Federal reserve risks recession by raising interest rates to fight inflation

Paul Krugman:

Well, the Fed was wrong, too.

I mean, if there was a — there wasn’t a whole lot of air between my views about the future inflation in early 2021 and those of the Fed. And we all — the world is a complicated place. And if you never make a mistake, you’re not taking enough risks.

And the Fed was concerned to avoid mistakes it has made in the past, when it has been much too tight. And they failed to see. There were some things that there were no — really nobody’s fault, or nobody’s fault except Vladimir Putin’s, like that the rise in energy and food prices.

But the U.S. economy got overheated to a greater degree than they or I expected and — but the point is that they have reacted to that. The Fed has tightened a lot. And even more important, markets have priced in the fact that the Fed is going to tighten and will continue to tighten somewhat more.

So, mortgage rates, which is probably the most important point — place where what the Fed does affects real people’s lives, largely through mortgage rates, which affect housing, which affect construction, which affect employment and so on through the economy, mortgage rates have really soared this year.

So the Fed has already reacted to that mistake and has tried to undo the damage. And, at this point, the problem is, will they do too much?

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