By Randy Myers
The U.S. economy appears close to executing a soft landing—slowing the economy enough to reduce inflation without triggering a recession, says former Federal Reserve Board economist Claudia Sahm. But as usual, it faces multiple risks to sticking that landing—including future Fed policy decisions on interest rates.
Sahm served nearly 12.5 years at the Fed, concluding her tenure there as section chief overseeing a team of five economist and three research assistants. Today she’s chief economist at New Century Advisors and head of her own consulting firm, Sahm Consulting. She is widely known as the creator of the Sahm Rule, a real-time indicator designed to tell policymakers when the economy has entered a recession so that they can begin to take corrective actions.
Sahm laid out her assessment of current economic conditions—and the risks the economy faces—during a presentation at the Stable Value Investment Association’s 2024 Fall Forum on October 16.
The Sahm rule is triggered when the three-month moving average of the unemployment rate increases by at least 0.5 percentage points from its lowest point in the previous twelve months. Sahm told Fall Forum attendees the rule shows the U.S. economy has been in a recession since July. But, she cautioned, it’s not infallible.
“This doesn’t look like a recession,” she said of current economic conditions. “It doesn’t feel like one.”
One possible explanation, Sahm said, is that increases in the labor force, particularly from immigration, are likely pushing the unemployment rate up and overstating the weakening demand for workers. Indeed, one of the most disconcerting economic indicators at the moment, she said, is a decline in the hiring rate since mid-2021 to levels that are below those that existed prior to the Covid 19 pandemic.
Conversely, Sahm said, layoffs have remained persistently below pre-pandemic levels for the past three years, and the number of people quitting their jobs also has been trending lower over the past two years.
Sahm credited the Fed in part for helping to steer the economy toward a soft landing with its management of interest rates over the past few years, although she had hoped it would start cutting its short-term rate target a couple of months before it finally did so on September 18.
“I think the passage of time did a lot of the work,” she said.
Looking ahead, Sahm also said that future Fed policy decisions will be a risk to the economic outlook for 2025 and beyond, especially for inflation.
In the meantime, she said, it’s clear that the Fed is committed to pursuing both of its dual mandate to promote price stability and maximum employment. The “direction of travel” for interest rates is clearly down, she added, although the timing and extent of any further rate cuts by the Fed will depend on how the economy fares from here.
“I very much hold to (Fed Chairman Jerome) Powell’s view that we need to be pointed in a direction, as long as the direction is down, but our ability to estimate where things are going to land two months, even six months from now, is limited,” she added.
While the labor market has cooled considerably in the past few years, Sahm said, she said the Fed does not want or welcome further cooling. And she expressed a fair amount of confidence in its ability to manage toward that goal.
“As I have said throughout this year, the Fed is the biggest risk to the economy and economic recovery,” Sahm said. “(But) I feel a lot better about the Fed (today).”
Sahm explained that she thought the Fed waited too long to cut short-term rates, and that in her view July would have been appropriate. But, she said, the Fed made up for this by cutting its target for the federal funds rate—the rate at which banks lend to each other overnight—by 50 basis points rather than 25 points.
Sahm also noted that it’s not just Fed monetary policy that will help shape the economy moving forward, but also fiscal policy. The platforms of both presidential candidates, former President Donald Trump and Vice President Kamala Harris, she warned, could contribute to inflation risk.
“I think we’re going to avoid recession,” she summarized. “But things can change really quickly.”’
