BackRaghuram Rajan: Fed tightening eases stimulus pressure globally
Former RBI governor Raghuram Rajan says the Federal Reserve's plan to further withdraw support for the US economy will ease pressure on other major central banks
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Washington: The Federal Reserve’s plan to further withdraw support for the US economy will ease pressure on other major central banks to keep up their own “aggressive" monetary stimulus, former Reserve Bank of India governor Raghuram Rajan said.
“I think with the Federal Reserve seeing limited room for continued accommodation and starting to raise interest rates, I think you will see the pressure on other central banks also come off—as much as it has been over the last few years —to continue accommodation," Rajan said in an interview on Bloomberg Television on Tuesday.
“The expectation is that the dollar will remain strong and that certainly is consistent with the Federal Reserve being first out of the box in normalizing policy,"’ said Rajan, who stepped down as governor in September at the end of his three-year term. He is now a finance professor at the University of Chicago Booth School of Business.
US monetary policy makers raised the benchmark interest rate by a quarter point in December— just the second increase in almost a decade—and released forecasts showing three more hikes this year, saying market expectations for inflation have advanced.
While a stronger dollar amid tighter policy conditions could pinch US exports, it may have a neutralizing effect for the economy given the fiscal policies under discussion by the incoming administration of President-elect Donald Trump, Rajan said.
Trump, a Republican who will be sworn into office later this month, has promised tax cuts, looser regulations and increased spending on infrastructure. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 global currencies, has gained 6.7% since the 8 November election.
Delicate spot
Central banks are now in a “delicate position" as they are faced with returning to their core mandates of controlling inflation, following years of being “the only game in town" which has created a sense of tension with the political establishment. While the Fed will need to “tread very carefully" in the current political environment, it has a track record of doing what it deems appropriate and won’t bow to outside pressures, he said.
“I have no doubt that given the tradition they have established, the Fed will do what it thinks is right, rather than cater to political opinion," Rajan said.
Research shows the US isn’t losing a large number of jobs because of free trade, said Rajan, adding his voice to the growing debate about the merits of globalization. In the US, job losses from factory closures are being replaced by more high-tech positions via a shift to automation, he said, while consumers have also gained because imported goods are cheaper for them to buy.
A belief held by some that trade isn’t benefiting people is “tremendously dangerous" for the US and the world, he said. Bloomberg
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