The Fed needs to 'start getting out of the way' and deliver a big rate cut next week, famed economist Claudia Sahm says

• Economist Claudia Sahm urged the Federal Reserve to cut interest rates by 50 basis points next week.
• Sahm cites solid inflation progress and a slowing labor market as reasons for the big rate cut.

The Federal Reserve "absolutely" needs to deliver a 50 basis point interest rate cut next week, according to famed economist Claudia Sahm.

Sahm told CNBC on Friday that the inflation data alone is enough to cement a jumbo rate cut from the Fed, not to mention recent signs of a slowing labor market.

"You got two more months of good inflation data. That's what the Fed asked for. That on its own would have gotten us 25 next week, as it should, and will get us a whole string of cuts after that," Sahm said.

But with the Fed Funds rate being above 5% for longer than a year, the weak July jobs report, and sharp downward revisions to recent job growth, the Fed needs to make a big adjustment, according to Sahm.

"There's an aspect of just recalibrating. We got some more information. We need to kind of clean it up, do a 50 basis point cut, and then be ready to do more," Sahm said.

She added: "Especially if Powell wants to deliver on his 'we want no further weakening, no further cooling,' they are going to have to like really move here, because that cooling trend is well established and until it is interrupted, we are going to continue to see payrolls drift down and unemployment rate drift up."

The US economy has added an average 224,000 nonfarm payrolls per month since January 2023, but the last five monthly readings came in below average.

The unemployment rate hit a cycle low of 3.4% in January 2023 and has since steadily climbed to 4.2% in August after hitting its highest level since October 2021 in July at 4.3%.

Investors are undecided as to what the Fed will do at its FOMC meeting next week, with the CME FedWatch Tool showing a near 50/50 split probability between a 25 basis point or 50 basis point cut as of Friday morning.

Sahm has made headlines in recent months after the weak July jobs report triggered the Sahm Rule, an indicator she created that attempts to identify when the US economy is in a recession.

But Sahm reiterated that her namesake rule is flashing a false signal because the jump in unemployment was driven by an increase in labor supply, rather than a drop in labor demand.

"Right now the hiring rate has fallen back and so it starts showing up in unemployment, and that is a problem, but it's not a recession problem. Just as serious, just not the same thing," Sahm said.

Sahm's call that the US economy is not in a recession is backed up by recent economic growth, with second quarter GDP seeing growth of 3.0%.

Meanwhile, the Atlanta Fed's GDPNow tool estimates that third quarter GDP growth is tracking at 2.5%. An economic recession is typically categorized by two consecutive quarters of negative GDP growth.

"The US economy is not in a recession right now," Sahm said.