The Opinions - Paul Krugman on the Interest Rate Cut and What’s Next

Episode Date: September 18, 2024

The economist and New York Times Opinion Columnist Paul Krugman makes the case for aggressive rate cuts by the Federal Reserve and argues that now is not the time for caution. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

This is The Opinions, a show that brings you a mix of voices from New York Times opinion. You've heard the news. Here's what to make of it. I'm Paul Krugman. I'm an opinion writer for the New York Times, also a professor at the City University of New York. I won third place in the Optimist Arritical Contest in junior high school, and I also got a Nobel Prize. Today, the Federal Reserve is more or less guaranteed to cut interest rates. We don't know how big it'll be, quarter point, half point, but it's coming. It's going to be a big deal. The reason they're going to do it is, first and foremost, that we've won the war on inflation.

And we did it without a recession or a large rise in unemployment. The important thing now is to not fumble the landing. And so the question is going to be, will the Fed be pulling the plane's nose off? fast enough so that we do get a smooth landing on the runway. What I think the Fed should do is big rate cuts. The discussion has been between 25 and 50 basis points, where a basis point is a hundredth of a percentage point. That's just the jargon people use.

I would say 50 for sure, but if you really look at it, I would say that even if they cut by 50, interest rates will be about 300 basis points higher than they were on the eve of the pandemic, and inflation is under control, what justifies those 300 extra basis points? So I would like to see the Fed cut by 200, 250, 300 basis points quite quickly right away with rhetoric that makes it clear that this is just the beginning. The Federal Reserve is a slightly mysterious entity.

It's sort of part of the government and sort of not part of the government. and because it controls the amount of money in circulation, roughly speaking, it can also control short-term interest rates, which in turn tends to drive longer-term interest rates, which in turn drive things like whether people buy houses, whether businesses invest in new office buildings and so on. So the Fed is a tremendously powerful economic actor and also one that can act quickly. It doesn't require legislation. So the Fed is basically the short-term manager of the economy. What happened for the past several years, really almost four years now, is that the Fed was shocked by a big acceleration and inflation and initially thought it would go away quickly, and they were

wrong about that, then responded by raising interest rates. And the reason you do that is to try to cool off the economy, reduce spending, reduce the demand for goods. And it's standard practice. I've done this before, although this is the biggest rate hike we've seen since the early 1980s.

Now, inflation looks like it's under control. The official numbers are on the order of two and a half percent. A lot of people, including the Fed, think that those are, even that is really an exaggeration, that some of that is kind of statistical

illusion involving technical ways about the way they calculate housing costs and so on. So we basically beat inflation and the Fed needs to start cutting rates. Can we at this point get a full soft landing where we have inflation under control without a recession? And the answer is probably, but it's iffy. We'll find out, I guess, in retrospect, but you'll find out, I guess, in retrospect, but you you can certainly make the case that we've already waited too long. Jerome Powell is the chair of the Federal Reserve. It is a committee, but at least in recent decades,

the Fed Chair almost always gets what the Fed Chair wants. And almost as important as the rate decision is what the Fed Chair says afterwards. There's a press conference. To give you a number, they also issue a statement. And people pour over that statement for tiny changes in wording from the last statement. It's like Kremlinology or something, right? Because you're trying to infer the minds of the people making these decisions. So a lot depends on whether Powell says as clearly as Fed chairs ever say

that we think inflation is beaten and we think that the economy is weakening. If he says inflation appears to be well on track to target, which I think he said last time, but if he says it really forcefully now, that will be doveish. There are people out there who say, I'm not convinced that we've really licked inflation, that there's still a last mile. If Powell says anything that makes it sound like he's a last miler, that will be contractionary. That will tighten financial conditions.

If he says pretty clearly that I don't think that there's a last mile, I think we're there, then that will elucid them. If he says that we're not concerned about the rise in unemployment and just stops there, that would be hawkish. That would tend to raise raise. So it's the words and the specificity. What the Fed actually does is a signal of its future intentions. And so that's why all eyes are going to be on the number, but the number mostly is important as a symbol. It's telling us more about the Fed's state of mind than it is about the specific.

cost of money. One final point to make is that what the Fed does will have a political impact. I think there's no question that the Fed cutting rates is good news for Kamala Harris. It won't really have much effect on the economy in time for the election. We're practically on top of the election at this point. But it will be a signal that the Fed thinks that inflation has been defeated. And that's good news for, you know, the candidate of the incumbent party, even if she's not the incumbent president. On the other hand, that's not something that the Fed should take into account. The Fed is supposed to be doing its job. It's supposed to be doing the best thing it can for the economy. The really political thing would need to hold off on doing the right thing

because it might have a political impact that helped the party in power. We have a Fed that's insulated from politics for a reason. And so, yeah, I mean, it, presumably we'll make headlines if the Fed cuts rates. It'll make headlines either way, but especially if they go through, as they should, with a 50 basis point cut. It will be a kind of official acknowledgement that we have actually beaten inflation. Now, it's kind of funny because the Fed doesn't know anything that the rest of us don't. They don't actually have any inside information.

Nonetheless, by so doing, they will kind of make it official, and that will have some political impact. If you like this show, follow it on Spotify, Apple, or wherever you get your podcasts. This show is produced by Derek Arthur, Sophia Alvarez Boyd, Vichaca, Phoebe Lett, Christina Samuelski, and Jillian Weinberger. It's edited by Kari Pitkin, Alison Bruzek, and Annie Rose Strasser. Engineering, mixing, and original music by Isaac Jones, Sonia Herrero,

Pat McCusker, Carol Saburo, and Afim Shapiro. Additional music by Amin Sahota. The fact check team is Kate Sinclair, Mary Marge Lacher, and Michelle Harris. Audience Strategy by Shannon Busta, Christina Samuelski, and Adrian Rivera. The executive producer of Times Opinion Audio is Annie Rose Dresser.