Nobel laureate Paul Krugman said the US economy may be heading into a recession at a time when the Federal Reserve doesn’t have the firepower to properly combat a slump.
“There seems to be an accumulation of smaller problems and the underlying backdrop is that we have no good policy response," he said in a Bloomberg Television interview in Dubai.
The headwinds facing the economy prompted the Federal Reserve this month to halt its interest-rate hiking cycle, which Krugman said was never “grounded in the data" to begin with. “Continuing to raise rates was really looking like a bad idea," he added.
Krugman isn’t alone in seeing a gloomy outlook for the world’s biggest economy. US chief financial officers in a Duke University survey published in December overwhelmingly said they expect a recession within two years.
“I wouldn’t be as definitive, but it seems pretty likely," Krugman said.
While Krugman doesn’t expect a crisis of the magnitude of 2008, he said policy makers in Washington would struggle to contain large shocks. The economist, a vocal critic of the Trump administration, said it was hard to see the US leadership “respond in any kind of a nimble way."
“We’re clearly in worse shape," he said, citing lower public debt in 2008 and “lots of room" to lower interest rates back then. “And we came into the last crisis with pretty remarkable leadership."
“Let’s put it this way, our current Treasury Secretary is no Hank Paulson," he said.