Former central bank economist, Claudia Sahm, has sounded a warning to Jerome Powell and the Federal Reserve. Sahm raises concerns about an increase in the risk of recession if there are delays in rate cuts. With her extensive experience in the financial sector, she underscores the need for preventative strategies and proactive measures to counter this risk.
Sahm proposes that maintaining a strong economy is crucial, and asserts that a robust economy should not cause delays in rate cuts from the Federal Reserve. She believes that these cuts not only boost the economy, but can also prevent future financial crises, and stimulate growth.
According to Sahm, continuing with high interest rates could potentially harm the economy and cause market stress. She argues passionately against risking damage to the job market in an attempt to reduce inflation. Instead, she advocates for a balanced approach, with focus on financial stability and economic growth.
Opposing the ‘higher-for-longer’ policy, Sahm suggests that strong labor conditions and inflation should not stand in the way of interest rate cuts. She insists that now, as we near the end of Covid disruptions, is not the time for the central bank to show reluctance in reducing rates.
Sahm cautions that maintaining current high interest rates will increase recessionary risks and can negatively impact sectors like housing, due to increased mortgage rates. This puts pressure on both borrowers and lenders in financial markets, potentially leading to slower economic growth. She advises a careful evaluation of these factors to ensure economic stability.
Questioning traditional economic models, Sahm disputes the rationale of the central bank for upholding steady rates. She refers to the situation in 2023 where, despite a decline in inflation, unemployment remained below 4%, challenging the macroeconomic theory that a decrease in inflation is required for unemployment to increase.
Lastly, Sahm urges the Federal Reserve to be more adaptable and responsive to global economic shifts. She highlights the risk of global deflation and raises concern over the unwillingness of the Federal Reserve to change its policy accordingly. In her opinion, maintaining high rates in a fluctuating labor market could be especially harmful. She encourages proactive action to mitigate potential market downturns.
