Krugman: Bernanke Plans to Tighten Too Soon

Monday, 01 Mar 2010 09:16 AM

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Officials say the Fed isn’t getting ready to tighten the money supply, but economist Paul Krugman is worried the Fed will raise rates anyway.

“There’s a lot of speculation that the rise in the discount rate presages further action,” Krugman writes in The New York Times.

“Let’s hope that this is wrong.”

It’s worth noting, Krugman says, that after the 2001 recession, the Fed waited almost three years before it began to tighten.

“Assuming that the recession technically ended in June 2009, comparable behavior now would say no rate rise — and no tightening through other measures, such as shrinking the Fed’s balance sheet — for at least another two years,” Krugman observes.

Declining inflation and very high unemployment strengthen Krugman’s conviction that there is really no justification for tightening now, and probably not for years to come, he says.

“If the Fed does tighten anyway, I’ll have to dust off Jamie Galbraith’s analysis, which suggests that the Fed, um, behaves differently depending on which party holds the White House.”

The Fed's announcement that it was increasing the rate it charges banks for emergency loans to 0.75 percent from 0.50 percent knocked down global stocks and commodity prices and pushed up the U.S. dollar, Reuters reports.

The move also prompted futures traders to boost bets the Fed will raise its benchmark short-term interest-rate target by September, even though the Fed signaled it is still committed to holding that rate ultra low for "an extended period."

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