Sustaining Price Stability

T he year 2003 was a watershed in Federal Reserve history. In his semi-annual testimony to Congress on monetary policy in July, ChairmanGreenspan declared that measures of core consumer inflation had de-celerated in the first half of the year to a range that could be considered “ef-fective price stability.”1 The Chairman paused briefly to acknowledge, with understated satisfaction, the achievement of this goal, which Congress had as-signed to the Federal Reserve and the Fed had pursued for over two decades. He quickly pointed out, however, that the Fed would be confronted now with new challenges in sustaining price stability—specifically preventing deflation as well as inflation. Earlier in the year, at the conclusion of its May meeting, the Federal Open Market Committee (FOMC) had expressed concern for the first time that inflation might decline too far, saying that “the probability of an unwelcome substantial fall in inflation, though minor, exceed(ed) that of a pickup in inflation from its already low level.”2 The case for maintaining price stability—in the United States and else-where—is rooted in experience and theory, which indicate that monetary pol-icy best supports employment, economic growth, and financial stability b