Paul Krugman says the Fed's pessimistic view of inflation feels a bit desperate, now that price pressures are cooling rapidly

• The Federal Reserve's pessimism "is starting to feel a bit desperate," top economist Paul Krugman said last week.
• The central bank has signaled it'll raise interest rates past 5% and keep them there for all of 2023.

The Federal Reserve's pessimistic view of inflation is starting to look "a bit desperate" with price pressures now appearing to be rapidly cooling, according to top economist Paul Krugman.

The Nobel laureate said that Thursday's December Consumer Price Report, which showed another big drop in inflation toward year-end, suggests the central bank is being overly negative when it signals it'll keep interest rates high for all of 2023.

"Thursday's report on consumer prices was really good news. I mean, really, really good news," Krugman wrote in a New York Times op-ed published Friday.

"Even when you try to filter out the noise by excluding more volatile prices and looking at averages over several months, you get a picture of rapidly slowing inflation," he added.

"Inflation numbers have been getting better for a while, but the Federal Reserve – which is very unwilling to risk letting up on its inflation fight too soon – has been insisting that inflation is still hot if you look at what it considers more fundamental measures, especially the price of core services," Krugman wrote.

The central bank raised benchmark borrowing costs from near-zero to around 4.5% last year – and has signaled it'll carry on clamping down on consumer price pressures this year despite the recent favorable data.

Two top US monetary policymakers, San Francisco Fed president Mary Daly and Atlanta Fed president Raphael Bostic, said last week that they expect the central bank to raise rates past 5% and hold them there for the whole of 2023 to try to bring soaring prices under control.

The Fed also uses the Personal Consumption Expenditures price index as its preferred inflation gauge, instead of the CPI. The PCE reading for December is set to be released on January 27.

"The Fed has decided to be pessimistic based on a quite narrow measure," Krugman said. "And we won't have a read on the Fed's currently preferred inflation measure until a somewhat different set of inflation numbers comes out."

"But the attempt to stay pessimistic on inflation is starting to feel a bit desperate," he added.

Read more: The US closed out 2022 with another big drop in inflation