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Home / Business / & # 39; Sahm Rule & # 39; goes into the Fed lexicon as fast, real-time recession flags

& # 39; Sahm Rule & # 39; goes into the Fed lexicon as fast, real-time recession flags



BOSTON (Reuters) – Astronomers name comets and biologists name species, but come up with something cool in economics, and you might be reminded of a law or rule or a "curve."

FILE PHOTO: People wait in line to attend TechFair LA, a technology job, in Los Angeles, California, USA, January 26, 2017. REUTERS / Lucy Nicholson

Introduces the latest: Sahm Rule, whose architect, Federal Reserve economist and Consumer Section Manager Claudia Sahm came up with it to flag the outbreak of recession faster than the current process that formally dates the business cycle. It also aims to be more reliable than some of the financial market metrics known to throw away false signals.

In a paper published earlier this year, she said that unemployment could cut through all this. It is a widely used and easily understandable statistic that captures why the recession matters. It also turns out that when the three-month average unemployment rate rises half a percentage point over the low year before, the economy has just or is about to enter a period of contraction.

It has happened every time since the 1970s, Sahm noted in recommending that her rule be used as a way to automatically trigger stimulus payments to households to help offset the breadth of rising unemployment and potentially shorten the recession without waiting. that politicians should sort through the data and vote on a stimulus package.

A number of such measures, totaling around $ 420 billion, were used to combat the recent recession. Sahm's goal was to create a program that would get the money rolling fast, and continue to roll until the economy stabilized.

The unemployment rule should identify a recession "almost immediately and long before it is officially recognized," Sahm said at a May-sponsored seminar by the Washington Center for Equitable Growth on proposals to combat the next downturn.

For example, the last recession began in December 2007, but the panel of economists at the National Bureau of Economic Research, which dates boom and busts, did not officially state it until a full year later.

However, the Sahm rule hit 0.53 in February 2008 and under her proposal the benefits would start flowing. It peaked at four and did not fall below 0.5 until June 2010.

While being developed as part of a specific proposal for a new "automatic stabilizer", the Sahm rule now appears to have expanded. St. Louis Federal Reserve on Wednesday added the "Sahm ​​Rule Recession Indicator" to its massive Federal Reserve Economic Data System, FRED, a popular and publicly available tool that offers everything from the number of jobs in Alabama to British inflation since the early 1200s.

"Didn't even think to put 'series in FRED & # 39; on my bucket list … excellent," Sahm, a 2007 University of Michigan PhD, said on Twitter along with a picture of himself in a FRED t -shirt.

NO Red Flags YET

Sahm's recession is currently well below the worry level, at just 0.07 percentage points. On average, it has been a bit negative since unemployment reached its peak and began to fall in mid-2010, following the end of the deep recession of 2007 to 2009.

But it comes into the Fed's lexicon at a time when debate is centered around the eventual the beginning of the recession, and under conditions that can test the robustness of the rule.

The current unemployment rate of 3.7% is considered unnatural by many Fed officials, and policy makers actually expect it to rise about half a percentage point without an actual contraction of the gross domestic product.

This increase is expected over several years, but depending on how quickly it occurs, the Sahm rule may be broken by a phase of sluggish growth – not the kind of downturn that she believes would justify annual payments of several hundred dollars per person to unemployment fell.

Unlike the recurring return of comets or the stable characteristics of a species, economic "rules" may be better characterized as guideposts that may change over time.

Stanford University professor John Taylor's "Taylor Rule" to set interest rates described the Fed's behavior well for a time, but is not considered as useful when the central bank's interest rates hit zero, as many have done in recent years; Milton Friedman's "Friedman Rule" for money growth lost relevance as inflation and monetary dynamics changed; and even A.W. The Phillips famous “Phillips Curve” has lost advantage as a practical measure of the trade-off between inflation and unemployment.

FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, USA, March 27, 2019. REUTERS / Brendan McDermid

Whether Sahm's board is functioning as advertised in the future, at least she is in good company.

(GRAPH – sahm rule: here)

Reporting by Howard Schneider; Editing by Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.

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