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• While elevated mortgage rates have weighed heavily on housing, Rajan said the broader economy does not appear constrained.
• Last month, the Fed appointed Rajan to its Balance Sheet Policy Task Force.
• Rajan led the Reserve Bank of India from 2013 to 2016.

Ahead of Federal Reserve Chair Kevin Warsh’s first Jackson Hole keynote speech on Friday, Chicago Booth School of Business Professor Raghuram Rajan said the Fed should be raising interest rates, arguing that financial conditions are not holding back the U.S. economy. His hawkish view comes hours before Fed Chair Kevin Warsh delivers his first Jackson Hole keynote address, as investors look for clues on the rate trajectory.

“I would be more hawkish than where the Fed is right now,” Rajan said in an interview with Bloomberg, adding that he would have opposed last year’s rate cuts and preferred rates to be higher today.

“I certainly would have been averse to cutting rates last year, and I certainly would be at a higher level than now. I do think that financial conditions are not restrictive at this point,” he added.

Rajan Says Spending Still Persists

Rajan pointed to strong data center investment, a large fiscal deficit and continuous consumer spending to support his view. While elevated mortgage rates have weighed heavily on housing, Rajan said the broader economy does not appear constrained.

“When you have all these things together, it would suggest an economy which is not being held back. I personally would think that the Fed should be raising rates, or should have raised rates already,” Rajan said.

Three Fed Officials Wanted A Rate Hike In July 

Rajan’s call comes after three Fed officials: Beth Hammack, Neel Kashkari and Lorie Logan, who voted for a quarter-point rate increase in July. However, the FOMC voted 9-3 to hold rates at 3.50% to 3.75%.

Warsh is set to take the stage at Jackson Hole at 10:00 am ET on Friday and is closely watched ahead of the September policy meeting. The Fed’s July meeting offered little forward guidance, so investors will be parsing Warsh’s commentary for a clearer signal on the policy outlook. 

Rajan Appointed To Fed Task Force

Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. He led the Reserve Bank of India from 2013 to 2016 and served as the International Monetary Fund’s chief economist from 2003 to 2006.

In July, the Fed appointed Rajan to its Balance Sheet Policy Task Force alongside Harvard economists Karen Dynan and former Fed Governor Jeremy Stein. The task force will examine the costs, benefits, and institutional implications of the Federal Reserve’s current balance sheet regime.

The overall market was mixed in pre-market trading, with the SPDR S&P 500 ETF (SPY) edging 0.01% lower, the SPDR Dow Jones Industrial Average ETF (DIA) up 0.27%, and the Nasdaq-100 tracking Invesco QQQ Trust (QQQ) falling 0.3%. Retail sentiment for QQQ on Stocktwits turned ‘neutral’ from ‘bearish.’

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