Fed Rate cut expectations by March are ‘Optimistic’, Rajan says

Federal Reserve

While inflation in the US is slowing, it’s not easing at a fast enough pace that would give the Fed comfort to shift policy, Rajan, who is now a professor of finance at the University of Chicago Booth School of Business, told Menaka Doshi at a Bloomberg India Edition newsletter event in Mumbai.

“The Fed would like to see either a substantial fall in inflation, but also, the problem is the labor market is hot,” Rajan, who is a well known commentator on the global economy, said Wednesday. “The Fed may think if rates are not doing damage, why worry.”

The Fed is widely expected on Wednesday to keep interest rates unchanged at its last policy meeting of 2023. Economists surveyed by Bloomberg expect the Fed’s projections will show two rate cuts next year and five more in 2025.

Keeping rates higher for longer will come with its own risks, Rajan said. Credit card debt and auto loans in the US are a concern and smaller banks are showing signs of stress, he said.

Central banks across the world are projected to shift gear next year after an era of aggressive rate hikes. A key concern is whether policymakers can pivot quickly enough to blunt the impact of past tightening and avoid a severe downturn in their economies.

It’s very “hard for the Fed to land the economy right on deck,” Rajan said.

Rajan, 60, was speaking at the event alongside Rohit Lamba, an economics professor at Penn State University, co-authors of a recently published book on the Indian economy, titled “Breaking the Mould: Reimagining India’s Economic Future.”

The authors argue that India should focus on building its value-added services export industries, such as global capability centers, instead of a policy slant toward low-value manufacturing, where profit margins are shrinking and competition is intense.