AYESHA RASCOE, HOST:
These days, the way Americans and voters feel about the economy often comes down to one word - inflation, as in higher prices. Is that really my grocery bill? - 'cause it's super high. Data from the labor department released last week shows inflation is cooling a bit with consumer prices up 3% compared to last year. That's a long way from the four-decade high inflation reached in 2022,but not quite the Federal Reserve's target of 2%. Claudia Sahm worked in the Obama administration and is a former Federal Reserve economist. Welcome to the program.
CLAUDIA SAHM: Thank you. Happy to be here.
RASCOE: So what is the significance of this new data?
SAHM: So inflation is slowing, and that means that the prices that people go in and pay - they are considerably higher than before the pandemic, even considerably higher than a few years ago. And yet, they're not rising as quickly, and that gives an opportunity for our paychecks and other income to catch up so that we can deal with and handle those higher prices.
RASCOE: So last week, Fed Chair Jerome Powell said before Congress that he was encouraged but said the Fed still needs even more good data before it can start cutting interest rates. So what do you make of that?
SAHM: The Fed is being very patient. They understand how painful inflation is. They don't want to make a mistake and have us make progress and then backtrack on it. And yet, last week, not much after Jay Powell said those very words, we got more confirmation of good news, of confidence that we are headed in the right direction. This is very much the way the Fed works. And thankfully, reality and the data are giving them that good news, giving them the confidence that should translate into lower interest rates.
RASCOE: Well, and inflation is one piece of the puzzle when it comes to cutting interest rates. The labor market is the other. And Powell said that when it comes to labor, that part was strong but not overheated. You wrote in your Substack last week that, quote, "today's labor market remains the success story of the pandemic recovery." How so?
SAHM: The jobs came back very quickly. This was a very strong, job-full recovery, and that's extremely important. High prices are difficult and can be a hardship. Lacking a paycheck is a disaster for many families. We got the labor market going maybe stronger than the Fed or really businesses could handle 'cause we did have labor shortages. We had some wage increases that ended up showing up in prices.
And yet, we've gotten the labor market back to something that looks a lot more like before the pandemic. What is important now is to stay in that really good place and not allow that progress on the labor market to slip by having further cooling into weakening into a potential recession.
RASCOE: Do you worry about the Fed maybe taking too long to cut interest rates? And why is that?
SAHM: Yes. And frankly, I worry that the Fed has taken too long. The reason is monetary policy, this changing of the interest rates - it takes time for it to affect the decisions that families make, that businesses make, and then how it feeds through and the bigger effects on the economy. It takes time. And so just saying, we're at a good place right now does not necessarily mean that's the decision you should make.
I do worry that there are signs that we've waited too long. The labor market might not stay in that great place. And frankly, we've had signs for many, many months that inflation was headed in the right direction. So it's time for the Fed to get going.
RASCOE: How significant is it that we're back to the pre-pandemic economy?
SAHM: It is quite remarkable where we are today. We have a great economy. Inflation has come down substantially. Unemployment is still very low, and that gets us back to a place that is quite similar to where we were going into the pandemic.
And if you think of all the disruptions that happened in the past 4 1/2 years - we've had inflation come down without a recession. That wasn't supposed to happen. When the pandemic began and we had millions of people losing jobs by the week, the idea that we'd have a job-full recovery - that wasn't supposed to happen. So we are coming back to a place of normal - which is, given all the disruptions - is a relief - without the scarring that one might have thought we would have. It is remarkable.
RASCOE: Economist Claudia Sahm of Sahm Consulting. Thank you so much for being with us.
SAHM: Thank you.
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