Destabilizing speculation

US Fed now risks decelerating too slow after being too fast in 2013, says Raghuram Rajan

One of the main global critics of the Federal Reserve’s 2013 ‘tapping tantrum’ episode is now concerned that the central bank is falling behind as it phased out Covid-era monetary stimulus.

“The Fed thinks it has time” to slow down the tightening process, especially given long-term disinflationary forces like aging, automation and globalization, Raghuram Rajan said in an interview with Kathleen Hays and Bloomberg Television’s Haidi Straud-Watts Tuesday Morning in Asia. .

But compared to the consequences of the global financial crisis, “there is a big difference after the pandemic, which is the huge amount of budget spending,” said the University of Chicago economist and former governor of the Reserve Bank of India.

“My concern is that if they don’t take full account of these new forces, they might be late,” Rajan said. “And that may, as everyone is saying, need a bigger tightening down the line.”

Rajan’s tenure as RBI chief from 2013 to 2016 coincided with the Fed’s rocky housing pullback, which hit emerging markets particularly hard as currency volatility rose and foreign investors pulled out. money.

This time around, as Fed Chairman Jerome Powell continues to focus on a gradual pace of reduction, emerging markets are still worried about a “sudden shift in stance” as they have also “much less room for waiting and monitoring” than the Fed given that they have less credibility and political space, Rajan said.

Rajan’s warning that the greatest danger to the global economy is that the Fed is tightening too slowly – and that it must compensate with a more destabilizing pace later – echoes other leading economists. plan like former US Treasury Secretary Larry Summers.

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