The Federal Reserve should raise interest rates to contain accelerating inflation, said Raghuram Rajan, a former Reserve Bank of India governor now serving on a task force set up to examine the US central bank.
“The Fed should be raising rates or should have raised rates already,” Rajan told Bloomberg Television’s Haslinda Amin from Jackson Hole, Wyoming, where he is attending the annual conference of central bankers and other senior officials. “I would be more hawkish than where the Fed is right now.”
Markets expect the Fed will boost borrowing costs in December as inflation remains elevated, while a sharp rise in bond yields indicates that investors are also pricing in some chance of a September move.
“I do think that financial conditions are not restrictive at this point,” Rajan said, adding US growth is coming from “very strong” investment in data centers. The US also has a “very strong fiscal deficit, which doesn’t look like it’s coming down anytime soon.”
American consumers are running down savings and continuing to spend. “When you have all these things together, it would suggest an economy which is not being held back.”
Warsh’s communications strategy has been a bit shaky since taking the helm. After the July policy meeting, he offered little insight on his views of the economy and avoided offering forward guidance on rates. Investors interpreted his comments as showing a lack of resolve to bring inflation back to target, and long-term bond yields subsequently climbed to a two-decade high.
Rajan sees the Fed chief differently. “Warsh has the right instincts,” and has tried to make clear that “he is very much against inflation,” and wants to bring it down, he said.
Investors will follow the Fed chief’s speech to see “that he has a plan to do it; that he knows what he has to do, and he can communicate that very clearly.”
Rajan is co-leading one of five task forces established by Warsh. His is examining the Fed’s approach to balance sheet policy.
Rupee Resilience
On India, Rajan said the rupee has held up better than some had feared. The currency is currently around 95.50 a dollar, up from nearly 97 in May after the RBI undertook capital raising measures to bring dollars into the country.
“At this point, I don’t think the currency is that far out of whack,” Rajan said. “I don’t think it’s a panic situation.”
In a recent interview, Governor Sanjay Malhotra said the RBI expected at least $80 billion in foreign-currency inflows from its recent measures.
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