In an opinion piece in the New York Times titled “Inflation Is Ebbing. Now the Fed Must Protect Jobs,” the inventor of Sahm’s Rule Claudia Sahm said the 0.5 percentage point cut in policy interest rate by the Federal Reserve signifies a change in the central bank’s strategy towards managing inflation and employment.
What Happened: The rate cut brings the federal funds rate to a target range of 4.75 percent to 5 percent, inching closer to pre-pandemic levels. The Fed’s decision indicates a shift from its focus on inflation, which has been on a downward trend for the past two years, to strengthening employment, wrote Sahm in the Times.
Despite the rate cut, the funds rate remains high enough to deter some borrowing and spending, suggesting the Fed’s continued caution against inflation. However, the larger cut also reflects the Fed’s concern over recent indications of a labor market slowdown.
“Unlike many other central banks, however, the Fed has a mandate for maximum employment along with price stability, and the decision for a larger cut also signals that it is taking seriously recent signs of slowing in the labor market,” said Sahm, a former economist at the Federal Reserve Board of Governors.
Sahm noted that the decision was met with dissent, with Fed governor Michelle Bowman advocating for a smaller cut. Sahm said that the recent unemployment rate increase aligns with early recession trends, but the U.S. isn’t in or nearing a recession, with GDP growth on track. The Fed’s half-point rate cut, termed a “recalibration” by Chair Jerome Powell, aims to reduce risks, though it has raised concerns about a potential economic crisis.
Additional rate cuts are anticipated as inflation continues to fall. Most Fed officials predict a further reduction of at least 1.5 percentage points in the funds rate by the end of 2025, assuming only a minor increase in unemployment, according to Sahm.
Why It Matters: This bold move by the Federal Reserve breaks a four-year streak of steady rates, surprising Wall Street analysts who had predicted a more modest 0.25 point cut. The larger reduction aligns with investor sentiment favoring a more aggressive easing approach at the start of the rate-cut cycle.
Earlier, Sahm had refuted claims of a U.S. recession despite market instability. She insisted that traditional indicators might not accurately reflect the current unusual economic cycle. Sahm later defended the relevance of her economic indicator amid criticism.
Photo via Shutterstock.
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This story was generated using Benzinga Neuro and edited by Shivdeep Dhaliwal
