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Paul Krugman says he agrees with Larry Summers that the Fed has to walk a fine line in order to prevent widespread US economic damage


Nobel Prize winner Paul Krugman

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  • Dovish economist Paul Krugman concurs with hawk Larry Summers on the Fed’s path forward.
  • Summers told Bloomberg TV on Friday that the Fed is facing symmetric risks in going too fast or slow on rates. 
  • “This really disturbs me to say this, but I think I agree with Larry,” Krugman told Bloomberg TV on Monday. 

For once, Larry Summers and Paul Krugman are on the same page. 

At least for now, the economists agree that the Federal Reserve is walking a fine line, where the risk of raising rates too high is equal to the risk of not raising them high enough. 

In an interview with Bloomberg TV on Monday, the inflation dove Krugman concurred with an earlier statement from his more hawkish counterpart.

On Friday, Summers told Bloomberg TV the Fed needs to keep its foot on both the breaks and the gas at the same time to navigate an “economy where things could go either either way,” comparing it to driving a car “on a very, very foggy night.” 

When asked about that on Monday, Krugman replied, “This really disturbs me to say this, but I think I agree with Larry.”

He elaborated by contributing his own metaphor to explain how the Fed is trying to balance seemingly equal risks: “We’re trying to operate the controls on some fairly sensitive machinery, in the dark, wearing mittens.”

Krugman added that “we don’t have a very good view of what’s happening” or “fine motor control over the important things.”

Previously, both economists have been on opposing sides. Summers, a former Treasury secretary, was among the first to warn that the Fed wasn’t taking enough action as inflation began to soar and continued to beat the drum that policymakers needed to get more aggressive on rates.

On the other side, Krugman has warned that the Fed is at risk of going too far in fighting inflation, causing unnecessary economic damage. 

But while he believes the central bank will inevitably overtighten, he said the market’s unwillingness to believe the Fed will continue hiking is actually lessening some of the potential adverse ramifications. 

“It turns out that the markets are basically fighting the Fed so that the contractionary affects of Fed policy aren’t nearly as strong as one might have feared,” Krugman said.

To be sure, the Fed will get it wrong one way or another, though the consequences won’t be that severe, he said, adding that he’s “fairly optimistic that we’re looking at some hiccups rather than a crisis coming.”

Read the original article on Business Insider