target over the preceding six years. bis central bankers ’ speeches how should the fomc respond to this shortfall in the price level? if the fomc simply targets a 2 percent inflation rate after 2018, then the price level will be permanently 2. 5 percent lower than was expected in 2012. this approach to policy – which is the standard one followed by most leading central banks around the world – is called inflation targeting. but there is an alternative : the fomc could target a slightly higher inflation rate for a few years after 2018 in order to make up for the shortfall in the price level. this latter policy approach is often termed price level targeting. why would the fomc want to use price level targeting? there are two reasons – and they are closely related to the concerns about low inflation that i raised earlier. the first reason is that price level targeting makes long - term contracts safer for borrowers and lenders. for example, suppose a family took out a 30 - year mortgage in 2012, under the expectation that the fomc would deliver on its commitment to keep inflation at 2 percent. because inflation has been so low over the past two years, the borrower ’ s current repayments are now surprisingly expensive in real terms. ( by “ real terms, ” i mean that the borrower has to give up a surprising amount of goods and services to be able to afford the repayments. ) the fomc can ’ t solve that problem today, of course. but if the fomc uses inflation targeting, the borrower ’ s repayments are likely to remain surprisingly expensive in real terms even in 2042, 30 years after taking out the mortgage. in contrast, if the