If annual inflation averages less than 1.5 percent for more than three or four years, onlookers will begin to suspect that the FOMC’s true objective for inflation is lower than its declared “two percent or a bit under.” Correspondingly, if inflation is persistently higher than 2 percent, then the public will begin to believe that the FOMC’s true objective for inflation is higher than 2 percent.
In either case, inflation expectations could become unmoored, and the FOMC could lose control of inflation itself. Communication can only be effective if the FOMC also retains credibility. As I mentioned, Congress has also mandated that the FOMC set monetary policy so as to promote maximum employment.