Raghuram Rajan Says Fed Chair Powell Should Get More Credit

Monetary Policy Stance - The Fed is under pressure to cut rates but is seeking more data before committing [1] - The Fed is subtly shifting expectations towards a rate cut, acknowledging a shifting balance of risks [2] - The shifting balance of risks may warrant adjusting our policy stance [2] - A rate cut in September is not guaranteed, and the August labor market numbers will be critical [12][13] Labor Market Analysis - The labor market appears to be softening, with a slower pace of hiring due to decreased immigration [3][4] - The labor market is weak enough that the Fed doesn't foresee substantial inflation increases from second-round effects [5][6] - The balance of risk on labor is tilting to the downside, even as inflation risks are to the upside [3] Inflation Concerns - Core inflation remains well above the 2% target, and has not budged downwards [6] - There was no mention of the fact that we haven't seen a downward adjustment in inflation [7] - Tariffs are expected to push inflation up, but the Fed is primarily concerned with inflationary expectations feeding into wages [5][10] - The Fed will do what it takes to keep inflationary expectations anchored [10] Fed's Framework Review - The Fed is revisiting its framework, acknowledging that the previous framework was designed for low inflation, the opposite of the current problem [14][15][16][17] - The Fed is moving back to its old framework [17] Chair Powell's Legacy - Chair Powell is likely to get less credit than he should for navigating the Fed through difficult times towards a soft landing [19] - Chair Powell has displayed immense calm and equanimity amidst external pressures [20][21]