Speaking to the Economic Club of Toronto this morning, Federal Reserve Board governor Edward Gramlich said the Fed should target explicit inflation targets, but that it may be useful to set a long-term range for prices.

Gramlich saysthat the Fed should not adopt a more formal inflation-targeting regime. “My reading of the empirical evidence is that the key ingredient in keeping inflation low and stable is that the central bank be firmly determined to achieve and maintain stable prices in the long run. I believe the Fed is already so determined,” he says. “To me, there does not seem to be huge value in further tying down the committee through a formal inflation-targeting regime, and there could be some costs.”

However, Gramlich did say that it may be possible to get some of the advantages of inflation targeting, namely increased transparency and accountability, by announcing its preferred long-run range for inflation. “There is theoretical uncertainty about how well formal inflation targeting should work and empirical uncertainty about how well it has worked in those countries that have tried it. If we were to move in the direction of a more systematic approach, I personally would go to a preferred range for inflation rather than a particular target and without all of the other trappings of a formal inflation-targeting regime,” he says.

“This range should be understood as a preferred range that would not bind the committee or override other important objectives of monetary policy,” he suggests. “It should clearly be understood as a long-term objective, not a short-term objective. The FOMC would not have to defend any deviations from the preferred range. Perhaps such a step would increase transparency without limiting central bank flexibility to any appreciable degree.”

If it were to adopt a range, Gramlich suggests the Fed’s preferred inflation measure, known as the core PCE deflator, should be between 1% and 2.5%. “The midpoint of this range is then slightly less than 2% per year, which turns out to be about what U.S. core PCE inflation has averaged over the past eight years. But I would stress the range more than the point estimate,” he says.