“Is a Recession Looming? The Latest Economic Data Points to a Potential Rate Cut in September”

The economic data calendar is heating up despite the usual summertime lull, with investors eagerly awaiting the latest Consumer Price Index (CPI) inflation print this Thursday. This comes on the heels of last Friday’s monthly job numbers, which showed some surprise weakness in the unemployment rate.

Federal Reserve Chair Jerome Powell is set to deliver his semiannual Humphrey-Hawkins testimony to Congress this week, where he will likely provide insights into the Fed’s stance on its twin mandates of maximum employment and stable prices. The latest economic data is increasingly supporting the case for the Fed’s first rate cut since 2019, with the odds of a September rate cut now standing at 72%.

Powell, known for being data-dependent, has recently expressed a cautious approach, noting the gradual slowdown in the strong job market. However, the unexpected uptick in the June unemployment rate to 4.1% has raised concerns, as it is approaching a key recession indicator known as the Sahm Rule.

The Sahm Rule, created by former Fed economist Claudia Sahm, signals the beginning stages of a recession if the unemployment rate’s three-month average rises by half a percentage point or more from its low over the previous twelve months. As of June, the reading is at 0.43 percentage points, and if the upcoming employment releases show further increases, the rule could be triggered.

Despite the potential trigger of the Sahm Rule, the Fed may choose to hold off on a rate cut, especially in an election year. Powell has emphasized the need for more evidence that inflation is moving down to the Fed’s 2% target. If Thursday’s CPI numbers show a substantial jump, the odds of a September rate cut could decrease significantly.

Sahm herself has expressed doubts about the rule’s effectiveness in the current economic environment, but she has been advocating for the Fed to act soon to avoid an unnecessary recession. The focus may shift from inflation to jobs and maximum employment in the coming months, potentially leading to speculation about an impending recession.

As investors await Powell’s testimony and the upcoming economic data releases, the possibility of a September rate cut remains on the table. The Fed’s decision will be closely watched, as it navigates the delicate balance between supporting economic growth and maintaining price stability in a changing economic landscape.