Recession outlook: Sahm says the Fed needs to cut rates next week

• Economist Claudia Sahm called on the Federal Reserve to cut interest rates by 50 basis points next week.
• Sahm cites solid inflation progress and a slowing labor market as reasons for the big rate cut.
• Sahm also reiterated that the US economy is not in a recession, despite the recession indicator of the same name flashing.

The Federal Reserve “absolutely” needs to cut interest rates by 50 basis points next week, according to renowned economist Claudia Sahm.

Sahm told CNBC on Friday that the inflation data alone is enough to solidify a jumbo rate cut from the Fed, not to mention recent signs of a slowing labor market.

“You’ve got two more months of good inflation data. That’s what the Fed asked for. That alone would have gotten us to 25 next week, as it should, and it’s going to get us a whole slew of cuts after that,” Sahm said .

But with the Fed Funds rate above 5% for more than a year, July’s weak jobs report and sharp downward revisions to recent job growth, the Fed needs to make a big adjustment, according to Sahm .

“There is a recalibration aspect. We have more information. We need to clean it up, make a 50 basis point cut and then be ready to do more,” Sahm said.

She added: “Especially if Powell wants to stick to his ‘we don’t want to stop weakening, we’re not going to cool’, they’re going to have to really move here because this cooling trend is well established and until is broken, we are We will continue to see wages fall and the unemployment rate rise.”

The US economy has added an average of 224,000 non-farm payrolls per month since January 2023, but the past five monthly readings have been below average.

The unemployment rate hit a cycle low of 3.4% in January 2023 and has since climbed steadily to 4.2% in August, after reaching its highest level since October 2021 in July at 4, 3%

Investors are undecided about what the Fed will do at its FOMC meeting next week, with the CME FedWatch tool showing a near 50/50 split between a 25 basis point or 50 basis point cut as of Friday morning .

Sahm has made headlines in recent months after July’s weak jobs report triggered the Sahm Rule, an indicator she created that tries to identify when the U.S. economy is in a recession.

But Sahm reiterated that her eponymous rule sends a false signal because the increase in unemployment was driven by an increase in the supply of labor rather than a decrease in the demand for labor.

“Right now, the employment rate is down again and so unemployment is starting to come in, and that’s a problem, but it’s not a recession problem. Just as bad, just not the same,” Sahm said. .

Sahm’s call that the US economy is not in recession is supported by recent economic growth, with second-quarter GDP rising 3.0%.

Meanwhile, the Atlanta Fed’s GDPNow tool projects third-quarter GDP growth at 2.5 percent. An economic recession is usually classified as two consecutive quarters of negative GDP growth.

“The U.S. economy is not in recession right now,” Sahm said.