The Fed, in nostalgia...

Inflation and/or deflation affect the value of money and therefore demand and supply in the economy by the way of increasing or decreasing real wages and/or real interest rate, both as a tool to achieve full-employment. Inflation reduces the real interest rate which pushes investment by lowering the value of money and debt, and also reduces the real wages and demand which decreases the cost of labor and capital and increase investment; however disinflation or deflation increases the real interest rate and real wages which increases the cost of investment by increasing the value of money which might not be true. Inflation is often used to induce investment and supply by increasing the price-level, and disinflation or deflation increase demand and investment by decreasing the prices. Of the two, it is clear from the above lines, that inflation reduces demand,  and disinflation or deflation increases demand, and, investment and supply, both, by reducing prices and increasing the value of money and, real interest rate and real wages. Therefore, we might also get closer to the point that during a slowdown i.e. in a period of high unemployment and low demand, an increase in real interest rate and real wages by lowering prices or inflation would incentivize demand and investment and supply when the money-supply is loose. Nonetheless, inflation and slowdown is hard to happen at the same time because during slowdown there is a pressure on the price-level to go down in the presence of higher unemployment. Nevertheless, inflation coincides with boom and low unemployment. Thus, it is futile to expect inflation during low growth and higher unemployment. Then, it is not worth to expect that inflation would cut real interest and real wages to promote supply and investment, but lower prices and more money-supply is expected to increase real wages and real interest rate which would also increase savings and investment by increasing the value of money. A recent study shows that prices significantly affect the economic growth rate and the relationship between the two is negative, i.e. lower prices increase economic growth. Among the major factors affecting prices and economic growth are money-supply, current account deficit and house-price-index. Therefore, the Fed’s targeting of higher income, demand and inflation failed to increase real wage expectations and spending, and lower real interest rate never happened during the slowdown. Notwithstanding if the Fed had committed higher real wage expectations it would have increased spending, and, savings and investment too by increasing the real interest by committing a lower price-level.