Economist
Claudia
Sahm
on
CNBC’s
The
Exchange.
CNBC
The
Federal
Reserve
is
risking
tipping
the
economy
into
contraction
by
not
cutting
interest
rates
now,
according
to
the
author
of
a
time-tested
rule
for
when
recessions
happen.
Economist
Claudia
Sahm
has
shown
that
when
the
unemployment
rate’s
three-month
average
is
half
a
percentage
point
higher
than
its
12-month
low,
the
economy
is
in
recession.
As
the
jobless
level
has
ticked
up
in
recent
months,
the
“Sahm
Rule”
has
generated
increasing
talk
on
Wall
Street
that
what
has
been
a
strong
labor
market
is
showing
cracks
and
pointing
to
potential
trouble
ahead.
That
in
turn
has
generated
speculation
over
when
the
Fed
finally
will
start
reducing
interest
rates.
Sahm,
chief
economist
at
New
Century
Advisors,
said
the
central
bank
is
taking
a
big
risk
by
not
moving
now
with
gradual
cuts:
By
not
taking
action,
the
Fed
risks
the
Sahm
Rule
kicking
in
and,
with
it,
a
recession
that
potentially
could
force
policymakers
to
take
more
drastic
action.
“My
baseline
is
not
recession,”
Sahm
said.
“But
it’s
a
real
risk,
and
I
do
not
understand
why
the
Fed
is
pushing
that
risk.
I’m
not
sure
what
they’re
waiting
for.”
“The
worst
possible
outcome
at
this
point
is
for
the
Fed
to
cause
an
unnecessary
recession,”
she
added.
Flashing
a
warning
sign
As
a
numeric
reading,
the
Sahm
Rule
stood
at
0.37
following
the
May
employment
report
from
the
Bureau
of
Labor
Statistics
that
showed
the
unemployment
rate
rising
to
4%
for
the
first
time
since
January
2022.
That’s
the
highest
the
Sahm
reading
has
been
on
an
ascending
basis
since
the
early
days
of
the
Covid
pandemic.
The
value
essentially
represents
the
percentage
point
difference
from
the
three-month
unemployment
rate
average
compared
to
its
12-month
low,
which
in
this
case
is
3.5%.
A
reading
of
0.5
would
represent
an
official
trigger
for
the
rule;
a
couple
more
months
of
4%
or
better
readings
on
the
unemployment
rate
would
make
that
happen.
The
rule
has
applied
for
every
recession
dating
back
to
at
least
1948
and
thus
works
as
an
effective
warning
sign
when
the
value
starts
to
increase.
Even
with
the
rising
jobless
level,
Fed
officials
have
expressed
little
concern
about
the
labor
market.
Following
its
meeting
last
week,
the
rate-setting
Federal
Open
Market
Committee
labeled
the
jobs
market
as
“strong,”
and
Chair
Jerome
Powell
at
his
press
conference
said
conditions
“have
returned
to
about
where
they
stood
on
the
eve
of
the
pandemic
—
relatively
tight
but
not
overheated.”
In
fact,
officials
sharply
lowered
their
individual
forecasts
for
rate
cuts
this
year,
going
from
three
expected
reductions
at
the
March
meeting
to
one
this
time
around.
The
move
surprised
markets,
which
still
are
pricing
in
two
cuts
this
year,
according
to
the
CME
Group’s
FedWatch
measure
of
fed
funds
futures
market
contracts.
“The
bad
outcomes
here
could
be
pretty
bad,”
Sahm
said.
“From
a
risk
management
perspective,
I
have
a
hard
time
understanding
the
Fed’s
unwillingness
to
cut
and
their
just
ceaseless
tough
talk
on
inflation.”
‘Playing
with
fire’
Sahm
said
Powell
and
his
colleagues
“are
playing
with
fire”
and
should
be
paying
attention
to
the
rate
of
change
in
the
labor
market
as
a
potential
harbinger
of
danger
ahead.
Waiting
for
a
“deterioration”
in
job
gains,
as
Powell
spoke
of
last
week,
is
dangerous,
she
added.
“The
recession
indicator
is
based
on
changes
for
a
reason.
We’ve
gone
into
recession
with
all
different
levels
of
unemployment,”
Sahm
said.
“These
dynamics
feed
on
themselves.
If
people
lose
their
jobs,
they
stop
spending,
[and]
more
people
lose
jobs.”
The
Fed,
though,
finds
itself
at
a
bit
of
a
crossroads.
Tracking
a
recession
where
the
unemployment
rate
starts
this
low
requires
a
trip
all
the
way
back
to
the
latter
part
of
1969
into
1970.
Moreover,
the
Fed
rarely
has
cut
rates
with
unemployment
at
this
level.
Central
bankers
in
recent
days,
including
on
several
occasions
Tuesday,
have
said
they
see
inflation
moving
in
the
right
direction
but
don’t
feel
confident
enough
to
start
cutting
yet.
By
the
Fed’s
preferred
barometer,
inflation
ran
at
2.7%
in
April,
or
2.8%
when
excluding
food
energy
prices
for
the
core
reading
that
policymakers
especially
zero
in
on.
The
Fed
targets
inflation
at
2%.
“Inflation
has
come
down
a
lot.
It’s
not
where
you
want
it
to
be,
but
it
is
pointed
in
the
right
direction.
Unemployment
is
pointed
in
the
wrong
direction,”
Sahm
said.
“Balancing
these
two
out,
you
get
closer
and
closer
to
the
danger
zone
on
the
labor
market
and
further
away
from
it
on
the
inflation
side.
It’s
pretty
obvious
what
the
Fed
should
do.”
