The ‘Sahm Rule’ serves as a heuristic indicator employed by the Federal Reserve to ascertain the onset of a recession in the economy.
The Sahm Rule is a real-time evaluation tool based on monthly unemployment data from the Bureau of Labor Statistics (BLS). Named after economist Claudia Sahm, it forecasts the onset of a recession when the three-month moving average of the national unemployment rate (U3) increases by 0.50% or more compared to its lowest point in the preceding 12 months.
This simple yet effective indicator helps policymakers monitor economic cycles and respond accordingly
Time to cut according to the ‘Sahm Rule’
Sahm has reportedly stated that the Fed is taking a significant risk by not implementing gradual rate cuts now. Last week, Federal Reserve officials significantly reduced their forecasts for rate cuts this year, shifting from three anticipated reductions noted in the March 2024 meeting to just one.
According to the creator of a well-established rule for predicting recessions, the Federal Reserve is risking an economic contraction by not lowering interest rates immediately.