Fed's Mishkin says inflation shouldn't be too low

LEXINGTON, Virginia (Reuters) - Federal Reserve Board Governor Frederic Mishkin on Thursday said inflation should not be too low and a central bank was better off aiming at a point target for price stability than a vague "comfort zone" range.

Mishkin did not refer to the current outlook for the U.S. economy or discuss the financial strains that have led the Fed to slash interest rates aggressively in recent months.

"Inflation should be low, but not too low," he told the Virginia Association of Economists, at an event at Washington and Lee University in Lexington, Virginia.

"An explicit point objective anchors inflation expectations more effectively than a comfort zone," he said.

U.S. headline consumer inflation rose 4 percent in February versus a year ago due to higher food and energy prices.

But the Fed has been forced to put qualms about price pressures on the back-burner while it fights a financial crisis sparked by the collapse of the U.S. subprime mortgage market.

On top of cutting interest rates by 3 percentage points since mid-September, to 2.25 percent, it has pumped billions of dollars into the financial system to stop it from seizing up.

Mishkin declined to discuss the economy during an audience question and answer session, but did nod to the challenges that policy-makers currently face.

"This is as complicated a policy environment as you can get, with supply shocks that are inflationary at the same time that we have shocks that are contractionary from the financial sector," he said, elaborating on why having a specific inflation target was good monetary policy.

"You want to stabilize inflation so that you stabilize output as well. And what is important in that context is that you stabilize inflation in the longer run, he said.

The Fed is not among central banks that targets inflation, although a number of its top policy-makers, including Chairman Ben Bernanke and Mishkin himself, are strong advocates for adopting an explicit objective.

Several other Fed policy-makers have voiced inflation "comfort zones" of 1 percent to 2 percent, but Mishkin made plain that he saw drawbacks with this approach.

"It seems virtually self-evident that communicating about a single numerical value for the inflation objective is more straightforward than communicating about an interval or range of numbers," he said.

Mishkin acknowledged that he had not talked about the Fed very much in his speech. But he noted the Fed's communication strategy was a "work in progress" and that efforts to refine and enhance its policy framework were ongoing. He also spelled out his own personal preference.

"An inflation objective of 2 percent implies that monetary policy is rarely constrained by the zero lower band (of interest rates) and thereby minimizes the adverse consequences for macroeconomic stability," he said.

(Writing by Alister Bull; Editing by Leslie Adler)