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Brainard: Low US neutral rate may raise risk of elevated asset prices

Federal Reserve Governor Lael Brainard said extended periods of a low U.S. neutral interest rate may increase the risk of asset bubbles.

At a monetary policy conference in Washington, D.C., Brainard remarked that the U.S. economy has entered into a so-called "new normal," or a period where the neutral interest rate is much lower than decades past. The neutral interest rate is level of the federal funds rate that best contributes to the economy growing at its optimal level, with full employment and stable inflation.

The low level of the neutral interest rate creates several problems, according to Brainard. First, the Fed cannot use interest rates cuts as much to combat a hurting economy. Second, the low neutral federal funds rate may be a factor contributing to U.S. inflation undershooting the Federal Open Market Committees's 2% target. Lastly, an extended low neutral rate period may increase the risk of elevated asset prices, with higher price-to-earnings ratios for stocks.

Brainard is a voting member of the FOMC.