Both Scott Sumner and David Beckworth say the same thing: What the Fed wants is that nominal expenditure growth (NGDP) gets translated into as much real growth as possible. So, “talking” about “wanting” 2% inflation is “bollocks”. As David makes clear, that´s true IF inflation expectations are anchored. In that case stabilizing nominal expenditures is the “trick” that allows smooth growth, low unemployment and low inflation.
The figure below reproduces David´s picture with minor changes (I consider PCE-core price inflation instead of the GDP deflator). The Greenspan years indicate that a “Great Moderation” is possible to achieve and “perpetuate”, even if the talk is always about the “inflation fighting credentials” of the Central Bank. The ultimate cause is the maintenance of “monetary equilibrium”, which requires that changes in money demand (velocity) are offset with changes in the stock of money.
The next figure shows that during the period of the “Great Inflation”, from around 1965 to 1979, inflation expectations weren´t anchored so that growth in nominal expenditures were mostly reflected in changes in inflation. Real growth was very volatile. The oil price (supply) shock, which increases inflation and reduces real growth, is clearly visible. To Arthur Burns, there was nothing monetary policy could do and nominal expenditures were increased to reduce unemployment, with inflation control being the province of “incomes policy”. The result: more inflation.
The last figure provides a nice view of why the “Great Moderation” was lost in 2008. Contrary to the Greenspan years, Bernanke did not offset the fall in velocity (increased money demand resulting from “greater uncertainty”). In fact, the money stock fell! Now they are faced with the uphill battle of bringing the economy back to close to the trend path from which it dropped in 2008-09. But the “inflation paranoia” is very much alive, with important representatives residing in the FOMC!