The Fed faces a big challenge in cutting interest rates with the economy roaring, Nobel laureate Paul Krugman says
- The US economy is in a better-than-Goldilocks state, economist Paul Krugman wrote for The New York Times.
- "We have an economy that is both piping hot (in terms of growth and job creation) and refreshingly cool (in terms of inflation)."
Low inflation and blowout job growth have landed the US economy in a better-than-Goldilocks state, creating a dilemma for the Federal Reserve, Nobel economist Paul Krugman wrote in The New York Times.
353,000 new jobs were added in January, nearly double the expected amount of 185,000, Friday's jobs report shows. Meanwhile, price growth has steadily cooled, with core inflation actually slightly below the Fed's 2% target, Krugman noted.
"We have an economy that is both piping hot (in terms of growth and job creation) and refreshingly cool (in terms of inflation)," he outlined. He also cited strength in fourth-quarter GDP, which rose by a better-than-expected 3.3%.
This scenario makes interest rate decisions especially challenging. After all, the Fed pursued its aggressive hiking cycle to curb the post-pandemic inflation spike; but having nearly achieved this, the unexpected absence of a recession gives the central bank no obvious reason to start cutting.
As Krugman noted: "Powell is clearly wrestling with a dilemma many countries wish they had: What's the right monetary policy when the news is good on just about all fronts?"
As of Wednesday's FOMC meeting, central bank authorities chose to keep the federal funds rate steady at a range of 5.25%-5.50%. In his press conference commentary, Powell pushed back on stock market hopes that cuts could happen in March, citing that the Fed needs more confidence in inflation's trajectory.
But in Krugman's opinion, the risk of a slowdown should outweigh fears of an inflation resurgence, and it's best that the Fed starts cutting sooner rather than later.
Following Powell's commentary, analysts have looked to May as the potential start to the Fed's pivot. But the stellar jobs report puts even this timeline in question, Bankrate's Mark Hamrick said, in reaction to the report.
Others still believe that cuts will come sooner rather than later. Fundstrat's Tom Lee remains confident of a March turnaround, citing that Powell generally indicated a readiness to start slashing rates.