Fmr. IMF Chief Economist Rajan: Fed might have to act because it's been too long

• Powell's speech was good, reiterating seriousness about inflation and the need for higher interest rates, not relying on external factors.
• Rajan holds a hawkish view, believing the Fed should have already raised rates, and September will be a critical decision point.
• Inflation is increasingly structural due to persistent shocks (e.g., COVID, energy prices), necessitating proactive monetary policy.
• Reducing the Fed's large balance sheet is crucial but must be managed carefully to avoid market disruption, as the private sector gets 'used to' high liquidity.

Raghuram Rajan, former IMF chief economist, analyzes Fed Chair Powell's hawkish stance on inflation, emphasizing the necessity of higher interest rates. He suggests inflation is becoming structural and the Fed should have acted sooner. Rajan also highlights the critical need to carefully reduce the Fed's balance sheet due to the 'ratchet effect' on market liquidity.