Claudia Sahm thinks investors should rethink what makes them salivate.
The Federal Reserve is expected to make its third interest rate cut of the year on Wednesday, a move widely seen as insurance against a complete collapse of the job market. But for Sahm — a former Fed economist, architect of recession indicators and one of the central bank’s most closely watched outside performers — the most important question is not what the Fed will do on Wednesday. This is what further reductions would mean.
“If the Fed Powell ends up making a lot more budget cuts,” she said. Fortune before the decision, “then we probably don’t have a good economy. Be careful what you wish for.”
That framework runs counter to the prevailing mood on Wall Street, where rate cuts have recently been reflexively welcomed and futures markets are already pricing in a second round of easing in 2026. But Sahm thinks investors should only want more cuts if they are willing to encourage a recession.
Powell’s final stretch, and the hardest
Sahm expects the Fed’s announced cut today – almost universally expected in futures markets – to be accompanied by a speech that raises the bar for any decision in January. With underlying inflation still stable at 2.8%, above the Fed’s preferred rate of 2%, and unemployment rising, the Fed is straddling both halves of its mandate.
“That’s a tough question,” Sahm said. “Whatever they do, they could upset the other side. »
This tension is particularly acute as Fed Chairman Jerome Powell approaches the end of his term. He has three meetings left – January, March and April – before the administration names a successor, but President Donald Trump will announce his choice for the new president (widely believed to be White House adviser Kevin Hassett) around Christmas. Once he does that, Powell effectively becomes a “lame duck” as head of the Fed, although Sahm notes that “frankly, he has been for a while” since Trump, who came to loudly despise his nominee, was elected.
“This kind of feels like Powell’s last Fed meeting. » Bloomberg» wrote Conor Sen on X.
What matters now for Sahm is that data, not politics, drives policy. She warns that could change next year with a more political Fed.
The labor market signal the Fed is monitoring
What Sahm focuses on is not lowering policy rates but the underlying fragility of the labor market that the Fed is trying to guard against.
Unemployment rose three months in a row through September. Hiring has slowed to levels that historically put upward pressure on unemployment, “because there are still people coming into the job market,” she said.
However, layoffs have not yet increased. This is precisely why Sahm thinks it is dangerous to rely on initial applications for unemployment benefits to assess labor market risks.
“The initial claims don’t give you an idea of what’s coming,” she said. These are what economists like to call a lagging indicator, meaning they tend to rise after a recession begins, not before. Recent weekly readings, distorted by holidays and special factors, are even less informative.
The real risk, she believes, is that the Fed waits too long.
“If the Fed is waiting to see signs of deterioration,” she said, “it has waited too long.”
Sahm expects Powell to keep the path open for more easing, but emphasizes that each additional reduction requires a stronger justification.
“If Powell is talking about a policy rate that’s close to neutral,” Sahm said, “that tells you the bar is high enough to keep falling. Each cut relieves pressure on the economy and inflation stays high.”
This message – tightening the bar while remaining dependent on data – is what Wall Street might interpret as a “hawkish reduction.”
But Sahm emphasizes that the Fed cannot lock itself in. The December jobs report comes just a week after today’s press conference. Declaring victory – or declaring that the cycle of cuts is over – would expose Powell to being immediately caught off guard.
“If all goes well,” she said, “this could be the Fed’s last Powell cut.”
