The Federal Reserve should raise interest rates to contain accelerating inflation, said Raghuram Rajan, a former Reserve Bank of India chief who is 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 in an interview 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 raise rates 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.
Fed Chair Kevin Warsh has kept markets guessing about his policy stance, avoiding any forward guidance. That means his speech on Friday at Jackson Hole will be closely watched for clues on the rate outlook and implications for global markets.
“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 bringing 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 leading one of five taskforces established by Warsh to examine the Fed’s approach to key aspects of policy making.
