See the minutes of the December FOMC meeting, page 8, end of first column and top of second. A "long run rate of inflation" is just another way of saying "a long term path for the price level." The FT (p6 in today's paper copy) spins this as the Fed considering an explicit target for inflation, and suggests that this would bring the Fed "closer" to the Bank of England. Well, that depends on what "closer" means. The UK has a year-by-year inflation target (or, at least, it did have one until the British government accidentally destroyed it by not using it properly). The Fed discussed the introduction of a long-run (not annual) rate of inflation, particularly as a device to counter deflation (as I discussed in my 2002 Economic Affairs paper on the liquidity trap). The Fed is considering the introduction of a price-level target, or, perhaps, an indicative preference for the price-level path (rather than an outright target).
Out-of-control deflation is a significant threat, and (absent a price-level target) will be difficult to address through quantitative easing without creating significant inflation on the exit path (significant exit path inflation is what many commentators are now expecting). We should be following the Fed here and introducing our own price-level target. Gordon Brown will find it tricky, since a price-level targeting regime is incompatible with a medium-term commitment to join the euro (and hence to cease having a domestic monetary policy). But that doesn't stop us from proposing it.
P.S. If you fancy a scare, read Reinhart and Rogoff's December 19th note on "The Aftermath of Financial Crises". This considers the historical experience of countries following financial crises of the sort we have experienced. Amongst the headline numbers, the average peak-to-trough fall in GDP was 9.3% (!), the average fall in house prices 35.5%, and the average rise in unemployment 7%. Here's hoping we can do better than average...
P.P.S. I see that Alistair Darling has said (see today's FT) that Bank of England operational independence won't exist in a scenario of near-zero interest rates and quantitative easing. Of course, I never supported central bank independence as a concept anyway, but it is, perhaps, of interest to note its demise.
