Fed's Fischer urges policies to tackle low equilibrium interest rate

If interest rates remained stuck at then current low levels the US economy might be facing the prospect of longer and deeper recessions, the vice-chairman of the US Federal Reserve said.

Hence, he called on other arms of government to enact policies - such as encouraging private investment, improving infrastructure, education and more effective regulation - to promote quicker productivity growth and living standards.

Stimulative fiscal policies could also be beneficial he said, but with a caveat perhaps, " if the economy confronted a recession".

In remarks prepared for a speech at the Economic Club of New York, Stanley Fischer said the monetary authority would still have tools at its disposal - such as quantitative easing and forward guidance - at its disposal to deal with such circumstances.

However, he added that: "these alternatives are not perfeft substitutes for conventional policy. The limitation on monetary policy imposed by low trend interest rates could therefore lead to longer and deeper recessions when the economy is hit by negative shocks."

To those who would see the Fed raise rates, he said it was "not that simple" for the central back to push them higher in a world where an ageing population, weak demand and low investment may have reduced both the country's and the world's economic potential.

Fischer did not comment on the current policy settings per ser and on the subject of financial stability said he did not see a "heightened threat" from then current low rates.

"I should say that while this is a reason for concern and bears continual monitoring, the evidence so far does not suggest a heightened threat of financial instability in the post-financial-crisis United States stemming from ultralow interest rates. However, I note that a year ago the Fed did issue warnings--successful warnings--about the dangers of excessive leveraged lending, and concerns about financial stability are clearly on the minds of some members of the Federal Open Market Committee, FOMC."

As of 1819 BST the yield on the benchmark US 10-year Treasury note was down by four basis points to 1.76%.