Why would the FOMC want to use price level targeting? There are two reasonsand they are closely related to the concerns about low inflation that I raised earlier.
The first reason is that price level targeting makes long-term contracts safer for borrowers and lenders. For example, suppose a family took out a 30-year mortgage in 2012, under the expectation that the FOMC would deliver on its commitment to keep inflation at 2 percent. Because inflation has been so low over the past two years, the borrowers current repayments are now surprisingly expensive in real terms In contrast, if the FOMC uses price level targeting, the borrowers repayments in 2042 are likely to be close, in real terms, to what the borrower expected when originally taking on the loan.
The second reason that the FOMC might want to use price level targeting is that it would serve as an automatic stabilizer for the economy... [I]f the FOMC were to decide today to follow price level targeting, then businesses would anticipate more stimulative future monetary policy and, consequently, higher future demand. That expectation of higher demand would provide an additional incentive for them to hire and invest today. In this way, the FOMCs decision about price level targetinga decision about choices to be made several years from nowhas the potential to affect the near-term speed of the economys recovery.