The longer inflation is deliberately allowed to deviate from 2 per cent, the greater the risk that one begins to question what target the bank really has. We have seen elements of this in the recent debate on monetary policy in Sweden. This could also have significance for how the central banks’ principals perceive the way monetary policy is conducted, which can ultimately affect the banks’ mandate and position. The Riksbank has a mandate to work independently to maintain price stability and, without prejudice to this, to support the goals of general economic policy. On the one hand, this means that it is up to the Riksbank to determine which risks are relevant for its decisions. But on the other hand, the Riksbank is accountable to the Riksdag, which determines the Riksbank’s mandate. The Riksbank therefore needs to be able to show in a convincing manner that the trade-offs it makes are anchored in its mandate. And given the current mandate, it may be a problem if one accepts deviations from the inflation target over a long period of time. If the trade-offs in monetary policy are not clear and concrete, it will be difficult to assess whether it has been conducted in a reasonable manner and within the mandate. The costs are clear, but what have we gained?
These scenarios include those that seem highly implausible but might prove very damaging, as well as those that seem more plausible but might alter the outlook less. To complement this, we look at the implications for monetary policy of alternative scenarios for the outlook—what should we do if the world moves in a different direction. And we also look at the impact on the outlook for growth and inflation of different paths for the fed funds rate. These approaches help illustrate the size and sources of uncertainty we live with at any moment. They do not give us the capacity to attach precise probabilities to alternative scenarios or to quantify with precision the implications, but they help frame a discussion of the material risks to the outlook and the potential consequences of different types of policy mistakes. And they can help inform choices about how central banks should affect expectations about future interest rates. Along with these analytical tools, many central banks have adopted a decisionmaking structure that is designed to bring a diversity of independent perspectives to the table. Although the FOMC's discussions begin with the presentation of a forecast prepared by the staff of the Federal Reserve Board, the committee members bring to the discussion substantial information based on independent efforts to understand the underlying dynamics of demand and inflation and their implications for monetary policy. This can provide a stronger foundation for decisions, particularly where uncertainty is inherently great.