Synopsis: Emerging markets are concerned about an “abrupt change in stance” as Fed Chair Jerome Powell continues to emphasise a gradual pace of US Federal Reserve tapering, while they also have “much less room to wait and watch” than the Fed due to their lack of credibility and policy space, Raghuram Rajan said.
One of the most outspoken critics of the Federal Reserve’s 2013 “taper tantrum” is now concerned that the central bank would fall behind the curve in removing Covid-era monetary assistance.
In an interview with Bloomberg Television, former Reserve Bank of India (RBI) Governor Raghuram Rajan stated that the US Federal Reserve may be behind the curve when it comes to tapering.
“The Fed thinks it has time,” said Raghuram Rajan during the interview. Raghuram Rajan was the Governor of the RBI from 2013 to 2016, the last time the US Federal Reserve stopped buying assets.
At the time, Ben Bernanke was the chairman of the US Federal Reserve. The tapering programme in 2013 resulted in a large outflow of foreign funds from emerging nations like India.
Following the Global Financial Crisis, the US Federal Reserve began injecting money into the system (GFC).
In 2013, current US Fed Chairman Jerome Powell was one of the governors of the US Federal Reserve, and he supported tapering because he believed it would create a bubble and financial instability.
He then admitted that his judgement was incorrect a few years later. This time, he is the Chairman of the US Federal Reserve, and he appears to be in no hurry to begin tapering, despite the fact that some US Fed governors are thinking along the same lines as he was in 2013.
As Fed Chair Jerome Powell continues to emphasize a gradual pace of US Federal Reserve tapering, Emerging markets are concerned about an “abrupt change in stance” as Fed Chair Jerome Powell continues to emphasise a gradual pace of tapering, while they also have “much less room to wait and watch” than the Fed due to their lack of credibility and policy space, Raghuram Rajan said.
“My worry is that if they don’t fully account for these new forces, they may be behind the curve,” Raghuram Rajan added. “And that may, as everyone says, necessitate stronger tightening down the line.”
Raghuram Rajan’s tenure coincided with the Fed’s difficult removal of monetary stimulus, which impacted emerging economies particularly hard as currency volatility soared and international investors withdrew money.
Raghuram Rajan’s warning that the larger danger for the global economy is the Fed tightening too slowly — and then having to compensate with a more destabilising pace later — echoes other prominent economists such as former US Treasury Secretary Larry Summers.
