Krugman on Interest Rates
By David Henderson
Paul Krugman once bragged–I can’t find the link off-hand–that he doesn’t read much of what libertarians and conservatives write on economics, but he really knows their views well anyway.
Earlier this month, Jeff Hummel wrote one of the Feature Articles on Econlib, “The Myth of Federal Reserve Control Over Interest Rates.” In it, he showed why the Fed has little control over interest rates.
So what does Krugman write today? This:
Think about it: China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy those bonds up.
What’s Krugman’s basis for his view that the Fed sets short-term interest rates? Or, another way of asking, where does Hummel go wrong?