Krugman: 'The Fed Was Foolish Here'

The Federal Reserve made a big mistake when it spoke of tapering bond purchases earlier this month, Paul Krugman wrote in a blog post Sunday morning.

"The Fed grossly misunderstood the nature of the relationship between its statements and market expectations," the New York Times columnist explained in a harsh takedown of the central bank's actions over the past few weeks.

Federal Reserve President Ben Bernanke said in June that the Fed would likely slow the pace of its bond purchasing program, also known as "quantitative easing," later this year. This announcement caused the bond market to panic and sent interest rates on a wild ride.

As The Huffington Post's Mark Gongloff pointed out earlier this week, "it seems clear that Bernanke and the Fed had no idea just how much the market would freak out about their plan." Unfortunately, the volatile market has led to an increase in borrowing costs, which, as Gongloff warned, "could smother the recent rebound in the housing market."

Some say this kind of market activity is normal. Federal Reserve Bank of Richmond President Jeffrey Lacker said in a speech Friday that the markets would likely remain volatile while policy makers debated how to wind down its stimulus program, according to Bloomberg.

But Krugman argued that "the Fed was foolish here." While the economy is showing some bright spots, talk of an end to the stimulus poses a big threat to the recovering economy, which is still plagued by high unemployment, Krugman wrote.

Of course, the market's response wasn't much of a surprise to Krugman. The Nobel Prize-winning economist warned that the Fed's talk of tapering could "end up looking like a historic mistake" earlier this month.

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