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Is the Federal Reserve going to "roll over" again?

时间:2024-03-27|浏览:613

Since the beginning of this year, the closely watched U.S. CPI inflation has been higher than expected for two consecutive months, which made economist Claudia Sahm start to feel nervous.

That could give the Fed an excuse to say it's dragging its feet on cutting interest rates for a reason. She believes the Fed's earlier rate hikes have made mortgages, car loans and credit card repayments more expensive. "I really hope they cut interest rates by 25 basis points in March," Sam said after the February CPI data was released.

Over the past month, Sam has said she hopes the Fed will lower interest rates soon, with the federal funds rate currently between 5.25% and 5.5%. Sam did not advocate for the Fed to cut interest rates significantly, but she said the central bank needs to start easing the tight monetary policy it has implemented over the past two years.

Given what policymakers have said in recent weeks, Sam suspects the Fed's first rate cut may not come until July. Delaying a rate cut would increase the risk of a recession because overly restrictive policies remain in place for too long, she said.

Currently, the economy appears to be in good shape. A survey conducted by the National Association of Business Economists on February 12 showed that more than three-quarters of economists predict that the United States can avoid a recession even if inflation declines.

But recessions snowball, Sam said. "They start out as little threat, but slowly they can become large enough to trigger an avalanche that then sweeps through the economy, destroying millions of jobs, economic growth and incomes."

"They're taking risks that I have a hard time understanding," she said of the Fed, led by Powell.

The economist and former Federal Reserve staffer created "Sam's Rule," a popular indicator considered the best and earliest leading indicator of a recession.

She noticed that whether they are severe or mild recessions, they all have a common characteristic: when the moving average of the three-month unemployment rate in the United States minus the low point of the unemployment rate in the previous year exceeds 0.5%, it means that Now the recession has begun.

The February jobs report showed a slight increase in the unemployment rate from 3.7% to 3.9%, which immediately put the Sam Rule back into the market discussion. Some economists said job growth data for December and January were revised down significantly, akin to recession-style weakness, adding to market concerns.

Former White House chief economist Jason Furman published an article this month saying that "the balance of concerns shifted slightly away from inflation and toward recession" in the February employment report.

Since the Federal Reserve began raising interest rates in the spring of 2022, economists have generally expected a recession. The unemployment rate spiked several times last year, especially in May and August, and talk of "Sam's Rule" resurfaced. But in both cases, the rise in unemployment was later reversed.

"Once the snowball rolls down, no one can stop it."

Today, the three-month moving average of the U.S. unemployment rate is 3.8%. This average minus the lowest point in the past 12 months is 0.27%, which is well below the 0.5% stipulated in the Sam Rule.

Sam said the deterioration in the labor market may be slow at first but may then accelerate steadily. She said, "The labor market will not suddenly hit the bottom, but if the bad momentum continues and you wait for the data to reflect it, then you may be waiting too long. Because once the snowball starts rolling down, no one can stop it."

Other areas of the market that are sensitive to interest rate changes, such as the insurance industry, are already starting to show signs of pressure from restrictive rates, she said.

Powell's press conference last week and forecasts from Fed officials both pointed to three rate cuts this year, keeping hopes alive for a series of rate cuts that Sam said would ease some of the pressure to raise rates.

Despite Sam's concerns, she said she still believes the economy will have a soft landing and unemployment will remain low. Inflation will reach the Fed's 2% target by the end of the year, which would allow the Fed to cut interest rates three to four times this year. But the later the Fed starts cutting interest rates, the fewer rate cuts will occur. she says:

"I think the main risk to the Fed is that they move too slowly. Every time they wait, they increase the risk of a recession, and once a recession starts, it can't be stopped."

Article forwarded from: Golden Ten Data

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