Rajan Backs Warsh's Delicate Balance on Interest Rates

Raghuram Rajan, former Governor of the Reserve Bank of India and current professor at the University of Chicago Booth School of Business, spoke about his views on the Federal Reserve's policy under new Chair Kevin Warsh. In an interview, Rajan emphasized that Warsh must strike a delicate balance between controlling inflation and not being overly precise about policy responses.

Rajan agrees with Warsh that a central bank's reaction function involves more than just a couple of variables, highlighting the complexity of real-world decision-making. He also appreciates Warsh's attempt to explain the Fed's reaction function but notes the limitations of relying solely on macroeconomic theory.

Rajan is cautious about the impact of technology, particularly artificial intelligence (AI), which he believes can both positively and negatively affect the financial sector. He warns that regulators must remain vigilant and adaptive in response to rapid innovation, avoiding overregulation that could stifle beneficial progress.