Former RBI governor Raghuram Rajan joins US Fed review: What will his role be?

Former Reserve Bank of India (RBI) governor Raghuram Rajan has been appointed to a high-level task force by the US Federal Reserve to review its balance sheet policy, placing him at the centre of a broader effort to reshape the central bank's monetary policy framework.

Rajan is among the experts selected by newly appointed Federal Reserve Chair Kevin Warsh to serve on one of five task forces examining key aspects of the Fed's policymaking. The review comes as the US central bank reassesses its tools after the pandemic-era expansion of its balance sheet and the subsequent effort in bringing the inflation back to its long-term target.

What will Rajan do?

According to news agency PTI, Rajan will serve on the Balance Sheet Policy Task Force along with Harvard University economist Karen Dynan and former Federal Reserve Governor Jeremy Stein.

The panel has been tasked with examining the costs, benefits and institutional implications of the Federal Reserve's balance sheet policy, including the size and composition of its asset holdings and their role in implementing monetary policy.

The review is expected to evaluate whether the Fed's current approach remains appropriate after its balance sheet expanded to nearly $9 trillion during the Covid-19 pandemic through large-scale asset purchases aimed at supporting the US economy.

The central bank has since been shrinking its holdings while trying to return inflation to its 2 per cent target.

Although Warsh did not spell out Rajan's specific responsibilities, he said the task forces would bring fresh thinking to the Federal Reserve after inflation remained above target for more than five years.

"Our purpose here is to make better decisions in the conduct of monetary policy and put these years of high inflation behind us," Warsh told senators, according to a PTI report.

He added that the task forces would examine five core areas of the Fed's work—communications, balance sheet policy, the use of economic data, productivity and jobs, and the inflation framework.

"I reached out to 15 people who I have known and trusted with a diversity of views. It's a move towards transparency and new ideas," Warsh said.

Why Rajan?

The former RBI governor is widely regarded as one of the world's leading central banking experts. He served as RBI Governor between 2013 and 2016.

Before leading the RBI, he was Chief Economist and Director of Research at the International Monetary Fund (IMF), where he gained international recognition for his work on financial stability and macroeconomics. He has continued to be an influential voice on global economic issues through his academic work and policy research.

Other Indian-origin experts

Rajan is joined by two other Indian-origin experts on separate Federal Reserve task forces.

Harvard economist Raj Chetty will co-lead the panel reviewing the use of economic data to improve the quality and timeliness of indicators used in policymaking.

Meanwhile, Microsoft Executive Vice President and Xbox CEO Asha Sharma will serve on the Productivity and Jobs Task Force, which will assess how emerging technologies, including artificial intelligence, are likely to affect productivity, employment and long-term economic growth.