Economist Sahm urges Fed to raise rates as insurance against inflation

what happened

According to Seeking Alpha, economist Claudia Sahm, founder of Sahm Consulting and a former Federal Reserve and White House economist, argues that risk management points toward raising interest rates as protection against persistently elevated inflation. She says markets currently price the odds of a hike below 20%, yet "the case for a rate hike is stronger than the odds suggest."

Sahm notes that risk management was the most common rationale in the FOMC minutes for the September increase. She adds that the September CPI gave little reason for confidence in disinflation, with a broad upside surprise and core CPI rising at about a 4% annualized pace. The September PPI, she says, showed even more pipeline pressure, with transportation and warehousing costs climbing at a pace last seen in 2022.

Sahm also argues that the Fed should ignore the midterm elections, which fall less than a week after its vote. She warns that even delaying until after the vote would weaken the central bank's claim to independence.

why it matters

For markets, the signal matters: if the Fed judges inflation risk significant, rate expectations could shift sharply, pressuring bonds, equities and the dollar. Sahm's view runs against current futures pricing, so the debate is likely to stay in focus ahead of the decision.

market impact

US Treasuries and the dollar: higher odds of a hike pressure long bonds and support the dollar

tags

instruments