Macro Musings with David Beckworth Raghuram Rajan on the Impact of the Ratcheting Effect of The Fed's QE Program
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Feb 23, 2026 
Raghuram Rajan, former RBI governor and IMF chief economist now leading the Group of Thirty, reflects on central banking and financial stability. He revisits his 2005 warning on hidden tail risks. He explains QE’s ratcheting effect on the Fed’s balance sheet, how bank liabilities shift under QE, and policy tools like term deposits and pricing support to curb liquidity dependence.
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Jackson Hole Warning About Hidden Tail Risks
- In his 2005 Jackson Hole speech Raghuram Rajan warned that financial institutions were taking hidden tail risks pre-crisis.
- He argued banks and AIG were writing insurance like credit default swaps and collecting premia until they eventually had to pay the piper.
How Rajan Stabilized India After The Taper Shock
- Raghuram Rajan stabilized India's economy after the 2013 taper shock by focusing on inflation rather than exchange rates.
- He raised rates modestly, launched reforms and UPI payments, cutting inflation from double digits to ~4% and stabilizing the rupee.
India's Alternative Services-Led Growth Path
- India can follow a services-led growth path instead of large-scale manufacturing exports.
- Rajan argues focusing on urban services, skilling, healthcare, and data/privacy reforms can create jobs without competing with China-led manufacturing.
