According to MarketWatch, the former governor of the Reserve Bank of India (RBI) stated that the US Federal Reserve is unlikely to halt interest rate increases despite the potential for further pain for emerging market economies.
Key quotes
“The Federal Reserve seems intent on hiking interest rates and emerging market economies will just have to cope, according to a former emerging-markets central banker who warned about the 2008 financial crisis before it hit. “In 2013, when we had the last bout of volatility, the Fed stayed off raising interest rate for some time. It is not clear it can do that right now because we have inflation numbers in the U.S. gaining strength,” said Rajan, who in 2005 went to the Fed’s Jackson Hole retreat and warned that the global economy faced the risk of a meltdown from risky behavior in the financial sector.
Some emerging markets countries have fiscal space to take the necessary policy steps, “but, of course, there are exceptions,” he said. Rajan said it was too soon to say if Turkey’s currency crisis was an early warning of wider problems in emerging market countries. The best way forward for Turkey now is “the path of orthodoxy,” he said.
The best thing the U.S. could do would be to pull back on its trade fights with China and other countries, Rajan said. At the moment, there has been “a tick down” in the outlook for the global economy as a result of the trade disputes, but “not a major one.”
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