Former Fed Economist Warns More Rate Cuts Might Signal Trouble, Says This Could Be Powell's 'Last Cut'
Claudia Sahm, a former economist at the Federal Reserve, has issued a stark warning about the potential consequences of the Fed’s future rate cuts.
Fed Cuts May Signal Economic Weakness
Sahm, a prominent figure in the financial world, cautioned that the Fed’s rate cuts could be indicative of a troubled economy, according to a report by Fortune on Wednesday.
She emphasized that the focus should not be on the immediate effects of the rate cuts but rather on the underlying fragility of the job market that the Fed is striving to protect. Sahm warned that if the Jerome Powell–led Fed delivers significantly more rate cuts, it would likely signal a weak economy, cautioning, "be careful what you wish for," according to the publication.
She also warned against relying on initial jobless claims as a measure of labor-market risk, as they are considered a lagging indicator and may not accurately predict a recession.
Sahm stressed the importance of data, rather than politics, driving policy decisions. She expressed concern that the Fed’s approach could become more politically influenced in the coming year.
She said that this could be the “last cut” of the Fed under Jerome Powell.
Rate Cut Fuels Policy Divide
The Fed has been making significant moves in response to economic indicators. The Federal Reserve cut interest rates by 25 basis points to 3.5%–3.75% on Wednesday, marking the third consecutive reduction. This decision, made despite elevated inflation, revealed a growing internal dissent within the central bank.
Powell said rates are now roughly in the neutral range and that the Fed is positioned to “wait and see” how the economy develops. The S&P 500 closed 0.67% higher, and the Nasdaq 100 climbed 0.33%, shrugging off the Fed’s decision.
As Sahm highlighted, the labor market has been showing signs of strain. While U.S. job openings hit a five-month high in October, hiring has been slowing down, indicating a cooling labor market. This trend could have influenced the Fed’s interest rate decision.
Meanwhile, the Fed’s decision to resume purchasing Treasury bills has sparked a heated debate over the U.S. economy’s trajectory. While some analysts view this as a positive sign, economist Peter Schiff has warned that it signals a dangerous return to quantitative easing.
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