Federal Reserve has 'a political issue on its hands': Former Reserve Bank of India governor
Raghuram Rajan, India’s former central bank governor, warned that U.S. President Donald Trump’s attempts to influence the Federal Reserve could have “devastating” effects for the economy and monetary policy.
Rajan, who famously predicted the 2008 financial crisis and is now a professor at the University of Chicago Booth School of Business, said there are two problems with politicians trying to interfere with the Fed.
“It could either put [the Federal Reserve’s] back up, and they could say 'no' just because you’re jawboning, even if the economy needs more accommodative policy,” Rajan told BNN Bloomberg’ Greg Bonnell in an interview Monday.
“It could do the opposite with equally devastating effect: [Fed officials] succumb and then the view is these guys are poodles and that when in fact inflation shows up, they will not do what is necessary.
“Both outcomes are problematic, which is why leaders have stayed away from commenting thus far.”
For months, Trump has not shied away from publicly railing against the Federal Reserve and its chairman, Jerome Powell. Earlier this month, Trump said the Fed should slash interest rates and said the central bank “really slowed us down.” In December, the U.S. president tweeted: “The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders.”
Rajan stressed that it’s “very important” that central banks are left alone by politicians.
“They do unpopular things, but that’s good in the long run because it keeps inflation low. It keeps growth more stable than it would otherwise be,” he said.
“I think the Federal Reserve has a political issue on its hands and will have to deal with it as best as it can.”