Sahm Rule creator thinks Fed doesn’t need an emergency rate cuts
- Creator of recession-predicting rule says Federal Reserve doesn't need to cut rates
- The Sahm rule was triggered by a slowdown in jobs
- The rule caused a sell-off in global stock markets
Currency traders work near the screen showing the Korea Composite Stock Price Index (KOSPI), top left, and the foreign exchange rate between U.S. dollar and South Korean won at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Wednesday, July 31, 2024. (AP Photo/Ahn Young-joon)
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(NewsNation) — The U.S. Federal Reserve does not need to make an emergency rate cut despite weaker-than-expected economic data, according to Claudia Sahm, chief economist at New Century Advisors.
Sahm, who created something economists use to predict recessions called the Sahm rule, said the Federal Reserve does not need to cut interest rates, which would make it cheaper to borrow money, following a vote not to cut them.
What is the Sahm rule?
The Sahm rule, introduced by Claudia Sahm in 2019, states that the initial phase of a recession starts when the three-month moving average of the U.S. unemployment rate is at least half a percentage point higher than the 12-month low.
The Bureau of Labor Statistics reported the unemployment rate rose to 4.3% in July, a nearly three-year high. The three-month unemployment average is 4.1%, which triggered the Sahm rule, as the lowest level over the last year was 3.5%.
The Samn rule, in turn, triggered a global sell-off in the stock markets on Friday as people feared a downturn in the American economy.
What Claudia Sahm said
Sahm said, however, that the Federal Reserve doesn’t need to make an emergency cut right now.
In an interview with CNBC, Sahm said that the U.S. economy is not in a recession, but it could be pushed into one if the labor market doesn’t stabilize. She warned the central bank should not wait too long before cutting interest rates.
“The best case is they start easing gradually, ahead of time. So what I talk about is the risk (of a recession), and I still feel very strongly that this risk is there,” Sahm said.
