The Federal Reserve is expected to raise interest rates again by
three quarters of a point tomorrow. Fed chair J. Powell has made
it clear that he wants to substantially curb the rate of inflation.
But there are some concerns that the Fed could overreact and end
up tipping the economy into a recession. The latest warning signs
new home sales, as we just reported were down for the fifth time
this year, and consumer confidence slid the third month in a row.
Economist Paul Krugman has been writing about this in the New York
Times and he joins me now, Paul Krugman. Welcome back to the news
hour. So tell us. What do you expect the Fed to do tomorrow? And
do you think it's the right thing?
Well, they are going to do unless you know be a huge surprise that
they don't do a three quarters of a percentage point increase. Um,
which I have to say. I'm a big monetary dove. Most of the time. I
think they do need to do this. I think they needed to do the the
rate hikes they've done so far, because the although inflation is
a global phenomenon, and most of the inflation that we're seeing
is something that we're sharing with the rest of the world. It was
also pretty clear that the U. S economy was overheated at the beginning
of the
This year. We were just running too hot and the Fed needed to cool
things down.
The important question is what they do going forward, so I'm actually
going to be much more interested in
What they say than what they do. They're going to. They're going
to raise by 75 basis points. But are they going to show a willingness
to? Um you know, start to maybe, uh, ease off on further rate hikes
in the light of day there because there's a lot of very sort of short
term data coming in now that suggests that inflation is coming down.
Substantially. Uh and
Also a lot of data coming in suggesting that the economy is weakening
substantially. So the question really is going to be. Is the Fed
going to signal a willingness to maybe, uh, start to loosen up a
bit and in the near future, So you're more concerned at this point
about the signals they're going to send tomorrow and what happens
down the road? So how worried are you that what they do could tip
us into our into recession.
Oh, I mean, it's it's a very real possibility. I mean, you're trying
to do something. What the Fed is trying to do is cool things down,
you know, slow the economy down flat and the flattened the slope
without tipping it down to the point where the economy uh, you know,
goes into a plunge. That's unnecessary. It's the deeper than is necessary
to cool. Cool the inflation it's not as if
They have any kind of exact control. We're not talking about precision
fine tuning of the economy. In fact, the two tomorrow's meeting is
going to take place in almost the worst possible time there. There
was this going to be a lot of data coming in the next few weeks,
not GDP, but more important, we're going to be beginning some readings
on labor costs on Friday that everybody is in my circle is very anxious
to see and lots more to come. So the Fed is being obliged to take
Take by a scale will take a major decision really very much in the
dark.
And another chance of the chance of getting it wrong. Um
Is very high. Uh, not because the people at the federal bed but because
it's a very, very difficult job under these conditions and explain
to us why we should be more worried about a recession than we already
are about inflation. I mean people are suffering right now, with
higher prices.
No and we are. We should be worried about inflation, and it is clearly
unacceptable. Inflation needs to be brought down. Um, but there's
really not much question now that the Fed will do enough to bring
inflation under control. Um, the markets believe that if you look
at market expectations of what inflation is going to be over the
next year, they've gone from 7% to a few months ago to a little over
2% now, so the market's really are
You know, convinced that the Fed is going to do whatever it takes
to bring inflation under control. So now the risk is that they do
more than takes. So it's not a question that that inflation is okay
and recession is bad. It's that inflation is something that we know
they're going to deal with. And the question is, are they sufficiently
sensitive to the risk of over doing it and causing a
And unnecessary recession and and you know, And in brief, why is
a recession a bigger worry for you?
Well, recession means that people lose jobs. I mean, there's a, um
higher cost of living, which means that your your salary doesn't
stretch as far as a bad thing. Not getting a salary at all isn't
even worse thing. So you know they they were much in terms of the
actual economic losses, the losses from inflation or real there,
although the ones that hurt the most of the things over which we
the Fed has no control, like the price of oil, but
The losses of having productive workers not being allowed to produce
because the economy is depressed that the the the output the stuff
we could have been producing that we don't because factories have
been shut down because businesses have been shut down. Those are
always huge economic costs, and we really don't want to incur those
we've you know, no. Inflation is a bad thing. But you know, uh, the
great depression was really really bad things so you don't want
Really, really don't want the recession if you can avoid it.
For sure. Paul Krugman You wrote a column Just the other day, acknowledging
that you've been wrong and forecasting. You didn't sufficiently expect
that inflation was going to be as bad as it's been so as you think
about whether the Fed could overreact. How do you square those two
things?
Well, the Fed was wrong, too. I mean, if there was there wasn't a
whole lot of air between my views about future inflation.
Uh, in, you know, in early 2021 of those the Fed, uh and we all you
know, the world doesn't complicated place, and if you never make
a mistake, you're not taking enough risks. And the Fed was concerned
to avoid mistakes that has made in the past when it has been much
too tight, and they have failed to see you know, there are some things
that there were no but really nobody's father. Nobody's fault except
Vladimir Putin's
Um, like that, you know the risen in energy and food prices, but
the U. S economy got overheated to a greater degree than they or
I expected, Um, And but the point is that they have
React to that The Fed has tied the lot and even more important markets
have priced in the fact that the Fed is going to tighten and will
continue to tighten somewhat more so mortgage rates, which is probably
the most important point place where what? What? What the Fed does
affect people. Real people's lives largely through mortgage rates,
which affect housing, which affect construction, which affect employment.
And so on Through the economy, mortgage rates have really soared
this year.
So the Fed has already reacted to that.
Mistake and has tried to undo the damage. And at this point, the
problem is, will they do too much? And finally Paul Krugman is people
watching this? What should they take away tonight? In terms of your
view of how worried you are about a serious recession coming?
Okay. I think that we're probably not headed for anything remotely
like what? We went through.
And the you know, after the 2008 financial crisis, Um, for one thing,
the Fed is not stupid. They're they're not. Things are not out of
control. Inflation is high, but they're reacting to that. They don't
appear to be really huge. You know, structural weaknesses doesn't
look like the banking system is going to collapse. Consumers. Many
of them have some cushion of savings, so we're probably talking about
Um, something at worst.
Um, I'm showing my age because this doesn't sound like that long
ago, but something like the 2001 recession after the dot com bubble
pursed we're talking about a are relatively mild recession. But of
course, even a relatively mild recession means that millions of people's
lives are seriously disrupted. So, um, catastrophe? No but some
Pain is a definitely real possibility.
Paul Krugman. We appreciate it. Thank you.