ETNOW• Jan 9, 2026• 3:28Interview

Raghuram Rajan Interview: Does FED Still Has Credibility, How Long Can Inflation Be Above Target?

From ETNOW

Raghuram Rajan•Former RBI Governor, Former IMF Chief Economist

Executive Summary

Raghuram Rajan assesses the US Federal Reserve as increasingly dovish, potentially due to political pressure or a focus on weaker segments of the labor market.
Despite inflation remaining above target for nearly five years, the Fed appears to believe it will decline naturally without needing a highly restrictive policy, a stance Rajan questions.
The US economy is demonstrating strong performance, fueled by significant AI-related investment and a buoyant upper-middle class benefiting from asset price gains.
Rajan's analysis highlights a 'K-shaped' recovery, where the Fed's policy seems to prioritize employment for the struggling lower-middle class over aggressively tackling inflation, which also disproportionately harms them.

9 quotes

Concerns Raised

The Federal Reserve's dovish pivot despite inflation being above target for nearly five years.
Potential for political pressure to unduly influence monetary policy decisions.
The 'affordability crisis' affecting the lower-middle class in a K-shaped recovery.

Opportunities Identified

Strong US economic growth driven by significant investment in AI-related sectors.
Continued buoyancy of the upper-middle class, supported by substantial stock market gains, which can sustain consumption.

Key Themes

Federal Reserve's Dovish Stance

The analysis centers on the US Federal Reserve's perceived shift towards a more dovish monetary policy, prioritizing economic growth and employment despite persistent above-target inflation. Raghuram Rajan questions whether this is a response to political pressure or a genuine belief that inflation will self-correct.

This theme is critical as the Fed's policy direction dictates global borrowing costs, influences asset valuations, and tests the central bank's long-term credibility in fighting inflation.

The K-Shaped Recovery

The US economy is experiencing a divergent recovery. The upper-middle class is thriving due to stock market gains and stable housing prices, while the lower-middle class faces an 'affordability crisis'. This disparity appears to be a key factor influencing the Fed's decision-making.

Understanding this economic divergence is crucial for forecasting consumer behavior, sector performance, and potential social and political pressures on economic policy.

Persistent Inflation vs. Market Complacency

Inflation has remained above the Fed's target for an extended period, yet market-based inflation expectations remain relatively low and stable. This suggests markets still have faith in the Fed's ultimate ability to control prices, creating a potential disconnect between current data and future outlook.

This tension highlights a key risk: if market confidence in the Fed erodes, inflation expectations could become unanchored, forcing more aggressive and economically damaging policy action later.

US Economic Resilience and Growth Drivers

Despite monetary tightening, the US economy continues to perform strongly, described as 'chugging along'. This resilience is attributed to powerful secular trends, particularly massive investment in AI and related sectors, which are boosting growth.

The underlying strength of the US economy complicates the Fed's task of cooling demand and suggests that growth may remain above-trend, potentially keeping inflationary pressures alive.

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Topics

Monetary Policy US Federal Reserve Inflation Interest Rates Economic Growth US Economy Raghuram Rajan K-Shaped Recovery Labor Market Political Pressure AI Investment Asset Prices Central Banking Inflation Expectations Economic Outlook

Processed Apr 20, 2026 yt-dlp + mlx-whisper + Gemini