‘Fintechs shadow banks of current time, are fragile’

Ahead of the Federal Reserve meeting, Nobel laureate DOUGLAS W DIAMOND tells Veenu Sandhu and Manojit Saha why central banks need to be measured in raising interest rates. Professor at the University of Chicago's Booth School of Business, Diamond received the prize along with Philip Dybvig and former Fed chair Ben Bernanke.

- DOUGLAS W DIAMOND

What are your expectations from the Fed meeting?

Once inflation has gone to the level that it has around the world, itis very important for central banks to do something to get people to expect it to not group for very long. Otherwise it sort of feeds on itself. People expect more inflation, so they ask for higher prices or wages. Central banks need to worry about that. And the way monetary policy works these days, that means they have to raise interest rates.

I would like to think about the thing that really causes inflation, the real interest rate.

So basically, they have to raise the real interest rate above what it was, say, a year ago, when it was like minus 1 per cent or minus 2 per cent. I think the core inflation rate in the United States is 6 per cent or less. So it is not as bad as the one that includes energy prices and all that. So they have to raise it, and that’s just standard matter.