In late January 2012, the FOMC released an official statement confirming to the world what had long been expected. The official goal of monetary policy, or at least one of them, was to achieve price stability being clearly defined as 2% inflation (PCE Deflator). It was part of the ultimate transformation of Federal Reserve policy, from the hidden, intentionally opintentionally op of fedspeak under Greenspan toward a more transparent future. This new statement wasn’t a change in policy, but public confirmation.

It may have seemed uncontroversial at the time, after all, again, everyone knew that was the definition since the nineties. There was some major debate, however, internally. Only some of that discussion has since emerged, pieces of it written out in the FOMC’s policy transcripts (those for CY 2012 just released earlier this month).

The overriding concern was clarity. Chairman Bernanke didn’t want the public to hold the slightest doubt as to what it was the Federal Reserve was trying to achieve. They may argue and wonder about how the Fed carried out its goals, but Bernanke wanted no confusion about what those actually were.

CHAIRMAN BERNANKE   At the same time, this document is explicit in saying that in the short run, the inflation and employment objectives can conflict, which is evidenced by our many recent debates around the table about whether further actions to promote employment create risks of higher inflation. In those situations, as the document says, we take a balanced approach that is informed by our knowledge of the economy’s dynamics, the outlook, and the size and expected persistence of the deviations of our objectives from their desired levels.

This is no small matter. Central bank credibility is as much the issue as price stability. To put it into the framework of the FOMC’s earlier and similar June 2003 discussion, monetary policy works better (at all?) when the public believes the Fed can do what it says. If the public doesn’t know what the Fed wishes to achieve, it’s more difficult to make the case for that. If instead the central bank declares sustained 2% inflation as its definition of price stability and then gets it, as everyone at the meeting believed, it makes everything with monetary policy more effective.