Nobel Prize-winning economist Paul Krugman has raised concerns about potential pre-recessionary signals. He pointed to the Sahm Rule and its implications for the U.S. economy.
What Happened: Krugman discussed the possibility of a recession and the role of the Sahm Rule in predicting and managing economic downturns, in his opinion piece published in The New York Times on Wednesday.
The Sahm Rule, named after economist Claudia Sahm, is a key indicator used to predict the onset of a recession. It suggests that a recession may be underway if the average unemployment rate over the past three months has risen by 0.5 percentage points from its most recent low.
“The Sahm rule is currently sending the right cautionary message about the labor market cooling, but the volume is too loud,” Krugman highlights the way Sahm presents its economic theory.
This rule is designed to provide a timely signal for the federal government to take action to mitigate the recession’s impact.
“So are we entering a recession? A number of observers, including Sahm herself, have suggested that this time may be a bit different,” Krugman wrote.
Krugman pointed out that the unemployment rate has been gradually increasing, potentially triggering the Sahm Rule. However, he noted that this may not necessarily indicate an impending recession.
Factors such as a surge in new entrants to the labor force, including immigrants and remote workers, could be contributing to the rise in unemployment, creating a statistical illusion of a weakening economy.
“We may not be in a recession yet, but the job market is looking a bit, shall we say, pre-recessionary. To be fair, other indicators are looking stronger,” Krugman wrote.
Despite this, Krugman emphasized the need for caution, especially for the Federal Reserve. He suggested that the current state of the job market, while not indicative of a recession, warrants a strong case for cutting interest rates.
Why It Matters: Krugman’s concerns come on the heels of his recent call for the Federal Reserve to cut interest rates immediately. On Tuesday, Krugman urged the Fed to implement rate cuts, citing the New York Fed's inflation measure hitting 2.06% as a key factor.
He emphasized the need for immediate action, stating, "The eagle has soft landed. The New York Fed’s measure of underlying inflation is now just 2.06 percent. The Fed should cut rates now now now."
The upcoming Federal Open Market Committee meeting on Jul, 30-31 will be crucial. It will mark the eighth consecutive session where the federal funds rate is held steady at 5.25%-5.5%.
As inflation eased in the second quarter and unemployment saw a slight uptick, the key question is whether policymakers, particularly Fed Chair Jerome Powell, will prepare investors for a potential rate cut in September.
The Sahm Rule has been gaining attention on Wall Street. Economist Claudia Sahm has expressed concern about the Fed's reluctance to cut interest rates, warning that it could push the economy into a recession. Sahm believes that the Fed's inaction poses a significant risk, given the increasing unemployment rate.
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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote
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