Will Fed policy trigger a US recession?

Is the Fed behind the curve, and could that set the stage for US recession ahead?

If there is a recession in the next year or so, it is a huge unforced policy error. Right? And I'm much more concerned about that now than I have been in the past.

I'm Alison Nathan, and this is Goldman Sachs Exchanges. Every month, I speak with investors, policymakers, and academics about the most pressing market moving issues for our top of my report from Goldman Sachs Research. This month, I'm taking a closer look at Fed policy and the US economic outlook. The most recent jobs report was much weaker than expected. In fact, it triggered the Saum rule, which states that when the unemployment rate's 3 month average rises half a percentage point or more above the last 12 months low, the US is already in a recession. If that's the case, as it has been in e

So I developed this recession indicator, the so called SOM rule, in early 2019, and it was part of a policy project on how to improve fiscal stimulus. We needed an indicator to turn on, temporarily, programs in a recession. And what I did to construct the indicator was look at the historical record of recessions in the United States and the changes in the unemployment rate that happened with a particular eye to an indicator that was both highly reliable because it was going to start off a big fiscal program and triggered as early as possible in a recession. But it was looking at historical pat

And we recently saw the indicator get triggered. So tell us about that.

The unemployment rate moved up 0.53 percentage points, so that would trigger the SOM rule. And so then, historically, that is consistent with US economy being in the early months of a recession. If we look at the broader context in which it triggered, the US economy is in all likelihood not in a recession. Income is growing, consumer spending is growing, jobs growing. This is not an economy that's in contraction. But that's what the that's what the says. It's supposed to only turn on in a recession. It is not a forecast of a recession. It is supposed to be an indicator. So it's something that

is the rise in the unemployment rate that everyone's so focused on maybe giving us a misleadingly negative picture of the US economy?

So the reason the sovereign rule works is typically increasing unemployment rate, particularly when they get of a certain magnitude, are driven by less demand for workers. And that, whether that's in layoffs or not getting hired or, you know, in the various various ways, you get less demand for workers, then that can feed on itself because those workers spend less, and then there's less demand for other workers. And so that is the feedback loop that leads into a recession. That is the recessionary dynamic that, the these small changes unemployment rate or bad news picks up on. Right? Now there

let's dig through that mixed bag a little bit. We have seen hiring rates and quit rates declining as well. So does that give you greater cause for concern when looking at the holistic data?