Fed’s Kocherlakota Says More Debt Can Lift Long-Run Real Rates

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said it could be a good idea for the U.S. government to issue more debt as this would help lift the economy’s long-run neutral rate of interest.

Increasing the supply of assets available to investors “would push downward on debt prices, and so upward on the long-run neutral real interest rate,” Kocherlakota said Thursday in Frankfurt in remarks prepared for delivery at a conference hosted by Germany’s Bundesbank.

Lifting the so-called neutral rate, which prevails when Fed policy is neither stimulating nor restraining growth, would in turn benefit Fed policy makers by creating more space between the benchmark federal funds rate and zero, he said.

Fed officials have said they will likely raise rates this year for the first time since 2006 in response to falling unemployment and firming inflation. The central bank has kept its benchmark rate near zero since December 2008.

Kocherlakota, who has argued against increasing the policy rate until prices show more signs of rising, announced in June he will leave the Minneapolis Fed at the end of the year to join the faculty of the University of Rochester in New York state.

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