Former Reserve Bank of India Governor Raghuram Rajan has called for a more aggressive interest-rate approach from the US Federal Reserve, saying policymakers should raise rates to prevent elevated inflation from becoming entrenched.
Speaking to Bloomberg Television on the sidelines of the annual Jackson Hole gathering of central bankers, Rajan said he would adopt a more hawkish stance than the Fed’s current position. He argued that monetary policy is not sufficiently restrictive given the strength of the US economy.
Strong US Economy May Keep Inflation Elevated
Rajan pointed to several factors supporting economic activity, including substantial investment in data centres, a large fiscal deficit and continued consumer spending.
He said Americans are drawing down savings while maintaining consumption, suggesting that demand remains resilient rather than being significantly constrained by current monetary conditions.
Financial markets are currently pricing in expectations of a potential rate increase later in the year, while rising bond yields have also raised speculation about an earlier move. Investors are closely watching Fed Chair Kevin Warsh’s speech at Jackson Hole for indications about the central bank’s future policy direction.
Rajan said financial conditions remain relatively accommodative and therefore may not be doing enough to restrain inflation.
Investors Await Warsh’s Inflation Strategy
Warsh has provided limited forward guidance since taking charge of the Federal Reserve, leaving markets uncertain about the timing and pace of future rate moves.
His cautious communication following the July policy meeting contributed to concerns among investors that the Fed might not be sufficiently committed to bringing inflation back to its target.
Long-term Treasury yields subsequently climbed to their highest levels in roughly two decades.
Rajan, however, said Warsh has the appropriate instincts on inflation and wants to bring price pressures under control. He said investors would be looking for a clear strategy from the Fed chair on how monetary policy can achieve that objective.
Rajan is currently leading one of five taskforces established by Warsh to review key aspects of the Federal Reserve’s policymaking framework.
