Krugman bets Fed won’t bump up interest rates

Economy

Published: 15 Dec. 2014, 20:05

Krugman bets Fed won’t bump up interest rates

Paul Krugman

Paul Krugman, challenging the consensus of economists and the Federal Reserve’s forecasts, said policy makers are unlikely to raise interest rates in 2015 as they struggle to spur inflation amid sluggish global economic growth.

“When push comes to shove they’re going to look and say: ‘It’s a pretty weak world economy out there, we don’t see any inflation, and the risk if we raise rates and it turns out we were mistaken is just so huge,’” the 2008 Nobel laureate said in Dubai. “It’s certainly a real possibility that they’ll go ahead and do it, but probably not, and for what it’s worth, I and others are trying to bully them into not doing it.”

The “End This Depression Now!” author has criticized the U.S. government and central bank for not doing more to revive the economy after the financial crisis, and his position now pits him against most Fed officials.

Krugman said financial markets are signaling that policy makers will delay raising borrowing costs. His remarks build on arguments he’s made in his New York Times column. On Dec. 10 he wrote that the Fed risked “letting itself being bullied into doing the wrong thing” by raising interest rates prematurely.

Yields on 10-year U.S. Treasuries are at the lowest level since mid-2013, and inflation expectations have dropped with the slump in oil prices. The Federal Open Market Committee, which next meets to set rates on Dec. 16-17, will take energy costs into account in its assessment of inflation and the economy.

Top Fed officials, including Vice Chairman Stanley Fischer and New York Fed President William C. Dudley, said this month they expect the oil slump to spur domestic consumption, playing down the risk that it could push inflation further below the central bank’s 2 percent goal.

Unlike Krugman, Fed officials and economists surveyed expect higher U.S. rates in 2015.

The benchmark federal funds rate will rise to 1.375 percent by the end of next year, according to the median projection of Fed officials released in September. The median estimate of economists in Bloomberg’s latest survey is for a rate of 1 percent rate at year-end.

U.S. unemployment held at a six-year low of 5.8 percent last month, and economic growth is forecast to accelerate next year. Yet Krugman and others including HSBC Holdings Plc Chief Economist Stephen King have argued that the recent drop in U.S. unemployment masks low wage growth, suggesting that the economy is still struggling to recover.

“There is a very strong case that the United States is still a very depressed economy,” Krugman said at the Arab Strategy Forum in Dubai.

While most major central banks view inflation of about 2 percent as the yardstick for price stability, more than a quarter of the 90 economies monitored by Capital Economics have a rate below 1 percent, the most since 2009.

The outlook for global economic growth may deteriorate in 2015 with risks of crises in China and the euro area, Krugman said, as the European Central Bank fails to dodge deflation and the world’s second-biggest economy struggles to bolster domestic demand.

China’s economic growth will probably slow to 7 percent in 2015, the worst since at least 2007, according to economists’ estimates on Bloomberg.

“The two scary spots are the euro area and China,” said Krugman, who also warned of the risk of private-sector bankruptcies in Russia amid a slump in the currency.

Krugman was a frequent critic of former President George W. Bush over issues from the war in Iraq to tax cuts, He has repeatedly argued that the $831 billion stimulus package that Obama championed in 2009 was too small and that former Fed Chairman Ben S. Bernanke was too timid.

Bloomberg