Back in 1996 the FOMC was discussing how far they should push in bringing down the trend rate of inflation. Greenspan was predisposed to seek a 0% inflation target.
Yellen argued that 0% was too aggressive, and that a proper balance between the efficiency benefits of lower inflation (mainly arising from the tax interaction effects highlighted by Martin Feldstein) and the costs of lower inflation (arising from both the higher chance of hitting the ZLB and the Akerlof-Dickens-Perry inefficiencies with downward nominal wage rigidity) would produce an optimal inflation rate closer to 2%.
This is a real story. Seriously, read starting at page 41 of the FOMC transcript - it's a rather riveting discussion when you think about the implications: http://www.federalreserve.gov/monetarypolicy/files/FOMC19960703meeting.pdf
After going over the technical issues, the discussion reached the following climax:
CHAIRMAN GREENSPAN. Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions.
MS. YELLEN. Could you please put a number on that? [Laughter]
CHAIRMAN GREENSPAN. I would say the number is zero, if inflation is properly measured.
MS. YELLEN. Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way. My presumption based on the literature is, as Bob Parry summarized it, that given current inaccurate measurements, heading toward 2 percent is most likely to be beneficial.
Then everyone went around the room and there was a general consensus pointing toward Yellen's view on 2 percent, to the point where Greenspan ended up switching to the measurement issue by saying: "Can I switch the subject? Since we have now all agreed on 2 percent, my question is, what 2 percent?" And thus 2 percent became the implicit inflation target of the Federal Reserve.
Janet Yellen: right on inflation. Right for America.