Three Contradictions in Krugman’s Take on the Rate Cuts

Paul Krugman’s latest column is all over the place. He was trying to provide commentary on the Fed’s half-point cut in the Federal Funds Rate, but he was juggling too many contradictory narratives.

The contradictions start at the beginning. The Fed’s decision “was of minimal importance” but also a “momentous move.” It wasn’t important because it just a small change in the overnight interbank interest rate. It was very important because of its effect on other interest rates and because the Fed has “declared its belief that the war on inflation has been won.” Maybe Krugman was going for the antithesis literary device, like Neil Armstrong’s “small step for man, giant leap for mankind.” Maybe he wanted to downplay any immediate suspicions that such a large cut a few weeks before the presidential election would be politically motivated.

The other set of contradictory narratives is that the economy is great and yet the economy is so weak that it needs a “jumbo” rate cut. Or, as Tho Bishop put it, we have “An Economy So Strong It Requires Crisis-Level Fed Action.”

Krugman has been writing out-of-touch articles for years now about how great the Biden economy is. He loves to point out that many economists thought that unemployment would rise when the Fed starting hiking rates in 2022 (even though he also said the rate hikes would cause a recession).

But he also needs some sort of backing for his absurd recommendation, given the day before the FOMC decision was announced, that they should cut by up to 3 percentage points, six times the size of their “jumbo” half-point cut. (Krugman used the “jumbo” descriptor.) A rate cut that big can only be justified, in the Keynesian view, by economic catastrophe. Maybe Krugman sees catastrophe around the corner—he admits, “labor markets appear to be weakening, with unemployment still fairly low but up significantly from its low point last year and hiring falling off.” He has hinted in the past that a recession may be coming, but always in subtle language, without detracting from his main message: the Biden/Harris economy is great, inflation is yesterday’s news, and Trump is stupid and evil.

The last bit of contradiction has to do with the political implications of the Fed’s rate cut. Krugman acknowledges that “Today’s Fed move is, of course, good for Kamala Harris.” But he insists, “it wasn’t a political decision.” Krugman goes as far as to say that it would have been more political if the Fed didn’t cut rates.

This is just one example of a broader aspect of monetary policy: it creates winners and losers. It creates financial winners and losers and political winners and losers. Inflation helps borrowers and the financial sector but hurts lenders and savers. Easy money helps the incumbent party in the short-run by forestalling the inevitable reckoning, spiking the stock market’s punch bowl, and securing votes from borrowers eager to see lower rates.

The Fed maintains that it makes its decisions with no thought at all to the political implications. In Wednesday’s FOMC press conference, Fed Chair Jerome Powell was asked yet again about the Fed’s alleged independence, and he gave the same canned response.

We can only speculate about the political motivations of the FOMC members. We do not have to speculate about the way the Fed is perceived by the public. If politics is perception and perception is everything, then Krugman doth protest too much. By “going there” and preemptively disputing the idea that the Fed is political, he reveals that he knows how this rate cut will be perceived. And he’s not alone:

• Washington Post: “Federal Reserve rate cut may boost Kamala Harris in campaign homestretch”
• Daily Caller: “Federal Reserve Delivers What Could Be A Huge Gift To Kamala Harris Just Before Election”
• New York Times: “Fed’s Interest Rate Cut Would Cap a Winning Streak for Harris and Biden on Prices”
• Ben Shapiro: “The Federal Reserve Rides to Kamala’s RESCUE!”
• CNN: “The Fed’s long-awaited rate cut is colliding with presidential politics”
• Forbes: “How Will Interest Rate Cut Impact Election? Here’s What To Know As Fed Makes First Cut Since 2020”
• Christian Science Monitor: “How Fed’s aggressive rate cut may boost Harris’ prospects”
• ZeroHedge: “’Apolitical’ Fed Slashes Rates By 50bps With Stocks & Home-Prices At Record Highs”
• Reuters: “What has the Fed done in election years? Rate changes happen more often than not”

What’s the point of Fed independence if nobody buys it?

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