Rajan Urges Fed to Raise Rates, Says US Financial Conditions Not Restrictive

Raghuram Rajan, the former Reserve Bank of India governor, said the Federal Reserve should raise interest rates to contain inflation, arguing the US economy is not being restrained by current financial conditions. Rajan spoke to Bloomberg Television from Jackson Hole, Wyoming, where the annual central bank conference is underway. Markets currently expect the Fed to lift borrowing costs in December, though a sharp rise in bond yields has also pushed some traders to price in a September move. Rajan said he would be more hawkish than the Fed is right now. “I do think that financial conditions are not restrictive at this point,” he added. US growth is coming from “very strong” investment in data centers, and the country 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, Rajan said. “When you have all these things together, it would suggest an economy which is not being held back.” The Fed’s communication strategy under Chair Kevin Warsh has kept markets guessing. After the July policy meeting, Warsh offered little forward guidance. Investors interpreted his comments as showing a lack of resolve to bring inflation back to target, pushing long-term bond yields to a two-decade high. Rajan sees Warsh differently. “Warsh has the right instincts,” he said, and has tried to make clear that “he is very much against inflation.” Investors will watch Warsh’s Friday speech for signs “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 co-leading one of five task forces established by Warsh, examining the Fed’s approach to balance sheet policy. On India, Rajan said the rupee has held up better than feared. The currency is around 95.50 a dollar, up from nearly 97 in May after the RBI undertook capital raising measures to bring dollars into the country. “At this point, I don’t think the currency is that far out of whack,” Rajan said. “I don’t think it’s a panic situation.” Governor Sanjay Malhotra said in a recent interview the RBI expects at least $80 billion in foreign-currency inflows from its recent measures.