The U.S. Federal Reserve would like to let the air out of the financial markets slowly rather than sharply, Raghuram Rajan, a finance professor at the University of Chicago’s Booth School of Business and former RBI governor, told CNBC-TV18.
He said central banks around the world are buying time to see if inflation is transient. Rajan said it would take a lot of courage for the Fed to sharply raise interest rates.
“It would be a bold Fed to pull the fund out of the recovery, supporting the recovery by raising interest rates too quickly,” Rajan said.
He said central banks, including the Fed, have a tough job to do as economies are still recovering from the impact of the COVID-19 pandemic.
Rajan said central banks need to make sure growth doesn’t collapse when the monetary stimulus is withdrawn.
He believes that inflation could persist longer than expected by the market.
“In this situation, I think central bankers have a very difficult job. They have to make sure that growth does not collapse at the same time that they have to control inflation. And with an eye on both, I have a feeling they will generally be behind the So we’ll see higher inflation for longer than we would otherwise if they hadn’t taken all these other considerations into account, ”he said.
By 2013, when the US Federal Reserve announced it would start cutting its bond purchases, financial markets around the world had collapsed.
This time around, the Fed has so far been cautious in its language of reducing bond purchases. The widely held view in the market is that the Fed may raise interest rates sooner than expected.
First publication: STI