Speaking to Ayesha Faridi of ET Now, Rajan said the Fed appears focused on supporting employment and cushioning the economy, possibly due to weaker labour market conditions than headline data suggests, as well as political and social pressures linked to affordability concerns.
“With growth estimates at or above potential, it is not as if policy is especially restrictive,” said Rajan, who is the Katherine Dusak Miller Distinguished Service Professor of Finance at the Chicago Booth School of Business. “The Fed seems to believe inflation will come down naturally, without keeping rates overly tight.”
He cautioned, however, that prolonged tolerance of above-target inflation could eventually risk excess credit growth and renewed price pressures, even as the Fed attempts to “buy insurance” for the economy amid incomplete and delayed data.
US economy resilient, but tariffs hurt consumers
Rajan said the US economy continues to perform strongly, supported by massive investment in artificial intelligence, buoyant asset prices and stable housing markets. However, he warned that tariffs and tighter immigration policies are adding to the affordability crisis faced by lower- and middle-income households.
“Tariffs raise prices. Cutting immigration also reduces labour supply, which can push inflation higher and slow potential growth,” he said, adding that the return of manufacturing to the US is unlikely to generate large-scale employment, as new facilities are highly automated and require skilled technicians rather than mass labour.
AI boom real, but profitability remains uncertain
On artificial intelligence, Rajan said demand is genuine and capacity is fully utilised, unlike the unlit fibre infrastructure seen during the dotcom era. “There are no idle GPUs today; demand is scaling rapidly, especially from consumers,” he noted.However, he questioned whether current investments will translate into profits. While companies such as OpenAI, Google and Meta are racing for dominance, Rajan said the market remains highly competitive, with no clear monopoly emerging.
“The risk is not unused capacity but unprofitable capacity,” he said, pointing to recent market reactions following weaker-than-expected results from companies such as Oracle, which have made large bets on AI infrastructure.
China’s growth model under strain
Rajan said China’s economy faces deeper structural issues, despite stabilising growth and strong performance in select technology stocks. He warned that overproduction, a struggling real estate sector and an outdated growth model are forcing China to export excess capacity, triggering global trade tensions.
“China has doubled down on high-tech manufacturing without fixing its domestic demand problem,” he said, adding that many countries—including India and Europe—may respond with trade barriers.
That said, Rajan acknowledged China’s technological strengths, noting its ability to innovate even under restrictions. “Chinese firms are showing remarkable engineering sophistication. India should take this as a lesson—invest in universities, R&D and innovation, because this is an arms race we cannot afford to sit out,” he said.
Outlook: resilience with rising risks
Rajan summed up the global outlook as one of resilience but rising medium-term risks—from inflation persistence and credit excesses to geopolitical uncertainty and fragmented trade. While AI-led investment may keep growth afloat, he said policymakers and investors alike should remain cautious about assuming smooth, profitable outcomes.