Raghuram Rajan, former RBI governor and distinguished economist at the Chicago Booth School of Business, has expressed concerns about the US Federal Reserve's monetary policy approach and the sustainability of the current artificial intelligence investment boom. Speaking to ET Now, Rajan outlined his views on global economic challenges, from persistent inflation to the competitive AI landscape.

Fed's Dovish Stance Raises Credibility Concerns

Rajan believes the Federal Reserve has adopted a distinctly dovish stance despite inflation remaining above target for nearly five years, raising questions about the central bank's long-term credibility. The economist suggests the Fed appears focused on supporting employment and cushioning the economy, possibly due to weaker labour market conditions than headline data indicates, along with political and social pressures related to affordability concerns.

"With growth estimates at or above potential, it is not as if policy is especially restrictive," Rajan noted. "The Fed seems to believe inflation will come down naturally, without keeping rates overly tight." He cautioned that prolonged tolerance of above-target inflation could eventually risk excess credit growth and renewed price pressures, even as the Fed attempts to provide economic insurance amid incomplete and delayed data.

US Economic Performance and Policy Challenges

The US economy continues to demonstrate strong performance, supported by massive artificial intelligence investments, buoyant asset prices, and stable housing markets. However, Rajan warned that tariffs and tighter immigration policies are exacerbating 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," Rajan explained. He added 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 Investment Boom: Real Demand, Uncertain Profits

Regarding artificial intelligence, Rajan acknowledged that demand is genuine and capacity is fully utilised, contrasting sharply with the unlit fibre infrastructure seen during the dotcom era. "There are no idle GPUs today; demand is scaling rapidly, especially from consumers," he observed.

However, the economist questioned whether current investments will translate into sustainable profits. While companies such as OpenAI, Google, and Meta are racing for market dominance, Rajan noted 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 like Oracle, which have made substantial bets on AI infrastructure.

China's Structural Economic Challenges

Rajan highlighted deeper structural issues facing China's economy, 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," Rajan said, adding that many countries—including India and Europe—may respond with trade barriers.

Despite these challenges, Rajan acknowledged China's technological strengths and innovation capabilities 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 advised.

Global Economic Outlook

Rajan characterised the global economic outlook as one of resilience coupled with rising medium-term risks. These risks include inflation persistence, potential credit excesses, geopolitical uncertainty, and increasingly fragmented trade relationships. While AI-led investment may sustain growth momentum, he emphasised that policymakers and investors should remain cautious about assuming smooth, profitable outcomes in the evolving economic landscape.

Tensions between the White House and the US Federal Reserve reached new heights after Federal Reserve Chair Jerome Powell revealed that the administration had threatened him with potential criminal indictment related to the Fed's headquarters renovation. According to Reuters reports, Powell stated this pressure campaign aimed to force the central bank into cutting interest rates, raising serious concerns about the independence of America's central banking system.

Market Reaction

Financial markets responded swiftly to the unprecedented developments, with investors seeking safer assets amid institutional uncertainty. The market reaction was broad-based across multiple asset classes:

As of January 10, 2026, at 02:30 AM IST, the S&P 500 showed mixed performance with notable gainers including Builders FirstSource rising 12.01% to 124.66, Intel climbing 10.80% to 45.55, and Vistra advancing 10.47% to 166.37. However, losers included Las Vegas Sands falling 4.77% to 58.95 and CoStar Group declining 4.68% to 58.49.

Expert Analysis on Political Pressure

Market participants highlighted the significance of this development in the context of central bank independence. Damien Boey, portfolio manager at Wilson Asset Management in Sydney, noted that Powell's decision to directly address the issue marked a departure from his previous approach of downplaying political pressure. The market reactions, including stronger gold prices, softer equities, and a steeper yield curve, aligned with typical responses to perceived threats against central bank independence.

Alex Morris, CEO of F/M Investments in Washington, characterized the episode as a deliberate effort to undermine institutions viewed as obstacles to the administration's policy agenda. Morris suggested the move also signaled expectations to other Fed officials and potential successors about the administration's stance.

Implications for Fed Leadership

The situation has raised questions about Fed governance and leadership continuity. Brian Jacobsen, chief economist at Annex Wealth Management in Wisconsin, suggested that Powell could remain on the Fed's board even after his term as chair ends in May, potentially limiting the administration's ability to reshape the central bank.

Ray Attrill, head of FX strategy at National Australia Bank in Sydney, identified the uncertainty surrounding Powell's future and the public confrontation as negative factors for the US dollar. The unprecedented nature of the situation has created new variables for market participants to consider.

Currency and Institutional Risk Assessment

Currency strategists emphasized the broader implications of the political pressure campaign. Charu Chanana, chief investment strategist at Saxo Bank in Singapore, explained that a criminal inquiry into a sitting Fed chair forces investors to price in an institutional risk premium. This impact typically manifests first in currency markets and gold before spreading to interest rate volatility.

Joe Capurso, head of foreign exchange and international economics at Commonwealth Bank of Australia, confirmed that the US dollar fell against nearly all major currencies, including those that typically weaken during risk-off periods. However, he assessed that the developments were unlikely to alter Fed policy in the near term.

Long-term Market Outlook

Analysts offered varying perspectives on the lasting consequences of the political pressure. Christopher Hodge, chief US economist at Natixis in New York, noted that markets have previously weathered repeated political noise around the Fed, but warned that persistent pressure could eventually provoke stronger reactions. He cautioned that continued probing risks uncovering issues that could trigger broader market backlash.

Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho in Singapore, emphasized that questions around Fed independence are now firmly back in focus. While markets are not yet panicking, he identified the durability and intensity of the administration's actions as key factors in determining whether investor confidence will be materially shaken in the coming months.