On the one hand, that means the economy can continue to grow without pushing inflation too high. On the other hand, inflation that runs too low for long periods can pose difficult challenges. Below-target inflation reduces the amount of room the Federal Reserve has to cut the federal funds rate to cushion the economy from negative developments.
And it could lead people to lower their expectations for future inflation, which in turn could lead to an increasing shortfall of inflation from our objective.1 Indeed, some indicators of longer-run inflation expectations have been on the soft side in recent months.