Podcast Summary
In this podcast, Dr. Claudia Sahm, former section chief of the Federal Reserve Board of Governors, discusses the forecasting of recessions, the role of the Federal Reserve, and the current state of the labor and housing markets. She also shares her views on the Fed’s data-driven approach and the potential risks in the financial system.
Key Takeaways
Recession Forecasting and the Role of Inflation
- Recession Predictions: The consensus view for two years was that a recession was imminent due to high inflation. However, Dr. Sahm argues that the recent inflation was caused by COVID disruptions and geopolitical events, not by demand, and that a recession was not necessary.
- Current Economic Outlook: The consensus has now shifted to a belief that a recession will be avoided or has a very low chance of occurring in 2023, as inflation has come down and unemployment remains low.
The Federal Reserve’s Approach and Risks
- Fed’s Role: Dr. Sahm highlights the Federal Reserve as the biggest risk to a soft landing, as they could accidentally cause a recession if they push too hard or wait too long to raise interest rates.
- Data-Driven Approach: The Fed is data-driven but can be slow to change their narrative. This focus on backward-looking data may cause them to miss what’s happening in the present.
State of the Labor Market
- Labor Market Health: The labor market is described as strong, with solid payroll gains and a decreasing unemployment rate. However, the hiring rate has trended down and is currently below pre-pandemic levels, which is a cautionary sign.
- Unemployment Rate: The three-month average of the labor market has had a 50 basis point change over the past year, with the lowest rate being 3.4% and the current rate at 3.7%.
US Housing Market
- Housing Market Disruptions: The US housing market has experienced disruptions due to the sudden increase in mortgage rates and a lack of inventory, leading to higher housing prices.
- Fed’s Role in the Housing Market: The Federal Reserve has been buying mortgage-backed securities, but Dr. Sahm believes that the Fed should not engage in such purchases again.
Fed’s Future Actions
- Interest Rate Hikes: The Fed is likely to cut rates by 25 basis points in a gradual manner, with a pause between cuts to assess the impact on inflation.
- Communication Strategy: The Fed’s communication this year has been conservative and focused on building a strong case for their actions.
Sentiment Analysis
- Bullish: Dr. Sahm’s sentiment appears to be bullish on the US economy, as she believes that a recession is unlikely in 2023. She also describes the labor market as strong and highlights the significant gains in the labor force.
- Bearish: However, she expresses some bearish views on the Federal Reserve’s approach, arguing that their focus on backward-looking data could cause them to miss current trends. She also raises concerns about potential risks in the financial system, particularly in commercial real estate and private credit.
- Neutral: On the housing market, Dr. Sahm’s sentiment is neutral. While she acknowledges the current disruptions and increased housing prices, she does not predict a housing market crash. Instead, she calls for a more balanced approach from the Fed and other government entities to address supply issues.
