Sahm rule creator sees 50-bps Fed rate cut on labor market worries

By Bansari Mayur Kamdar

(Reuters) - The U.S. economy is not in a recession but labor-market weakness might worry the Federal Reserve enough to cut interest rates by 50 basis points on Wednesday, former Fed economist Claudia Sahm said.

"The likely path for the Fed is for the 50-(bps) cut this time, really adhering to the principles of data-dependence," Sahm told the Reuters Global Markets Forum on Tuesday.

"There was quite a bit of labor-market data, all in one direction, and it was not good. This is a Fed that has been very much behind the maximum-employment side of the dual mandate," Sahm said.

The Fed acts according to a dual mandate of price stability and maximum sustainable employment.

Markets are pricing in a 63% chance of a 50-bps rate cut by the Fed on Wednesday and a 37% chance of a 25-bps cut.

Sahm is the creator of the recession indicator, the "Sahm rule", which has until now accurately predicted every U.S. recession since 1970. The rule indicated a recession last month after data showed U.S. jobless rate reached 4.3% in July.

Sahm said, however, that the U.S. is not actually in recession and the rule failed to account for the current unusual economic cycle.

"The Sahm rule broke in the sense that it turned on outside of a recession," said Sahm, who is currently chief economist at New Century Advisors, an investment management firm.

The Sahm rule is a recession indicator, not a forecast tool, she said.

The central bank will also release its updated Summary of Economic Projections on Wednesday.

Sahm worries they might cause concern in the markets as most Fed officials will write down a long-term path for interest rates to be lower than some expect.

She expected the Fed's rate cut and new projections to stem from recent inflation data and recognition of a softer labor market.

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(Reporting by Bansari Mayur Kamdar in Bengaluru; Editing by Divya Chowdhury and Rod Nickel)