Fed's Kocherlakota: Fed Mission Could Be Made Easier With More Government Debt

        By Michael S. Derby
        Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said in a largely academic speech Thursday that more government debt borrowing could assist the Federal Reserve to achieve its inflation and job goals.
        Mr. Kocherlakota, who made his comments in the text of a speech to be delivered before a conference at the Bundesbank in Frankfurt, didn't comment on the U.S. economic or monetary policy outlook. He isn't currently a voting member of the monetary policy setting Federal Open Market Committee.
        Instead, the official, who will leave the Fed at the end of the year, stated changes the nature of the economy and markets have lowered the overall structure of interest rates in a way that provides the Fed less room in the future to provide stimulus to get the economy back on track if inflation or job growth proves too weak.
        "I want to be clear at the outset that I am not saying that it is appropriate for fiscal policy makers to increase the long-run level of public debt," Mr. Kocherlakota said. But it could help push up the level of so-called neutral rates in a way that would also allow the Fed's interest-rate target, when set to neutral levels, to be higher than currently appears to be the case, he said.
        Because the neutral interest-rate level for the Fed is lower than in the past, the central bank has less room to cut rates when trouble arises, Mr. Kocherlakota explained. He said the Fed can deal with its inability to lower rates into negative territory by way of buying long term assets, but he noted that there doesn't seem to be much appetite any longer for providing stimulus this way.
        The government can step into this situation by borrowing more debt and putting pressure on interest rates, moving them higher, the official said.
        "This additional debt issuance would reduce the likelihood of the FOMC's hitting the lower bound on the nominal interest rate. The FOMC would be better able to achieve its employment and price objectives," Mr. Kocherlakota explained.
        The official acknowledged that as a monetary policy-making official, he has no ability to direct the government to borrow more to help facilitate the Fed achieving its mission. Mr. Kocherlakota has been a steadfast supporter of the Fed taking aggressive action to support the economy, and he has opposed the Fed's steady march toward raising interest rates, which most official expect to happen this year.
        Mr. Kocherlakota's remarks sidestep the very real issue of politics. Government officials would face deep challenges explaining why they are borrowing more than they need simply to allow the Fed to do its job better.
        (END) Dow Jones Newswires
        July 09, 2015 05:50 ET (09:50 GMT)

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