The U.S. economy is not in recession, but weakness in the labor market could worry the Federal Reserve enough to cut interest rates by 50 basis points on Wednesday, former Fed economist Claudia Sahm said.
“The likely path for the Fed is a 50 basis point cut this time, really adhering to the principles of data dependence,” Sahm said on Tuesday at the Reuters Global Markets Forum.
“There was quite a bit of labor market data, all in one direction, and it was not good. This is a Fed that has been way behind on the maximum employment side of the dual mandate,” Sahm said.
The Federal Reserve acts under a dual mandate of price stability and maximum sustainable employment.
Markets are pricing in a 63% chance of a 50 basis point rate cut by the Fed on Wednesday and a 37% chance of a 25 basis point cut.
Sahm is the creator of the recession indicator, the “Sahm Rule,” which has so far accurately predicted every U.S. recession since 1970. The rule signaled a recession last month after data showed the U.S. unemployment rate hit 4.3% in July.
Sahm said, however, that the United States is not really in a recession and that the rule did not take into account the current unusual economic cycle.
“The Sahm Rule was broken in the sense that it was triggered outside of a recession,” said Sahm, who is now chief economist at New Century Advisors, an investment management firm.
The Sahm rule is a recession indicator, not a forecasting tool, he said.
The central bank will also release its updated Summary of Economic Projections on Wednesday.
Sahm worries that could cause unrest in markets as most Fed officials will be writing a long-term path for interest rates to be lower than some expect.
She expected the Fed’s rate cut and new projections to emerge from recent inflation data and recognition of a weaker labor market.
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