The Fed has done enough and 'really, really should pause' rate hikes, top economist Paul Krugman says

Paul Krugman
Paul Krugman.Ricardo Rubio/Europa Press/Getty Images
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  • The Fed has hiked rates enough and "really, really should pause," according to top economist Paul Krugman.

  • But he doubted the Fed would pause its rate hike regime, as central bankers are trying to restore lost credibility.

  • It means the Fed is running the risk of overtightening the economy and going "a bit too far," he warned.

The Federal Reserve has done enough monetary tightening, and central bankers should halt rate hikes, top economist Paul Krugman said Friday.

The remarks came a day after the October consumer price report clocked in below expectations, raising hopes that inflation is responding to the Fed's nearly 400-basis-point increase this year.

"My view is that the Fed has probably done enough already. And they really, really should pause and wait to see," Krugman told Bloomberg TV.

But he doubted the central bank would pause its rate-hike regime, as it has been scrambling to restore its credibility on fighting inflation after describing it as merely "transitory" last year.

A Fed pause could endanger its reputation further – even if staying the course means potentially overtightening the economy.

"They do feel they have some credibility to rescue, because they understated inflation. That will probably cause them to go a bit too far," Krugman predicted.

Too-high interest rates could halt economic activity and push the US into a recession, experts have warned, especially considering that some components of headline inflation lag behind the official statistics by around 18 months. The Fed's rate hikes also have a lagging effect on the economy – meaning current inflation figures could be overstated, and already well on the way down.

Currently, the fed funds rate is targeted between 3.75% to 4%, with expectations for the Fed to raise rates another 100 basis points before stopping. Fed Chair Jerome Powell said at the last policy meeting that he didn't see "the case for real softening just yet," but Krugman believed a 5% policy rate was unlikely, particularly if inflation continues its downtrend.

"But if we get another good CPI report, then there's going to be a lot of soul searching at the Fed, saying, 'are we being way too hawkish?'" he said.

 

Read the original article on Business Insider