Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

The most striking thing from today's Federal Reserve Open Market Committee decision is what wasn't said: How will the Fed respond if inflation continues to undershoot its 2 percent target?

This issue lies at the heart of the dissenting vote from St. Louis Fed President James Bullard, who argued that "the committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings."

I agree.

This is no trivial matter: The Fed's preferred inflation measure (core personal consumption expenditures) is running at 1.05 percent, the lowest level ever recorded, and the headline measure is running at 0.7 percent. Inflation tends to be highly persistent, so today's low readings are likely to repeat themselves in the future. Moreover, inflation expectations are declining, and the unemployment rate remains elevated -- factors which are likely to further depress future inflation. And with short-term interest rates stuck at zero, declining inflation amounts to a rise in real interest rates, which would likely further depress both economic activity and inflation.

The Fed's ownprojections suggest that the outlook for inflation has weakened somewhat, as it cut its forecasts for core inflation in 2013, 2014 and 2015. The Fed's inflation forecasts are now lower than they were when the current program of open-ended quantitative easing ("QE3") began. Even as far in the future as 2015, federal reserve policymakers expect inflation to still be below the 2 percent target.

Chairman Ben Bernanke clarified the conditions under which the Fed would continue its current policy of quantitative easing (or "asset purchases") to inject more money into the economy, but he linked this only to progress in reducing unemployment. The fact that he didn't link further monetary stimulus to progress in pushing inflation back toward its two percent target invites the inference that the FOMC isn't planning to use quantitative easing to offset concerns about low inflation or even possible deflation.

The issue here is that the Fed's inflation objective is starting to look like an inflation ceiling, instead of a target. Indeed, over the three years in which it has released its quarterly projections, not once has the Fed revealed a central inflation forecast -- over any time horizon -- breaching the 2 percent target.

Perhaps this explains the somewhat puzzling response of bond markets to the Fed's announcement. I thought it was clear that the Fed was trying to tell markets to calm down, and that any Fed tapering would be only gradual, and only if warranted by incoming data. Yet bond yields rose, suggesting that they believe that Fed policy will be somewhat tighter than they had thought before the statement. The reason may be that Bernanke has signaled a lack of concern about the problem of low inflation, and an unwillingness to take expansionary action to prevent it.

The Fed's policy of forward guidance has been a useful tool in trying to damp expectations that it would choke off an emerging recovery. It should use the same tools to also raise our confidence that it won't allow inflation to fall any further.

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Justin Wolfers at