Rajan Urges Fed Hikes as Warsh Faces 'No-Win' Call

Ex-RBI chief Raghuram Rajan says the Fed should already be raising rates, while Chair Kevin Warsh faces markets pricing a September hike amid.

Former Reserve Bank of India governor Raghuram Rajan said the Federal Reserve should raise interest rates to contain accelerating inflation — or should already have done so. Speaking to Bloomberg Television's Haslinda Amin from the Jackson Hole central bankers' conference in Wyoming, Rajan declared, "I would be more hawkish than where the Fed is right now." Rajan, who is now serving on a task force set up by the Fed to examine the central bank, argued that financial conditions "are not restrictive at this point," pointing to very strong data-center investment, a fiscal deficit that "doesn't look like it's coming down anytime soon," and consumers running down savings while continuing to spend.

In his first high-profile Jackson Hole speech since replacing Jerome Powell as Fed chair on May 22, Kevin Warsh said inflation is still too high and suggested the central bank may need to raise rates in coming months. Acknowledging that recent data show inflation cooled a bit, Warsh cautioned that they "do not tell me that underlying trends have meaningfully improved," adding that the Fed has "work to do" if underlying inflation is not clearly moving to its objective at sufficient speed. He pointed to robust business investment in AI equipment and infrastructure and strong consumer spending as evidence that rates are not restricting economic activity. Most analysts expect rates unchanged at the September 15-16 meeting, though investors are betting on a hike by December.

The stakes are unusually high because inflation has stayed above the Fed's 2% target for 65 consecutive months, according to The Observer. Warsh's preferred gauge showed inflation at 3.7% in July, per the Associated Press reporting carried by the Rocky Mount Telegram, after cooling in June and July following a May spike driven by soaring gas prices. Warsh also noted that in the past year, 54% of goods and services tracked by the government saw price increases of 3% or higher — down from the pandemic peak but "well above" the 32% typical in the two decades before the pandemic. Warsh specified that short-term interest rates remain the Fed's "predominant tool" for lowering inflation.

Warsh's speech marked a clear tonal shift from his bumpy first 100 days, in which investors complained his minimalist communication left them guessing. After his July press conference offered little insight, long-term bond yields climbed to a two-decade high — the 30-year Treasury bond last week reached its highest level in 19 years.

The dilemma is starkly political. Markets now see a quarter-point increase at the September 15-16 meeting as more likely than not, and a hike just before midterm elections would put Warsh immediately at odds with President Trump, who has repeatedly pressured the Fed to lower rates despite having handpicked Warsh. "He has multiple targets on his back. It's a no-win situation," Maurice Obstfeld of the Peterson Institute told the conference, as quoted by Business Standard and The Business Times. Yet holding rates risks another market backlash: former Fed vice-chair Donald Kohn cautioned that with Warsh's new framework, "You have to have a good reason not to do it" if the September 11 CPI report doesn't come in soft. Harvard's Kenneth Rogoff suggested delaying any hike until after midterms would better preserve Fed independence.

The next data prints will decide the showdown. Chicago Fed President Austan Goolsbee argued the right call hinges on whether the recent inflation bout — caused partly by the Iran war and Trump's tariffs — proves persistent or a one-time level shift; he called monthly readings near 0.3% "nowhere near target." Boston Fed President Susan Collins called the data "mixed," while St. Louis Fed President Alberto Musalem endorsed Warsh's message and said markets' anchored expectations depend on the Fed raising rates by about 75 basis points over the next nine months. Meanwhile, Rajan, leading one of five task forces Warsh established to review Fed policymaking, said investors will watch whether the chair "has a plan" to beat inflation and "can communicate that very clearly."