Raghuram Rajan warns US Fed’s slow tapering may keep it behind the curve

Former Reserve Bank of India governor and noted economist Raghuram Rajan thinks that the US Federal Reserve could be moving slower than it should in removing the monetary stimulus it had put in place in the wake of the economic crisis brought on by the Covid-19 pandemic.  

Rajan, who in 2013 had said that the Fed had moved too fast in tapering the stimulus, now says that the current crisis is different from the global financial crisis eight years ago, in that this time around there is an “enormous amount of fiscal spending”.

The university of Chicago economist, who also has an IIT-IIM-MIT pedigree to boot, said he is concerned that if the Fed does not fully account for the changed reality, “they may be behind the curve”.
“The Fed thinks it has time to slow-walk the tightening process, especially given longer-term disinflationary forces like aging, automation and globalization,” Rajan said in an interview to Bloomberg Television.

Rajan was the RBI chief from 2013 to 2016, a period that saw the US Fed swiftly remove the economic stimulus, which hit emerging market economies such as India hard, as foreign institutional investors began pulling out hot money from these capital markets. 

Rajan’s views concur with those of former US treasury secretary Larry Summers, who also thinks that if the Fed continues to go slow, it will have to act fact later, which could have a destabilizing impact on emerging economies.   

Rajan said that even though the Fed chairman Jerome Powell continues to stress on a gradual withdrawal, emerging markets remain cautious about an “abrupt change in stance” from the US central bank. 
Although Powell has said that the Fed could begin tapering the stimulus later this year if the US job recovery continues, he has been non-committal on when the pullback might actually begin.