Raghuram Rajan says Fed should raise rates as inflation remains elevated

Former Reserve Bank of India governor Raghuram Rajan has called for a more hawkish approach from the US Federal Reserve, arguing that interest rates should be raised to prevent persistent inflation from becoming entrenched.

“The Fed should be raising rates or should have raised rates already,” Rajan said in an interview with Bloomberg Television’s Haslinda Amin in Jackson Hole, Wyoming, where he is attending the annual gathering of global central bankers and policymakers. “I would be more hawkish than where the Fed is right now.”

Rajan’s comments come as markets assess the timing and pace of the Fed’s next rate moves. Investors expect borrowing costs to rise by December, while a sharp increase in bond yields has also reflected some expectations of a possible move as early as September.

Fed Chair Kevin Warsh is scheduled to speak at the Jackson Hole conference on Friday, with investors closely watching his remarks for signals about the central bank’s inflation outlook, interest-rate strategy and the implications for global financial markets.

Rajan said current financial conditions in the US do not appear sufficiently restrictive to bring inflation under control. He pointed to several factors supporting economic activity, including “very strong” investment in data centres, a large fiscal deficit and resilient consumer spending.

“When you have all these things together, it would suggest an economy which is not being held back,” Rajan said.

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Warsh’s communication has attracted scrutiny since he took charge. Following the Fed’s July policy meeting, he provided limited guidance on the economic outlook and the future path of interest rates. Investors subsequently interpreted his remarks as suggesting insufficient urgency to bring inflation back to the central bank’s target, pushing long-term Treasury yields to their highest level in two decades.

Rajan, however, said he believes Warsh has the “right instincts” on inflation. According to Rajan, the Fed chief has made clear that he is strongly opposed to allowing inflation to remain elevated and wants to bring it down.

The key question, he said, is whether Warsh can convince markets that he has a credible plan and can communicate it clearly.

Rajan is also co-leading one of five task forces established by Warsh. His group is examining the Federal Reserve’s balance-sheet policy.

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Rupee outlook

On India, Rajan said the rupee has remained more resilient than expected and does not currently appear significantly misaligned.

The currency was trading around 95.50 per US dollar, compared with nearly 97 in May, after the Reserve Bank of India introduced measures aimed at attracting dollar inflows.

“At this point, I don’t think the currency is that far out of whack. I don’t think it’s a panic situation,” Rajan said.

RBI Governor Sanjay Malhotra recently said the central bank expected at least $80 billion in foreign-currency inflows from those measures.

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