Originator of "Sam Rule" echoes Goldman Sachs CEO: The Fed does not need to cut interest rates in advance
The Federal Reserve does not need to cut interest rates urgently, despite weaker-than-expected economic data. Claudia Sahm, Chief Economist at New Century Advisors, suggests that the Fed should gradually ease monetary policy to lower borrowing costs and warns against waiting too long to cut rates. The proponent of the Sahm Rule believes that although the U.S. economy has not entered a recession, risks still exist. The unemployment rate exceeding the Sahm Rule's threshold has triggered a global market sell-off
According to the Zhītōng Finance APP, Claudia Sahm, Chief Economist of New Century Advisors, stated that despite recent weaker-than-expected economic data, the Federal Reserve does not need to cut interest rates urgently.
In an interview, Sahm said, "Based on what we know now, we do not need to cut interest rates urgently, I don't think it's necessary."
Sahm's views echo those of earlier Goldman Sachs CEO David Solomon. Solomon expects the Federal Reserve to avoid taking emergency measures to lower borrowing costs, as the U.S. economy is emerging from a recession.
However, Sahm added that there are valid reasons to cut rates by 50 basis points, pointing out that the Federal Reserve needs to "exit" its restrictive monetary policy.
While the Federal Reserve intends to exert downward pressure on the U.S. economy through interest rates, Sahm warned that the Federal Reserve needs to be vigilant and not wait too long to cut rates, as interest rate changes take a long time to impact the economy.
She said, "The best scenario is for them to start easing gradually in advance. So what I'm saying is the risk of (economic recession), I still strongly feel that this risk exists."
It is understood that Sahm is an economist who proposed the so-called Sahm Rule, which indicates that the initial stage of an economic recession begins when the three-month moving average of the U.S. unemployment rate is at least half a percentage point higher than the 12-month low.
Lower-than-expected manufacturing data and higher-than-expected unemployment rates have exacerbated concerns about an economic recession, triggering a global market plunge earlier this week.
Data shows that the U.S. unemployment rate in July was 4.3%, exceeding the Sahm Rule's caution line of 0.5%. This indicator is widely recognized for its simplicity and ability to quickly reflect the start of an economic recession. Since 1953, the accuracy rate of this indicator has been 100% (excluding the trigger of the rule last Friday).
When asked if the U.S. economy is entering a recession, Sahm said no, but she added that it is uncertain where the economy will go next. If there is further weakening, it could lead to a recession.
"We need to see the labor market stabilize. We need to see economic growth stabilize. Weakness is a real issue, especially if the situation in July continues, then the pace will deteriorate."