Raghuram Rajan fears US Fed’s slow tapering may put central bank behind the curve

The former Reserve Bank of India (RBI) Governor, who has been among the top global critics of the Federal Reserve’s 2013 ‘taper tantrum’ is now worried that the US Fed could fall behind the curve as it gradually removes Covid-era monetary stimulus.

“The Fed thinks it has time” to slow-walk the tightening process, especially given longer-term disinflationary forces like aging, automation and globalization, Raghuram Rajan said in an interview with Bloomberg Television on Tuesday. 

But compared to the aftermath of the Global Financial Crisis, “there’s one big difference post-pandemic, which is the enormous amount of fiscal spending,” said the University of Chicago economist. 

“My worry is that if they don’t fully account for these new forces, they may be behind the curve. And that may, as everyone says, necessitate stronger tightening down the line,” Rajan said in an interaction with Bloomberg. 

This time around, as Fed Chair Jerome Powell continues to emphasize a gradual pace of tapering, emerging markets still worry about “an abrupt change in stance” while they also have “much less room to wait and watch” than the Fed given they have less credibility and policy space, he added.

Rajan’s warning that the greater danger for the global economy is the Fed tightening too slowly, and having to make up for it with a more destabilizing pace later. 

US Federal Reserve chairman Jerome Powell’s Jackson Hole conclave address last week was being watched closely for hints of when America’s central bank would start tapering its asset purchases of about $120 billion per month, a point that would signal a gear-shift in its ultra-easy-money policy and possibly shake up global capital flows. Powell, however, was non-committal on when the taper would begin. He said the Fed could do so later this year if the US job recovery continues.

The Fed has been buying $120 billion a month in mortgage and Treasury bonds to try to hold down longer-term loan rates to spur borrowing and spending. Powell’s comments indicated that the Fed will likely announce a reduction, or, ‘tapering’ — of those purchases sometime in the final three months of this year. Most economists expect the announcement in November, with tapering actually beginning in December.

(With inputs from agencies)