Fed ‘shock therapy’ not needed, Krugman says

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The Fed is widely expected to begin raising rates next month at its March 15-16 meeting, shortly after it’s scheduled to have ended its bond-purchase program.

Economists are divided on how high the Fed may need to raise its benchmark policy rate from near zero; Fed projections in December showed it remaining below the 2.5 per cent longer-term estimate in 2023 and 2024.

Krugman said that if the Fed can avoid getting high inflation expectations baked in, “then a neutral rate is what you want to go for,” with regard to the end-point for rate increases.

“The goal here — when I say ‘soft landing’ — what I mean is not getting to the point where we actually need to throw the economy into a recession to bring inflation down,” Krugman said.

Wall Street banks and traders have boosted their forecasts for Fed tightening in response to accelerating price and wage increases.

‘Consistently’ hiking

Goldman Sachs Group Inc. economists said late Thursday that they now expect the central bank to hike seven times this year. Those at Citigroup, Deutsche and HSBC now see a half-point shift in March, joining Nomura in that call.

The Fed will need to be raising rates “consistently” until the underlying overheating in the economy that’s stoking price pressures dissipates, Krugman said. He added that he never thought that quantitative easing was an effective policy, so he has no issues with ending it.

Bloomberg

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