Fighting the Fed

The first headline I saw this morning on (that is the site from where I begin my morning explorations) was a link to Raghuram Rajan’s speech at Brookings on Thursday. I did not proceed further. I opened the link. Read the speech and I found it explosive.

I will be very interested to know how the US handles his visa after he hangs up his boots in RBI 🙂

As I was reading, I annotated his speech with my comments and highlights. A thought struck me to convert it into a proper Op.-Ed. with his remarks followed by my comments. MINT was only too happy to oblige.

The piece with my annotations and highlights is attached. Here is the URL to my piece in MINT.

Looks like the machinery of the West swung into action, closing ranks:

(1) FT correctly called it an explosive speech. Interesting that FT reports that Bernanke said that he would take Raghuram to task for his remarks! I think he must have meant that literally and otherwise. Raghu has torn into QE and mocked the Fed’s defence of QE.

(2) Reuters reported that there was a cool reception to his speech. Chicago Federal Reserve Chairman is reported to have said that low inflation was a problem globally. Is it? He does not seem to be aware of this short paper by two economists at the FRB Minneapolis, published in January 2004. Except in the Great Depression of 1929-32, there has been no link between deflation and depression. So, why bother about deflation so much as to build up enormous costs, distortions and dislocations locally and globally?


3 thoughts on “Fighting the Fed

  1. I think Bernanke is right, central bankers do get together several times a year at various fora and discuss various economic and policy issues. But when it comes to framing and executing policy, the central bank acts in a sovereign context. It does not need permission to adjust its balance sheet from an asset- or liabilities-side.

    Which countries get affected by UMPs, and by how much, depends on their monetary regime. Hard $ pegs -such as Hong Kong- are basically importing US policy, floating rate regimes -such as AUD- see relative prices adjust more quickly.

    India is somewhere in between, and, in this context, it is not at all clear to me that he quantum of the flows to or out of India have gone up dramatically since UMP began. I would argue that India under YV Reddy received far larger flows in 2005-2008 when the RBI had to step up its game for sterilizing these flows, in conjunction with MOF. But what raises the pain threshold of grappling with sizable inflows or outflows are in-country balance sheet vulnerabilities. And India has plenty more of these relative to 2005-08.

    For Rajan to trash Fed QE is a bit like the Royal Monetary Authority of Bhutan asking the RBI for prior consultation before it makes monetary decisions. Bhutan pegs the Ngultrum to the INR, and its energy balance -and indirectly its fiscal and external balances- are heavily dependent on fuel prices (and subsidies) in India. If you or the RBI couldn’t be bothered by what happens (or does not happen) in the land of the Thunder Dragon, chances are the Fed won’t two hoots about Mint Street.



    1. Thanks for your response. That is a fair depiction of reality. But, Rajan’s speeches have their relevance and utility and will have repercussions in ways that are not readily fathomable straightaway.


    2. One more point. The dislocations that are being caused in Australia are not insignificant- floating exchange rates or not. There is no more impossible trinity. There is a trade-off between only two things: independent monetary policy or unrestricted capital flows. It does not matter what exchange rate regime the country has.


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