Additional Coverage:
- Former Fed economist warns further rate cuts could hint at deeper economic trouble in US (marketrealist.com)
Fed Cuts Rates Again, But Experts Warn of Deeper Economic Woes
**Washington D.C. ** – The Federal Reserve concluded its final meeting of the year by lowering interest rates for the third consecutive time, a move announced by Chair Jerome Powell who cited a weakening job market as the primary driver.
The 25-basis-point cut sets the new target range at 3.5% to 3.75%. While widely anticipated, this sixth rate cut since September 2024 has garnered little enthusiasm from analysts and experts, with former Fed economist Claudia Sahm issuing a stark warning: further cuts could signal significant economic distress.
The Fed’s decision has highlighted internal divisions within the central bank, as three officials dissented from the latest move. Stephen Miran advocated for a more aggressive 50-basis-point cut, while Austan Goolsbee and Jeffrey Schmid argued for maintaining current rates. Despite these differing viewpoints, Chair Powell successfully navigated his deeply divided committee towards a consensus on managing the nation’s persistent inflation and unemployment challenges.
A key factor influencing the Fed’s decision was the concerning unemployment rate. The government’s JOLTS report, released Tuesday, showed a modest rise in job openings for October, though figures remained considerably below last year’s levels. Hiring remained stagnant at 3.2%, aligning with Powell’s characterization of a “low hire, low fire” labor market.
“If the [Jerome] Powell Fed ends up doing a lot more cuts, then we probably don’t have a good economy. Be careful what you wish for,” Sahm cautioned in an interview with Fortune.
She emphasized the difficult tightrope the Fed is walking between a sticky inflation rate of 2.8%, still above its 2% target, and a rising unemployment rate. “It is a tough one.
Whatever they do could upset the other side,” she added.
Sahm also noted that the approaching end of Powell’s term intensifies the current tension. With three meetings remaining in his current term-in January, March, and April-before the Trump administration names his successor around Christmas, the political backdrop adds another layer of complexity.
However, for Sahm, economic data outweighs political considerations. She expressed concern about the underlying reasons for the rate cut, suggesting it could be a risky maneuver.
“Initial claims don’t give you a sense of what’s coming,” she stated, explaining that current data often serves as a “lagging indicator.” This means negative rates tend to surge after a recession has begun, not as a preventative measure.
“If the Fed waits until they see signs of deterioration, they’ve waited too long,” Sahm asserted. She believes each additional cut requires increasingly strong justification, as every reduction eases pressure on the economy while aiming to stabilize inflation.
Wall Street has termed this approach, which combines pushing the bar high while remaining data-dependent, a “hawkish cut,” according to Fortune.
Sahm concluded by telling the publication that the December employment report, due a week after the rate cut, will provide crucial clarity on whether the move was necessary or if the cutting cycle needs to cease. “If all goes well, this could be the last cut of the Powell Fed,” she remarked.