Nobel Economics Laureate Paul Romer: "Raising Interest Rates Further Is Crazy"

"Fed Should Start Cutting Interest Rates"
US Economy Surprised with Q3 Growth
But Tightening Accumulated, Q4 Contraction Expected

The U.S. central bank, the Federal Reserve (Fed), signaled a prolonged era of high interest rates at last month's monetary policy meeting, while Paul Romer, a Nobel laureate in economics and a professor of business administration at Boston College, warned on the 26th (local time) that "it would be crazy for the Fed to raise rates further."

In an interview with Bloomberg TV on the same day, Professor Romer said, "The Fed should start cutting the benchmark interest rate." He explained, "The Fed needs to begin lowering rates and tell people that inflation will reach the 2% target within a year," adding, "We need to prepare to achieve a certain level of stability." This means that even if the Fed lowers rates, inflation can reach the target within a year. His opinion contradicts the Fed's forecast that inflation will surge if rates are cut, and it assumes that the economy will slow down in the future.

Professor Romer stated that the perception that prices never fall during economic booms is not true. He elaborated, "The theory that inflation only decreases when the economy slows down is no longer accurate," and added, "We need to look at the facts right now. We should not be confused by some theories that have proven to be wrong." This implies that since the U.S. economy is currently robust but may soon experience a slowdown or reversal, active consideration of rate cuts is necessary.

Currently, many economists expect the U.S. economy, which has been experiencing surprising growth, to slow down in the fourth quarter of this year. This is due to the recent sharp rise in Treasury yields and the cumulative effects of tightening policies that have been in place for over a year and a half. Following the Fed's announcement of a prolonged high interest rate environment, the benchmark U.S. 10-year Treasury yield recently surpassed 5% for the first time in 16 years but has since fallen to around 4.8% as of today. This increase in borrowing costs for the federal government, which is struggling with a large fiscal deficit, along with higher mortgage and financing rates for households and businesses, is likely to restrict consumer spending. The end of the federal government's student loan repayment moratorium at the end of August has further heightened concerns about reduced consumption. Since personal consumption accounts for two-thirds of the entire U.S. real economy, a decrease in spending inevitably leads to a decline in growth rates.

The corporate bond market, a source of financing for companies, is also rapidly freezing up. According to data from the London Stock Exchange Group (LSEG), U.S. companies raised a total of $70 billion this month through corporate bond issuance and loans. This is the lowest amount so far this year and the smallest monthly figure in 12 years. The number of corporate financing deals this month was 50, also the lowest in 20 years. This is a consequence of soaring Treasury yields amid expectations of prolonged high interest rates.

Currently, the market highly anticipates that the Fed will keep rates unchanged at the next monetary policy meeting. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of today, the federal funds futures market reflects a 99.9% probability that the Fed will hold rates steady at the FOMC regular meeting scheduled for August 31 to September 1 (7:52 PM Eastern Time). This is more than a 2 percentage point increase from the previous day's 97.6%.

However, there are also expectations that the Fed may raise rates further. Jamie Dimon, chairman of JP Morgan, has mentioned the era of "7% interest rates." Richard Clarida, global economic advisor at PIMCO, the world's largest bond manager, stated, "As the resilience of the U.S. economy is confirmed, the Fed may have to raise rates further to fight inflation," adding, "If bond yields remain at this level, we will see broader impacts of interest rates on the economy."

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