Amid rising gold prices and poor earnings reports from major companies, the Fed is under increasing pressure to cut interest rates.
Points
- Gold prices are rapidly increasing, signaling potential economic challenges.
- The Sahm rule has been triggered, indicating a recession.
- Major companies report poor earnings, leading to significant market losses.
- The Fed may consider a 50bp rate cut in September.
- Economic indicators like unemployment rates and PMI data support the recession narrative.
Gold is experiencing a rapid increase in value, the Sahm rule is signaling an early recession, and this week’s earnings reports from trillion-dollar companies have been disappointing. The result? A $3 trillion loss, with the stock markets still reeling.
The Sahm rule, a recession indicator used by the US Fed, relies on unemployment data from the US Bureau of Labor Statistics （BLS）. Named after economist Claudia Sahm, this rule is triggered when the three-month moving average of the national unemployment rate （U3） increases by 0.50 percentage points or more compared to the lowest level of the previous 12 months. Historically, it has predicted recessions with high accuracy, with only one false positive in 1959, which was followed by a recession six months later.
Currently, the three-month average unemployment rate is 4.1%, half a point higher than the lowest level of the past 12 months. For July, this figure is 70bp higher. Fed member Goolsbee noted that an unemployment rate above 4.1% should prompt Fed action, though he cautioned against overreacting to a single month’s data. PMI data has also been poor for an extended period, reinforcing the recession narrative.
Businesses are struggling, with trillion-dollar companies reporting below-expectation earnings. This situation has created significant pressure for the Fed to act swiftly. A 50bp rate cut in September is a possibility, with further cuts potentially on the table if economic conditions do not improve. Conversely, maintaining the current rate could push the US into a prolonged economic stagnation, causing widespread market instability.
Conclusion
The Fed is under significant pressure to signal potential rate cuts to stabilize the economy. With gold prices rising and major companies reporting poor earnings, the economic landscape is challenging. Preparing for potential rate cuts and understanding the implications of the Sahm rule can help investors navigate this period of uncertainty.