Nobel laureate Krugman “fanatically confused” on interest rates

investmentnews.com:

Nobel laureate in economics Paul Krugman said it’s entirely unclear where interest-rate levels are headed over the medium term, with arguments in favor of both a return to pre-pandemic levels and a higher-for-longer outcome.

“On interest rates I am fanatically confused,” Krugman said Tuesday on Bloomberg Television’s Wall Street Week with David Westin, with regard to whether borrowing costs will remain above pre-Covid levels. “Anyone who claims to know for sure what the answer is to that, is deluding themselves.”

Ten-year US Treasury yields are currently about 4.4%, compared with below 2% on the eve of the pandemic. The nonpartisan Congressional Budget Office earlier this year projected those rates at roughly 4% over the coming decade.

Krugman, now at the City University of New York, said it’s possible that a number of dynamics have “changed the picture” compared with pre-Covid. He cited substantially increased immigration, along with Biden administration industrial policy, “which is inducing a lot of manufacturing investment.”

Businesses potentially may also be stepping up capital spending thanks to new technologies, including artificial intelligence, Krugman said.

‘Either Case’

Even so, “maybe actually 2019 is still what should be our benchmark, and we’re going to go back to very low interest rates,” he said.

Federal Reserve policymakers, for their part, have slightly increased their median forecast of their benchmark interest rate over the long run to 2.6% as of March. Other economists have said it’s more likely at least 4% due to changes in the economy and fiscal trajectory.

Adjusted for inflation, that rate — known as R-Star — is seen by Fed officials at 0.6% over the long run.

“Has R-Star actually gone up” or “is