Hate him or love him, you have definitely heard of him and may respect him. Paul Krugman is one of the most famous economists in the world, and he has just put out a warning we think investors need to hear. Krugman’s big fear is that trouble is building in the economy and the Fed doesn’t have much firepower to help stimulate things if and when growth heads backwards. “There seems to be an accumulation of smaller problems and the underlying backdrop is that we have no good policy response”. Krugman argues that hiking rates was never “grounded in the data” to start with and that “Continuing to raise rates was really looking like a bad idea”.
FINSUM: What we know is that a recession will come at some time, what we don’t know is when. Krugman has given sometime in the next two years as his timeline, which to us wreaks of a lack of confidence.
As part of our doves vs. hawks rates debate today, here is a strong Paul Krugman article from the New York Times. Krugman argues that the Fed should leave rates at zero for the foreseeable future and contends that it is better to let the post-Crisis rebound expand to its full extent and bear the risk of overshooting the inflation target for a short period than it is to raise rates now in the fear of growing inflation. He believes the Fed inappropriately views the situation from a different perspective, having too strong a focus on sticking to the inflation control mandate and perceiving the situation much like the economic position the US was in during the 1970s. Krugman, on the other hand, argues that the country is actually in a position much more akin to the 1990s, when the Fed made the good decision to leave rates lower and let the economy create millions of more jobs.
FINSUM: This is exactly the kind of argument one would expect from Krugman, but it is delivered sharply and with vigour. The case to leave rates low is strong. In fact, the latitude the Fed has with its policy could be seen as one of the few benefits of the Crisis—that the economy and inflation were so weak that the central bank can afford to leave rates low even when unemployment is at 5.5%.