Central banks may do more harm than good, says head of India’s central bank

Raghuram Rajan, governor of the Reserve Bank of India, has been leery of the unconventional monetary policy tools used by central banks since the financial crisis. At some point, he said, pushing interest rates low seems to have the perverse effect of making people save rather than spend.

Perhaps the most cogent critic of Fed quantitative easing policy, Rajan says the asset-price boost that comes with it may disappear if these assets can’t grow into their valuation. That risks still haunts the U.S. economy, he said.

In an interview with MarketWatch on the sidelines of the International Monetary Fund’s spring meeting in Washington, he said he wants the Federal Reserve to raise rates at a measured pace. Doing so would give other leading central banks room to move away from unconventional policies as soon as there are signs of a recovery, Rajan said.

Rajan, 53, is on leave from his teaching post at the University of Chicago. He served as the International Monetary Fund’s chief economist and rose to prominence for raising prescient concerns about the serious risks facing the financial system well before the financial crisis.

The following is a transcript of an interview with Rajan, edited lightly for clarity.

MarketWatch: The latest International Monetary Fund report on the global economic outlook makes for dismal reading — why shouldn’t the Federal Reserve pause and wait until global conditions improve?

Rajan: If you read the writings of economists, it is not clear what’s keeping us still so slow, seven or eight years after the crisis. Ken Rogoff would say it is still the debt overhang and the deleveraging. [Robert] Gordon and others might say it is low productivity and still others may say it is the poorly understood consequences of population aging. But what do we do? And here I think there is more of a consensus that monetary policy pretty much has run its course. There are still guys who are looking for helicopter drops of money but I think that is a step sort of too far into the dark, where I am not sure there is a political consensus to do that in the major economies, if it comes to that.

[Source:- Marketwatch]