Originator of the "Powell Rule": The Fed's 50 basis point rate cut in September may not be a mistake, should have cut rates in July!

On Thursday, August 22, following the largest downward revision in non-farm payroll numbers announced by the U.S. Bureau of Labor Statistics, Claudia Sahm, the proposer of the "Sahm Rule," Chief Economist of New Century Advisors, and former Federal Reserve economist, stated that this downward revision gives the Federal Reserve "a definite reason to cut interest rates by 50 basis points in September," and she believes that "the Fed should have cut rates long ago."

Claudia Sahm stated that a significant 50 basis point rate cut by the Fed in September "may not necessarily be a mistake," especially if one considers that a 25 basis point cut should have been made back in July, "perhaps it was just a bit slow to start cutting rates."

She believes that the Fed can only make decisions based on the data and information available at the time, so it is unfair to criticize it for cutting rates too late, as weakening in the job market is indeed needed to lower inflation. The significant downward revision in non-farm payrolls within a year as of March is "retrospective," indicating that the slowdown in the U.S. labor market is more severe than previously thought:

"Therefore, a 50 basis point rate cut may not be a mistake, but a 're-calibration' of policy to bring it back on track."

She also emphasized that the Fed should not approach the issue with the mindset of "every piece of future data could guide decisions," but should focus on direction or forecasts. From this perspective, the Fed should have cut rates long ago, as the weakness in the labor market has been excessive:

"The employment data, which has the greatest impact on Fed decisions, is not the non-farm payrolls in September, but the employment report six months later. When we cut rates in September, we do not hold that future employment data, but the Fed must be able to predict this momentum trend, predict the direction of things.

The Fed should now emphasize the maximization of employment tasks more, and the level of attention to the labor market should not be less important than the need to lower inflation. The balance between the dual mandates of employment and inflation has shifted, and many Fed officials also acknowledge this."

She also stated that it should now be recognized that the U.S. labor market is no longer strong, and Powell should also acknowledge this, he may not mention strong employment during his speech at the Jackson Hole Symposium on Friday, "because it is not strong, but weakening."

Two weeks ago, when European and American stock markets plummeted due to concerns that the July U.S. non-farm payrolls indicated an impending economic recession, the proposer of the "Sahm Rule" came out to oppose the overly pessimistic market expectations, stating that "the U.S. economy has not yet entered a recession, but it is uncomfortably close." She expects that Fed policymakers may readjust their policies to consider the increasing risks.

She further suggested that considering the changes in the U.S. job market today, the Sahm Rule is somewhat ineffective and cannot prove that the U.S. has entered a recession. For example, the current rise in the unemployment rate is no longer due to a weakening demand for workers in the market, but rather due to an increase in labor supply. The surge in immigration in the U.S. post-pandemic has promoted the recovery of the job market, leading to an increase in the unemployment rate, which cannot be simply used as a reference indicator for a recession Bets in the futures market on Thursday show that the probability of a 50 basis point rate cut by the Federal Reserve in September has fallen back to less than 25% from yesterday's 38%, indicating that a 25 basis point rate cut is a "done deal".