Krugman: "Fed Missed the Timing for Rate Cuts... Must Cut Significantly in September"

"US on the Brink of Recession... 'Rule of Three' Triggered by Unemployment Rate"
"Fed Faces Inflation PTSD... Should Not Be Politically Influenced"

Nobel Prize in Economics laureate and City University of New York professor Paul Krugman emphasized that the U.S. Federal Reserve (Fed) must hasten to cut interest rates to prevent a severe economic recession.

In a column contributed to the New York Times (NYT) on the 5th (local time), Professor Krugman stated, "The United States probably has not yet fallen into a recession," but added, "However, the economy certainly appears to be on the brink of a recession."

Professor Paul Krugman of the City University of New York is delivering the keynote speech at the '2019 Economic Development Experience Sharing Project (KSP) Performance Sharing Conference' held on the 9th at the Conrad Hotel in Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

Professor Krugman said, "It is already clear that the Fed's failure to cut rates in July was a mistake. In fact, rate cuts should have started several months ago," and emphasized, "Since we cannot turn back the clock, the Federal Open Market Committee (FOMC) in September should cut rates by 0.5 percentage points instead of the usual 0.25 percentage points."

He cited the unemployment rate as the reason why the U.S. currently appears to be on the verge of a recession. On the 2nd, the U.S. Department of Labor announced that the unemployment rate rose to 4.3% in July, which triggered the activation of the 'Sahm’s rule.' Sahm’s rule is an economic indicator that judges the economy to be in recession if the recent three-month moving average of the U.S. unemployment rate is at least 0.5 percentage points higher than the lowest rate recorded in the previous 12 months.

In addition, he pointed out that private indicators such as the Conference Board Consumer Labor Market Survey and the slowdown in Amazon's online sales also warn of recession risks.

Professor Krugman warned that the Fed always acts too late when it moves based on perfect certainty in policy decisions. He acknowledged that the Fed's rate hikes in response to the inflation surge in 2021?2022 were appropriate, but noted that concerns in the second half of 2023 about a return to the 1970s era of soaring inflation proved to be unfounded. However, the Fed did not cut rates accordingly and was unwilling to act until it was confident that inflation had returned to target levels.

He particularly criticized the Fed for failing to escape the reputation of having raised rates too late in the past, which fueled inflation, saying, "It is hard to shake the feeling that the Fed is paralyzed by post-traumatic stress disorder (PTSD) from inflation." He added, "It is especially regrettable because they might lose at the threshold of victory."

Professor Krugman predicted that if the Fed cuts rates in September, it will face criticism from the Republican Party accusing it of making a decision favorable to Vice President Kamala Harris. However, he stressed that the Fed should proceed with the rate cut regardless of such reactions. He said, "Politics should not influence the Fed's decisions, and I hope it does not. If the Fed fails to respond to economic rationale simply because an election is approaching, that would be acting politically."

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