In strict inflation targeting, all policy actions are aimed at hitting an inflation target. In flexible targeting, policymakers balance deviations from both the unemployment and inflation targets. Usually, the policy prescriptions from the two targets are not in conflict. Above target unemployment is typically associated with muted inflationary pressures, and accommodative policies are appropriate to reduce both gaps from their respective targets. At times, however, conflicts can occur. When they do, a flexible targeter does not accept a large miss in one target in order to hit the other perfectly, but instead accepts moderate misses in both in order to minimize the total loss. A corollary is that any flexible inflation targeter has to accept the idea that optimal policy may involve inflation running for a time above the long-run target if that is a consequence of policies designed to bring unemployment more in line with its target rate. 3  For example, the economy may have experienced some permanent loss of potential output during the recession partly because of reduced capital deepening with lower rates of investment and partly because of other factors. In addition, extended unemployment insurance benefits and difficulties in matching workers with jobs may be temporarily pushing up the natural rate of unemployment. 4  See Board of Governors of the Federal Reserve System (2011). 5  See Evans (2011).
Charles L Evans: The Fed’s dual mandate responsibilities – maintaining credibility during a time of immense economic challenges Speech by Charles L Evans, President of the Federal Reserve Bank of Chicago, at the Michigan Council on Economic Education, Michigan Economic Dinner, Detroit, Michigan, 17 October 2011. *  *  *  The enormity of the problem In the summer of 2009, the U.S. economy began to emerge from its deepest recession since the 1930s. But today, more than two years later, conditions still aren’t much different from an economy actually in recession. Gross domestic product (GDP) growth was barely positive in the first half of 2011. The unemployment rate is 9.1 percent, much higher than anything we had experienced for decades before the recession. And job gains over the past several months have been barely enough to keep pace with the natural growth in the labor force, so we’ve made virtually no progress in closing the “jobs gap”. With unemployment having lingered for so long at rates around 9 percent, it is perhaps natural that some would begin to think that nothing more can be done to improve upon this situation. However, I don’t agree. Before seriously contemplating doing nothing, it is important to realize just how enormous this economic problem really is. To put this in perspective, consider that prior to the recession, most analysts thought the long-run trend growth rate of GDP was about 2-1/2 percent per year.