According to the author of the empirical rule predicting when an economic recession will arrive, if the Federal Reserve does not lower interest rates now, the US economy could potentially fall into a recession.
Economist Claudia Sahm used her rule to demonstrate that when the quarterly average unemployment rate exceeds the 12-month low by half a percentage point, the economy falls into a recession.
Due to the recent rise in the unemployment rate, the “Sahm Rule” has sparked discussions on Wall Street, indicating that the previously stable labor market may be weakening and hinting at potential economic issues. This speculation has sparked debates about when the Federal Reserve might start lowering interest rates.
The Sahm Rule measures the difference in percentage points between the three-month average unemployment rate and the 12-month low (currently at 3.5%). A 0.5-point difference will officially trigger the rule, with the unemployment rate reaching 4% or higher for several months to trigger it.
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This rule has been a reliable indicator of recession since at least 1948, and as its value increases, it can serve as an effective warning signal.
She pointed out that it would be a huge risk for the central bank not to start gradually lowering interest rates now. She stated that taking no action could trigger this rule and potentially lead to an economic recession, forcing the Federal Reserve to take more drastic measures.
According to the latest data from the US Bureau of Labor Statistics, the “Sahm Rule” reached 0.37 in the employment report published after the unemployment rate reached a level of 4%, rising to 4% for the first time since February 2022. This is the highest increase since the early stages of the COVID-19 pandemic.
Sahm believes that Powell and his colleagues are “playing with fire” by not paying more attention to changes in the labor market. Just as Powell said, she criticized the Federal Reserve’s wait-and-see approach to declining job growth, calling it risky.
