American economist Paul Krugman has warned that the economy may be turning faster than most think and the Federal Reserve may have overshot in its aggressive response to rising inflation.
What Happened: Krugman took to Twitter Inc TWTR Wednesday to weigh in on inflation and the strength of the U.S. labor market.
“I don’t think many people appreciate how fast the economy — both labor markets and inflation — may be turning,” Krugman said via tweet.
The Fed began tightening at the beginning of the year as long-term rates started rising in anticipation of rate hikes.
“But even long rates affect the real economy with a lag,” Krugman said.
Assuming the lag is about six months behind, we are only at the beginning of a significant Fed-induced contraction, he said, adding that six months is probably conservative.
Krugman noted a lot of people had been highlighting that despite the sharp decline in job openings in August, and the U.S. is still well above pre-COVID-19 pandemic levels. However, he suggested two more months of similar declines would completely close the gap.
“Yes, the Fed was behind the curve on rising inflation. But I worry that we may be enacting the old joke about the driver who runs over a pedestrian, then tries to fix it by backing up — and runs over the guy a second time,” Krugman said.
SPY Price Action: The SPDR S&P 500 SPY has been trending lower since the start of the year on continued inflation concerns. It hit new 52-week lows this week before bouncing back.
The SPY closed Wednesday down 0.23% at $377.09, according to Benzinga Pro.
Photo: Predrag Kezic from Pixabay.