Fed needs to 'ease off' after August jobs print: Claudia Sahm

August's jobs report results fell short of expectations, adding only 142,000 jobs while the unemployment rate ticked down to 4.2%. New Century Advisors chief economist Claudia Sahm joins Julie Hyman and Josh Lipton to discuss recession concerns and the Federal Reserve's rate cut outlook following this report.

Sahm, a former Federal Reserve Board economist, characterizes the labor market data as "not good" and indicative of a total slowdown. She notes that the labor market is cooling "in part because of an intention of the Federal Reserve to slow things down" to ease inflation. However, she believes it's time for the Federal Reserve to back off.

"These numbers, while they are not recessionary, aren't good. And the labor market that has been great for the past years is starting to really slip," she tells Yahoo Finance. Sahm is the namesake for the Sahm Rule, one of the Fed's key recession indicators.

Sahm believes a Fed decision to cut interest rates by 50 basis points would be justified "as a recalibration." She points to a series of labor data indicating a weak labor market and notes that "the trend looks worse than anybody could've known."

"It is not a 50 basis point in a 'the bottom is falling out and the recession is nigh' sense. It's just 'hey, things are slowing and we misjudged how quickly they were slowing, and we're gonna get on top of it,'" she explains, stating there is "no magic number" to solidify a Fed rate cut.

Find out what the Fed's Sahm Rule is and how it can be used in conjunction with labor data to assess the odds of a recession.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

The US economy adds less job than jobs than expected in August.

Meanwhile, job additions for June and July were also revised downward.

So the question of a recession lingering as the Federal Reserve prepares for its next interest rate decision here to discuss.

New century advisors, chief economist and former Federal Reserve Board economist, Claudia S Claudia, it's always great to see you, especially on Jobs day.

So first, just wanted to get your high level take here, not just on the job.

I, but what you think the, the fed is now likely to do so, the latest information that we've gotten about the labor market is not good.

It's not terrible, but we're, we're things are slowing down.

They're pointed in the wrong direction and it is absolutely clear what the Federal Reserve needs to do right now.

The, the labor market is slowing down in part because of an intention by the fed to slow things down to get inflation down.

But I mean, the effect and we knew this was coming, but the labor market would slow down and it's, it's time for them to, to ease off, right.

Like this is getting to a place where these numbers while they're not recessionary, these aren't good and we're really, you know, the labor market that has been great for the past years is, is starting to really slip.

So Claudia do do, would you recommend, you know, a, a cut, a traditional 25 or do you think 50 is warranted?

Given the data you're seeing, given the data that we have seen since the July FO MC meeting?

Right.

So we've learned a lot in the last two months about the labor market, a 50 basis point cut would be appropriate and warranted as a recalibration, right?

We've not just gotten two disappointing jobs reports.

We got a large, an preliminary estimate of an annual revision of payroll gains.

Things have been slowing down much more.

Uh, both in terms of there's less job creation and the trend is, is worse, looks worse than anybody could have known.

Sitting in July looking at the data.

So there is an argument to make, hey, we should have got going.

We're gonna do a little bit of catch up and then go ahead.

I it is not a 50 ASOS point in a, the bottom is falling out.

The recession is nigh.

It's just, hey, things are, things are slowing and we misjudged how quickly they were slowing and we're going to get on top of it because again, the federal funds rate is over 5% right now.

You know, 50 basis points is not the first cut that needs to be done.

We have a whole series and it's better to, to start moving with some real purpose here and respond to the, the data to what we're seeing in the conditions because the labor market will continue to soften.

Um Claudia.

I wanna ask you sort of a, a wonky economist data question.

So stick with me here for a moment.

And this brought um to our attention um by Omar Sharif of Inflation insights.

Uh It was his comment was picked up by Sherwood.

They looked at the three, he's looking at the three month average of payrolls over the last three months, including today's revisions.

And that, that three month average is now 100 and 16,000.

But if you look at this little note that he pointed to in the BLS, which to be fair, I never noticed before.

They are 90% confident that the job number is correct within a range of something like 100 and 30,000.

So 100 and 16,000 is less than 100 and 30,000, which I guess means that there is a chance that there was actually, I mean, it's not a probably not a big chance.

I guess what I'm getting at is to your point.

There are so many revisions.

How do we read these numbers when there is such this range and, and all of these revisions?

So we need to understand the data are imprecise.

They are subject to revision.

Revisions are a sign of how high quality our data are.

Like we get numbers really fast and we have statistical agencies that put effort into making sure they, that over time they get better and better and more accurate.

Right.

So, but that means that when you're doing decision making in real time with the imprecise numbers, you do things like take the three month averages look across different series.

Don't just, it's not just about payrolls, it's not just about unemployment rate, you really have to uh breathe it all in.

And one thing that I think particularly that I have spent a lot of time looking at now or like what are the, the contours of the data?

Right?

What, what Powell told us in Jackson Hole is they don't want to see further cooling, right?

Like what are, what's the direction of travel look like?

And, and so that's you try to move away from there is no magic number, right?

And to make policy or to make an assessment of the US, you know, labor market or economy in general, you have to look at lots of different pieces of data and yes, being very aware of these are in precise numbers and they will, they will change.

But you got a kind of high level