Paul Krugman ring a bellalarm on New York Times: I'american economy could be one step away from recession. Even if they are not officially in crisis yet, the increase in unemployment and the slowdown in the job market are worrying signs. The Nobel Prize for Economics and cornerstone of modern economic thought accusation la Federal Reserve of not having lowered i interest rates in July, a delay that could make the situation worse. With the elections presidential of the 2024 on the horizon, the Fed could find itself caught between economic needs and political pressures, risking compromising the already fragile economic balance.
The economic storm: signs of pre-recession
Krugman paints a worrying picture for the American economy. “While we are not yet officially in a recession, pre-recession signs are increasingly clear, including rising unemployment and a slowing labor market.” In addition to official data, private surveys and the general economic climate also point to a slowdown: the decline in consumer spending and the growing caution of large retailers like Amazon suggest difficulties ahead. “None of these signals scream recession, but they increase the risk of an imminent slowdown,” underlines the Nobel Prize winner.
Krugman points out that the Federal Reserve recently made a significant mistake by not lowering interest rates in July; in fact, it should have started doing so months ago. This delay could further aggravate the economic difficulties already underway. According to him, the Fed should consider a lowering of the rates of half a percentage point – a more decisive measure than the traditional quarter of a point – in the mid-September meeting. “We hope that the recent collapse in long-term interest rates, reflecting expectations of future Fed cuts, will be enough to avoid an unnecessary recession,” Krugman writes. Simply put, a intervention timely it is crucial to prevent the economy from plunging into a recession.
“Am I 100% certain there will be a recession if the Fed doesn't act promptly? Of course not — the economy, like life, is inherently uncertain. But decision makers who wait for absolute certainty before acting always risk moving too late."
The Fed's caution: a price too high?
Krugman examines why the Fed so be it reluctant a reduce i rates of interest. After raising rates dramatically to combat high inflation in 2021-2022, the Fed appears hesitant to do the same now that inflation is slowing. This caution may stem from the fear of repeating the mistake of not acting in time in the last inflation cycle. However, Krugman warns that waiting for mathematical certainty before making decisions can lead to late and potentially harmful interventions.
The fear of a return toinflation of the 1970s pushed the Fed to keep rates too high for an extended period. However, in the second half of 2023, it became apparent that such concerns were overblown; inflation fell steadily without the prolonged periods of high unemployment feared by some economists. Despite this, the American Central Bank did not lower rates, probably waiting for definitive confirmation that the problem has been resolved. In part, the Fed may have been fooled by misleading data: The apparent increase in monthly inflation in early 2024 turned out to be more noise in the data than a real increase.
Furthermore, the Fed may have been paralyzed by an inflationary trauma, reacting too cautiously after criticism for not raising rates soon enough in the past. For a long time, the economy held up well despite high rates; but now the cracks are starting to emerge. The most frustrating part of this situation is that “we risk squandering a victory already won: America has achieved what many considered impossible, a soft landing with low inflation without a surge in unemployment.” But this success could be compromised if the “pilot” waits too long to correct the course.
The political effect: the role of US elections
Krugman does not fail to underline a crucial aspect: the role of the Fed in view of the next ones elections presidential of 2024. A possible rate cut could be seen as an attempt by the Fed to to influence il outcome electoral, favoring i Democrats and, consequently, Kamala Harris to beat Donald Trump. Krugman acknowledges that lowering rates could improve the economic situation and, therefore, support the Democrats' election campaign, but warns that such decisions must be made solely on the basis of economic, not political, considerations.
The Fed risks finding itself in a delicate position, where every economic decision is scrutinized through a political lens. However, Krugman is clear: the Fed's action must be guided by economic necessity and not by external pressures. A delay in adopting adequate measures could have serious consequences for the economy and, consequently, for the political landscape.
