Central Banks' Limits Revealed: Can They Rescue Us From High Interest Rates?

Raghuram Rajan, former Reserve Bank of India governor, spoke at the Jackson Hole Symposium about the limitations of central banks in addressing high interest rates and rising debt. He joined Steve Davis to discuss Fed chairman Kevin Warsh's speech and Treasury secretary Scott Bessent's intervention in bond markets.

Rajan explained that attempts to push down long-term yields can distort important market signals, making it difficult for policymakers to understand the underlying economic conditions. He also warned that rising debt-servicing costs could force policymakers to pay greater attention to addressing persistent government deficits.

According to Rajan, central banks can address liquidity problems and market dysfunction but cannot rescue governments from an underlying fiscal crisis. He emphasized the need for more fiscal prudence amid high levels of government debt and cautioned against assuming unusually low real interest rates will continue in the future.