April 19, 2024
Nobel laureate Paul Krugman says the Fed faces a big challenge in cutting interest rates as the economy booms.


  • Economist Paul Krugman, writing for The New York Times, says the US economy is in better shape than Goldilocks.
  • “We have an economy that is both extremely hot (in terms of growth and job creation) and refreshingly cold (in terms of inflation).”
  • This puts the Fed in a difficult position, as it has reasons to cut interest rates or keep them steady.

Nobel economist Paul Krugman wrote in The New York Times that low inflation and robust job growth have left the U.S. economy no better than Goldilocks, creating a dilemma for the Federal Reserve.

Friday’s jobs report showed 353,000 new jobs were added in January, nearly double the expected amount of 185,000. Meanwhile, price increases have slowed steadily, with core inflation actually slightly below the Fed’s 2% target, Krugman said.

“We have an economy that is very hot (in terms of growth and job creation) and fresh (in terms of inflation),” he underlined. He also cited strength in GDP in the fourth quarter, which grew a better-than-expected 3.3%.

This scenario makes interest rate decisions particularly challenging. After all, the Fed adopted its aggressive tapering cycle to curb the rise of inflation after the pandemic; But having almost achieved this, the unexpected absence of a recession gives the central bank no clear reason to start cutting.

As Krugman said: “Powell is clearly grappling with a dilemma that many countries face: What is the right monetary policy when the news is good on all fronts?”

According to Wednesday’s FOMC meeting, central bank officials decided to keep the federal funds rate steady at a range of 5.25%-5.50%. In his press conference remarks, Powell dismissed stock market expectations that a cut could happen in March, citing that the Fed needs more confidence in the trajectory of inflation.

But in Krugman’s opinion, the risks of a recession should outweigh fears of a resurgence of inflation, and it is best for the Fed to start cutting sooner rather than later.

Following Powell’s comments, analysts see May as the possible start of the Fed’s pivot. But Bankrate’s Mark Hamrick responded to the report, saying the stellar jobs report calls into question even this timeline.

Others still believe cuts will happen sooner rather than later. Fundstrat’s Tom Lee is confident about a change in March, saying Powell has generally signaled readiness to start cutting rates.

Source: www.businessinsider.com

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