Economist Krugman: Fed Shouldn’t Go Too Far on Rates

Economist Krugman: Fed Shouldn’t Go Too Far on Rates

While the Fed needs to tighten, there’s no need to ‘throw the economy into a recession to bring inflation down,’ he said

While most economists are talking about the Federal Reserve raising interest rates more aggressively after Thursday’s news of raging inflation, Nobel laureate economist Paul Krugman says the Fed shouldn’t go overboard.

Consumer price soared 7.5% in the 12 months through January, the biggest increase in almost 40 years.

The Fed does need to do some tightening, Krugman told Bloomberg. “This is clearly a very hot economy and it’s the Fed’s job to cool it off a bit,” he said. The economy grew 5.7% last year. “Consistent” rate increases will be necessary to get the job done, he said.

But Krugman noted that long-term measures of inflation expectations are lower than short-term ones. “It’s not a crisis,” Krugman said. “At this point, I don’t see any sign yet that inflation has gotten entrenched in the economy. The Fed still has room to engineer a soft landing. But it needs to start doing that.”

By soft landing, “what I mean is not getting to the point where we actually need to throw the economy into a recession to bring inflation down,” Krugman said. What’s needed is “definitely not shock therapy,” he said.

At the other end of the spectrum is Goldman Sachs. Its economists, led by Jan Hatzius, now predict seven rate hikes this year — 0.25 percentage point at each of the Fed’s remaining meetings this year. That’s up from the five rate increases they previously expected.

“The January CPI report … was very firm, with every key measure of the underlying trend running hot last month,” the Goldman economists wrote in a commentary. 

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