[lbo-talk] Krugman on interest rate weirdness

[Doug Henwood]

On Mar 24, 2008, at 4:52 PM, Michael Pollak wrote:

> Sure, but remember, his original question was the wonkish one of  
> whether
> the Fed could cut the Fed Funds rate to 1% by the end of the year  
> (as Citi
> economists expect):
>
> http://krugman.blogs.nytimes.com/2008/03/20/fed-funds-question- 
> seriously-wonkish-and-possibly-dumb-too/
>
> And he's saying: maybe they actually can't.  In which case, that's
> interesting and maybe later could be important.  (He later quotes Brad
> Delong's tag line and say "Be afraid -- be somewhat afraid.")

Maybe they can't but the level of T-bill interest rates isn't much  
evidence that they can't. If anything, it means the Fed is lagging  
the market, not leading it. (The market assumes the Fed will be  
cutting more, so rate reflect that assumption.) As I keep saying,  
it'd be a symptom of problems if the actual fed funds rate were above  
the Fed's target, as it was briefly last fall. But it's right on  
target now. So there's nothing in the present structure of interest  
rates to suggest that they couldn't drive short rates lower if they  
wanted to.

It almost seems that Krugman is getting carried away because this is  
a "Republican" crisis.