Inflation may persist for longer; US Fed has tough task on hands: Raghuram Rajan

The US Federal reserve would want to let the air out of financial markets slowly rather than abruptly, Raghuram Rajan, Professor of Finance at the University of Chicago Booth School of Business and former RBI Governor told CNBC-TV18.

He said central banks everywhere are buying time to see if inflation is transitory. Rajan said it would take a lot of courage for the Fed to raise interest rates abruptly.

"It would be a bold Fed to take the bottom out of the recovery, the supports out of the recovery by raising interest rates too quickly," said Rajan.

He said central banks, including the Fed, have a tough task on hands since economies are still recovering from the impact of the COVID-19 pandemic.

Rajan said central banks have to ensure that growth does not collapse when monetary stimulus is withdrawn.

He is of the view that inflation could persist for longer than what the market expects.

"In this situation, I think central bankers have a very difficult task. They have to ensure that growth doesn't collapse at the same time they have to control inflation. And with eyes on both, my sense is they typically will be behind the curve. So we will see higher inflation for longer than we would otherwise if they didn't have all these other considerations," he said.

In 2013, when the US Federal Reserve had said that it would start cutting back on bond purchases, financial markets globally had gone into a swoon.

This time, the Fed has so far been guarded in its language of tapering bond purchases. The widely held view in the market is that the Fed may raise interest rates ahead of schedule.