For the 12 months ending in November, prices for personal consumption expenditures rose 1.0 percent, and inflation excluding the relatively volatile food and energy components – which tends to be a better gauge of underlying inflation trends – was only 0.8 percent, down from 1.7 percent a year earlier and from about 2–1/2 percent in 2007, the year before the recession began.
But, such a strategy poses risks. If the Fed were deemed too accommodative for too long, credibility could be undermined, threatening to create a persistent inflation problem that would have to be corrected, no doubt at great cost. The public could mistakenly see the stance of policy as a sign that our commitment to long-term price stability has wavered.