Economist Claudia Sahm has challenged the stance of Federal Reserve Chair Jerome Powell on the ‘Sahm Rule’ and has called for immediate action to address inflation.
What Happened: Sahm, known for developing the Sahm Rule, which predicts a recession, took to X to express her views. She emphasized the need for immediate easing to combat inflation.
Her comments come after Powell’s recent dismissal of the Sahm Rule during a press conference following the Federal Reserve’s two-day policy meeting.
Powell was asked about the rising unemployment rate and its potential to trigger the Sahm Rule. Powell responded, “We are monitoring the situation very closely. However, these are not economic rules dictating what must happen.”
She also lauded Nobel Prize-winning economist Paul Krugman for summarizing her theory. Sahm argued that the Fed should not wait until a recession to implement fiscal measures, as the Sahm Rule is a trigger within a recession.
When asked about the potential impact of rising unemployment on the Sahm Rule and the rate-cutting process, Powell emphasized that the Fed was closely monitoring the situation. He also cautioned against assuming that past patterns would repeat exactly, given the unique circumstances of the current inflationary period.
Powell said, “We believe we’re seeing a normalizing labor market, but we’re watching carefully for any signs of more significant changes. If such signs emerge, we are prepared to respond.”
Sahm, however, believes that the Fed should have initiated easing measures to address inflation without waiting for recession risks. She wrote, “Back to Powell… the Fed is not Congress. The Sahm rule is a trigger *in* a recession to start fiscal. The Fed waiting that long is waiting too long. They know that. My ‘thing’ was not for them. Today was the day to start easing, not on recession risks but on inflation down.”
Why It Matters: 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. This rule has been a topic of discussion in recent months, with economists like Krugman warning of potential pre-recessionary signals.
The Federal Reserve’s recent policy meeting saw the central bank keeping the policy interest rate unchanged at 5.25%-5.5% and offering no clues on a potential interest rate reduction in September. However, Powell hinted at a possible rate cut in September if inflation and the labor market perform as expected.
Meanwhile, some economists, including Bill Adams, the chief economist for Comerica Bank, have suggested that the Federal Reserve should consider cutting rates to address the softening economy and inflation trends.
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Photo courtesy of the Federal Reserve
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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