Yahoo Finance Nobel economist Paul Krugman says this is the best job market in decades, and the Fed doesn't need high unemployment to bring down inflation
The Fed doesn't need to raise unemployment to lower inflation, Paul Krugman said.
He pointed to falling inflation measures, and said the risk of a wage-price spiral was low.
That suggests the labor market is sustainable, though Fed Chair Jerome Powell has said otherwise.
The US job market is the strongest it's been in decades – and the Federal Reserve doesn't need to raise unemployment in order to bring down inflation, according to Nobel laureate Paul Krugman.
"The big question now is whether the good news on jobs is somehow a mirage, based on an unsustainably hot labor market that will have to cool off drastically to contain inflation," Krugman said in an op-ed for the New York Times on Monday. "There's good reason to believe that we can sustain the incredibly good job market we have right now, even while getting inflation under control."
The top economist pointed to the March payroll report on Friday that showed the US added 236,000 jobs. That's slightly lower than economists' estimates of 239,000, but still indicated the labor market has stayed strong despite the Fed's aggressive rate hikes over the last year.
Central bankers raised interest rates over 1,700% in the past year to tame inflation and rein in economic growth. Fed Chair Jerome Powell has said rates will likely need to stay elevated until the labor market cools.
But inflation measures have been cooling without a rise in unemployment, Krugman said. Wage growth is also less than 4%, around the same level as before the pandemic. That suggests the risks of a wage-price spiral are low – a scenario where rising inflation causes rising wages, which perpetuates inflation.
"It will be a real tragedy if exaggerated fear of inflation causes the Federal Reserve to push interest rates too high for too long, leading to a gratuitous recession that throws away many of the gains we've made," Krugman said.
His view echoes that of other economists, who say that inflation is now dropping rapidly and the Fed risks overtightening the economy into a recession by keeping interest rates high.
The economy is now flashing signs of being precariously close to a full-blown recession, Bank of America said on Monday. The bond market, meanwhile, has priced in the Fed quickly cutting interest rates later this year, which could only happen if a recession is close at hand, DataTrek said.
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