Quoting from a paper by Professor Michael Woodford, titled "Methods of Policy Accommodation at the Interest-Rate Lower Bound" (available here):
A more useful form of forward guidance, I believe, would be one that emphasizes the target criterion that will be used to determine when it is appropriate to raise the federal funds rate target above its current level, rather than estimates of the “lift-off” date. If such an explicit criterion made it clear that short-term interest rates will not immediately be increased as soon as a Taylor rule descriptive of past FOMC behavior would justify a funds rate above 25 basis points, this would provide a reason for market participants to expect easier future monetary and financial conditions than they may currently be anticipating, and that should both ease current financial conditions and provide an incentive for increased spending.
An example of a suitable target criterion would be a commitment to return nominal GDP to the trend path that it had been on up until the fall of 2008. This would both make it clear that policy will have to remain looser in the near term than a purely forward-looking Taylor rule would imply, and at the same time provide assurance that the unusually stimulative current policy stance does not imply any intention to tolerate continuing inflation above the Fed’s declared long-run inflation target — that in fact, it will not led to a future level of nominal income any higher than what people had reason to anticipate at the time that they acquired their existing nominal assets and undertook their existing nominal obligations.
If the Federal Reserve decides to do this and then inflation hits 5% with GDP continues to lag - then what? Shouldn't a threshold for inflation also be announced along with the GDP target path - perhaps 3% over the medium term as Chicago Fed President Charles Evans suggests?
Now, if both the GDP targeting and an inflation threshold are announced by the Federal Reserve, could someone plausibly infer this to be a negative outlook on the economy? I.e., someone viewing the Federal Reserve as believing stagflation as possible (due to quantitative easing, labor market structural issues, oil shock, and a plethora of possibilities)?
Path targeting can be beneficial, but it has some risks that need to be weighed against.