The headline might appear strange. But, you cannot fault me for coming up with it after this comment by Raghuram Rajan, the Governor of the Reserve Bank of India, in this interview with Wall Street Journal:
WSJ: We’re talking about slow growth. We’re talking about global disinflation. We’re talking about how hard it is to reach escape velocity. Can the rest of the world afford for the Fed to raise rates in this environment?
RAJAN: Can we afford for the Fed not to? The worry is that the longer we stay in this environment, the deeper are the distortions that we’ll have to undo eventually. At some point you’ve got to say, ‘OK, enough. We’ve got to get out.’ The longer we stay here the more the distortions pick up. There will be no perfect time. [Link]
He is right. There is no perfect time. In fact, the longer it takes to make things normal, the better if it were begun sooner. Unfortunately, many have interpreted his comments made in 2013 on spillover effects to make the case for the Federal Reserve not to embark on making monetary policy more normal again. As we had blogged, Ray Dalio of Bridgewater Associates made that case, bizarrely, before the Federal Reserve met in March.
Strangely, I saw the same sentiment expressed somewhat indirectly in ‘India: Selected Issues (March 2015)’ (IMF Country Report No. 15/62)
It is therefore very much in the source countries own interest to ascertain that financial stress is contained when tightening their monetary policy stances. [page 11 – Link].
How to ascertain that financial stress is contained and if ascertained, what to do about it? Not embark on monetary policy normalisation.
That said, the conclusions mentioned in that essay, ‘SPILLOVERS FROM SURGES IN GLOBAL FINANCIAL MARKET VOLATILITY’ are worth internalising for many advocates of financial liberalisation in India. A separate post on that is warranted.