that there were no adequate procedures in place for liquidating the assets of systemically important financial institutions in an orderly fashion. in 2010, the u. s. congress passed an act that provides these procedures. simultaneously – and correctly – the congress removes the fed ’ s ability to engage in institution - specific assistance. the act does leave in place the fed ’ s ability to engage in broad - based market interventions of the kind that i ’ ve described, albeit with more congressional and white house oversight. this ability of the fed could be useful in the event that financial market turmoil in other parts of the world ever threatens to spread to u. s. credit and capital markets. cutting interest rates i ’ ve talked about how the fall in land prices generated a sharp increase in risk perceptions in financial markets and how that in turn led to a financial crisis. i now want to turn to what i see as the second key effect of the fall in land prices. this fall reduced the net worth of many households and firms. according to fed calculations, household net worth fell by over 25 percent from the second quarter of 2007 to the first quarter of 2009. households responded to this change in their balance sheets by forgoing consumption, which led in turn to a fall in output and employment, 3 and put downward pressure on the price level. the fomc reacted by lowering its target interest rate from 5. 25 percent in august 2007 to a range of 0 to 0. 25 percent in december 2008 ; it now remains at this lower bound. since inflation expectations remained stable, the fomc ’ s action has had the effect of lowering the real interest rate facing households. households, of course, typically respond to lower rates by saving less and demanding more consumption. similarly, firms undertake more investment projects. in this way, the fomc can and has partially offset the impact on the economy of the loss of net worth. indeed, the fomc would probably have liked to respond by cutting its target interest rate still further. the problem is that this target interest rate cannot go below zero. instead, the fomc has engaged in large - scale purchases of long - term assets issued or backed by the government. the goal of these transactions is to lower long - term real interest rates and again offset the impact on the economy of the net worth shock. so, to sum up, the fall in land prices triggered an increase in risk perceptions and a decrease in household net worth. the increase in risk led to

fomc uses price level targeting, the borrower ’ s repayments in 2042 are likely to be close, in real terms, to what the borrower expected when originally taking on the loan. the second reason that the fomc might want to use price level targeting is that it would serve as an automatic stabilizer for the economy. as i described earlier, when demand is low, inflation tends to be below target. with price level targeting, the fomc makes up for low inflation by using monetary policy to stimulate higher future inflation and higher future demand. but this prospect of higher future demand is an incentive for businesses to hire and invest more now. thus, with price level targeting, the fomc ’ s anticipated future policy choices automatically offset current adverse shocks. 1 i ’ ve framed the decision about inflation targeting versus price level targeting in terms of its impact on the fomc ’ s future policy decisions. as i ’ ve just talked through, though, these future decisions have the potential to affect near - term macroeconomic outcomes. in particular, if the fomc were to decide today to follow price level targeting, then businesses would anticipate more stimulative future monetary policy and, consequently, higher future demand. that expectation of higher demand would provide an additional incentive for them to hire and invest today. in this way, the fomc ’ s decision about price level targeting – a decision about choices to be made several years from now – has the potential to affect the near - term speed of the economy ’ s recovery. i suspect that all of this sounds pretty dry to some of you. i assure you that the debate over price level versus inflation targeting is about as exciting as central banking can get! i ’ m certainly not trying to resolve that debate today. in particular, i ’ ve not talked at all about the thorny and important question of how the fomc should respond to past overshooting of its inflation target. but i do think that the question of whether to target the inflation rate or the price level should be a subject for serious discussion among central bankers. maximum employment i ’ ve argued that the low inflation rate is a signal that the fomc is underperforming with respect to its maximum employment objective. but we don ’ t need to rely on this signal to see, for example, gauti eggertsson and michael woodford, 2003, “ the zero bound on interest rates and optimal monetary policy,