Speaking yesterday on BloombergTV's "What’d You Miss," Nobel laureate Paul Krugman shared his thoughts on whether the Fed should raise interest rates this year or hold off until 2016. He had two basic arguments. The first is that U.S. economic data is not yet showing a need to raise rates this year. His second argument is that the Fed will inevitably be wrong one way or another when it does hike, and that it's better to raise rates too late (and have a little inflation) than to raise rates too early (and snuff out the recovery).
Here's what he said.
What we do know is that inflation is still below target, and what we also know from the experience of the last eight years is that it is really really hard to get an economy going if interest rates are at zero and you've shot your bolt on that... If the Fed waits too long to raise rates, then we get a little bit of inflation. If the Fed raises rates too soon, we risk getting caught in another lost decade. So the risks are hugely asymmetric. I really find it quite mysterious that the Fed is eager to raise rates given that, they're going to be wrong one way or the other, we just don't know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other.
Nobel laureate Edmund Phelps, who was also on the program, countered that if the Fed is too patient it could cause investors to believe that the U.S. central bank really is worried about the economy and that's why it is keeping interest rates so low.