[New Year Interview] Sam, Creator of the "Rule of Three," Predicts "Soft Landing in the US... Interest Rate Cut of 1%P Expected from May" This Year

2024 Economic Diagnosis Expert Interview②
Dr. Claudia Sam

"Fed Dot Plot Rate Cut Outlook Weak"
Expected to Lower by Over 1%P by Year-End
First Rate Cut Suggested in May, Not March

"As inflation in the United States slows down more quickly, the Federal Reserve (Fed) will have more room to cut interest rates throughout the year. The 0.75 percentage point cut forecasted in the Dot Plot is pretty, pretty weak."

Dr. Claudia Sahm, a former Fed economist, stated in a video interview with Asia Economy ahead of the 2024 New Year, "A soft landing is approaching. It hasn't landed yet, but it will in the new year." Dr. Sahm is a star economist who gained worldwide attention for devising the so-called 'Sahm’s rule,' which detects U.S. recessions based on the unemployment rate, and she is the founder of SAHM (Stay-at-Home Macro) Consulting.

Dr. Claudia Sam [Image provided by Claudia Sam]

Dr. Sahm said, "The Fed still believes it can lower rates now," adding, "But the reason it is not cutting rates immediately is that the Fed wants to be certain of continuous progress toward achieving the 2% inflation target." Regarding the December Federal Open Market Committee (FOMC), which was considered more dovish than expected, she summarized it as "talk of a soft landing." Earlier, the Fed kept rates steady for the third consecutive time at 5.25?5.5% during the December FOMC and lowered the year-end rate forecast for 2024 to 4.6%, signaling the possibility of a 0.75 percentage point cut over the year.

Regarding this, Dr. Sahm said, "0.75 percentage points is quite weak," and predicted that total rate cuts exceeding 1 percentage point could be implemented from May through the end of the year. She dismissed concerns that the last stretch to achieve the 2% inflation target, the so-called 'last mile,' might be difficult, saying, "I don't see it that way."

However, she also pointed out that as the Fed and other major central banks consider rate cuts in 2024, this could become the biggest risk to the U.S. and global economies next year. She warned, "There is a risk that the situation could become unstable once rate cuts begin," and added, "Another risk is the U.S. elections. As the election approaches, the economy could be wrapped in politics."

Below is a Q&A with Dr. Sahm.

- What do you see as the biggest economic risks in 2024?

▲ There are two. First, rate cuts. Major central banks like the Fed, European Central Bank (ECB), and Bank of England (BOE), which previously raised rates rapidly, now face the decision of when to cut rates. Starting rate cuts could shake the economic situation and financial markets. The other risk is elections. The U.S. presidential election will be held in 2024. Divisions could deepen, and the economy could be politicized.

- What concerns do you have from a global economic perspective?

▲ Everything traces back to inflation. Countries with labor markets characterized by high wage growth face risks of inflation rebounding or disinflation slowing down. If inflation continues in any form, central banks will have to maintain high interest rates, which always carries recession risks. I believe recession risks are more real outside the U.S. Europe and the UK are concerning. The Chinese economy also does not look good. Moreover, China's economic weakness will pose risks to some countries, including those in Asia.

- Can the U.S. economy achieve a soft landing as confidently as the Fed suggests?

▲ It hasn't landed yet, but it will in 2024. To me, a soft landing means inflation is below or near 2%, and unemployment is below 4%. We are now seeing the runway. Inflation is driven by supply-side factors such as the COVID-19 shock and the Ukraine war, not demand. The economy has not collapsed, and the labor market remains robust. I believe 2023 was a path toward a soft landing. However, if something like a pandemic occurs, a soft landing is not guaranteed.

- There are evaluations that the December FOMC was more dovish than expected. What is your view?

▲ It was the most optimistic FOMC since 2021. The December FOMC was about a soft landing. Until now, the implicit story was that higher unemployment would be tolerated to reduce inflation. But looking at the December FOMC, we no longer think below-trend growth and higher unemployment are necessary for rate cuts. The dots in the Dot Plot have moved closer together. However, significant differences remain, with two members still seeing no rate cuts in 2024.

- The market expects the first rate cut could happen in March. When do you think cuts will be possible?

▲ I don't expect March. The Fed will want to see more data. Rate cuts are entirely possible in May. Whether mid-March or early May doesn't make a big difference. We are not in a situation requiring such precision. Frankly, I believe the Fed could lower rates now. But the reason it is not doing so immediately is that the Fed wants to confirm continuous progress toward the 2% inflation target.

- How much rate cut do you expect over the year?

▲ I think total cuts will exceed 1 percentage point. As inflation slows faster in the new year, the Fed will have more room to cut rates. The 0.75 percentage point cut forecast in the Dot Plot is pretty, pretty weak.

- Do you think the 'last mile' to achieve the 2% inflation target will be difficult?

▲ The same question came up at the December FOMC press conference, and Chair Powell said it was "interesting." It was another notable moment and one of the dovish moments of the press conference. I also do not think the last mile will be the hardest part, so I found this very noteworthy. If inflation were demand-driven, the last mile might be more difficult, but as you know, I do not hold that view.

- The market is paying attention to your 'Sahm’s rule' as a recession prediction indicator. What do you think about that?

▲ I never thought it would become a recession indicator that the market watches. What I created was a mechanism to help households falling into recession by enabling immediate fiscal stimulus. I believed an automatic safety net was needed to activate stimulus as soon as a recession begins, and I created an indicator for that purpose.

I keep getting asked when a recession will come. But no one asks what to do if a recession occurs, which I find frustrating. I want to emphasize that this rule is not perfect. It is not a natural law but an empirical pattern.

This content was produced with the assistance of AI translation services.