Sam Rule proposer: The Fed does not need to cut interest rates urgently
Sam, Chief Economist of the Federal Reserve, stated that despite recent economic data falling below expectations, the Fed does not need to cut interest rates urgently. She believes that the Fed needs to exit its restrictive monetary policy and gradually ease policies to prevent the risk of a recession. According to Sam's rule, when the U.S. unemployment rate rises by more than 0.5 percentage points, a recession has already begun. Although not in a recession currently, the weakness in the economy is a real concern. If the economy continues to deteriorate, it may slide into a recession
The proponent of the Sahm Rule, Chief Economist at New Century Advisors Claudia Sahm, stated that despite recent economic data falling below expectations, the Federal Reserve does not need to cut interest rates urgently.
In an interview, Sahm said, "Based on what we know now, I don't think we need an emergency rate cut, I don't see any scenario where that would be necessary."
However, she also pointed out there are ample reasons to support a 50 basis point rate cut, adding that the Fed needs to "back off" its restrictive monetary policy.
While the Fed is intentionally exerting downward pressure on the U.S. economy through interest rates, Sahm cautioned that the Fed needs to be vigilant, not waiting too long to start cutting rates as rate changes take a long time to impact the economy.
She said, "The best-case scenario is they start easing policy early and gradually. So I'm talking about the risk of a recession, I still firmly believe that risk is there."
The Sahm Rule indicates that the early stages of a recession have begun when the three-month moving average of the U.S. unemployment rate is at least 0.5 percentage points above its lowest point in the past 12 months.
Lower-than-expected manufacturing data and higher-than-forecasted unemployment rates have heightened concerns about a recession, triggering global market turmoil earlier this week.
The U.S. unemployment rate in July was 4.3%, surpassing the threshold of the Sahm Rule. This indicator is widely accepted for its simplicity and quick reflection of the start of a recession and has not failed since 1953.
When asked if the U.S. economy has already entered a recession, Sahm replied that it has not yet, but she also pointed out that the future economic trajectory is "not guaranteed." If the economy deteriorates further, it could slide into a recession.
She said, "We need to see the labor market stabilize. We need to see economic growth steady. The weakness in the economy is a real issue, especially if the situation in July continues, then the pace will worsen."
On Monday, Sahm stated that while the U.S. has not entered a recession yet, it is "alarmingly close to a recession." She expects Fed policymakers to potentially recalibrate their policies to account for the escalating risks. "The rise in the unemployment rate is consistent with being 'in the early stages of a recession.'"
Sahm stated, "We may not be there yet, but we are getting closer and closer to that, which is concerning," as financial markets plummet, the "frightening phrase" that many fear becomes more likely, taking immediate action by the Fed to address the escalating risks is not the appropriate move, "it's important to stay calm at times like this."