Paul Krugman: "Difficult to Predict Future Interest Rate Path"

Bloomberg TV Interview
Growth Expected to Fall to Around 2%, Similar to 2019 Levels

Paul Krugman, Nobel laureate in Economics and professor at the City University of New York, described the future interest rate path as "fanatically confusing" and difficult to predict. However, he predicted that interest rates would eventually fall to around 2%, the level seen in 2019.

In an interview with Bloomberg TV on the 21st (local time), Professor Krugman stated, "Anyone who claims to be confident in the answer about interest rates is deceiving themselves."

The yield on the 10-year U.S. Treasury bond is currently 4.4%, significantly higher than the sub-2% level before the COVID-19 pandemic. The Congressional Budget Office (CBO) projects that the 10-year U.S. Treasury yield will remain around 4% over the next decade.

Amid a delay in Federal Reserve (Fed) rate cuts due to the strong U.S. economy, Professor Krugman pointed out that various dynamics compared to the pre-pandemic period "may have changed the situation," citing increased immigration and the Biden administration’s industrial policies that encourage expanded manufacturing investment as causes of the robust economy. He also mentioned the possibility that new technologies, including artificial intelligence (AI), have expanded corporate capital expenditures.

However, he expects interest rates to normalize in the long term. Professor Krugman said, "2019 should still be our benchmark," adding, "We will return to very low interest rates." The U.S. benchmark interest rate ranged from the high 1% range to the mid-2% range in 2019.

Regarding the possibility of a rise in the neutral interest rate, he explained, "It may have actually risen, or it could be a temporary phase."

On the issue of U.S. federal government welfare policies and fiscal deficits, he said, "If you continue to spend more than you earn, it cannot last forever," adding, "At some point, you will have to either increase revenue or reduce benefits for the elderly. Politically, both seem impossible."

Meanwhile, Fed officials reiterated their existing stance that further confirmation of inflation easing is necessary regarding the future interest rate path.

Christopher Waller, a Fed governor known as a "hawk" (favoring monetary tightening), said on the same day that before lowering rates, inflation data supporting such a move must be confirmed "for several months." However, he drew a line against the possibility of rate cuts, stating, "I believe further increases in the policy rate are unnecessary."

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said, "It is better to wait longer before cutting rates to prevent inflation from rebounding," adding, "I want to ensure that rate cuts are not rushed and that policy easing is not ambiguous." He predicted, "If inflation is expected to decline relatively slowly, rate cuts should not be expected before the fourth quarter."

This content was produced with the assistance of AI translation services.