The idea is that the Fed would target a level of the CPI index, for instance.
Let's say a central bank has a 2% annual inflation target.
one year, that means a basket of goods costing $100 should rise to $102.
But if inflation is at 0%, then it stays at $100 and the central bank
has missed its target.
Now let's say it misses its target 10 years
in a row. If the target had been met, the $100 basket would cost
$121.90 (with compounding). But if the target was missed every year, it
would still be at $100. So there's at 21.9% shortfall.
What if instead of targeting 2% the next year, the target is a level in the index.
So the central bank could say it's going to keep rates low until that level is achieved.
Bernanke has also said it warrants a closer look last month.