Former Sahm Rule Proponent Reverses: Advocates a September 25‑Basis‑Point Hike Amid Misleading Disinflation Signals
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You might want to know
Is the recent slowdown in headline inflation genuine or largely the result of seasonal and transitory factors?
Could tariffs and AI‑driven chip demand reignite upward pressure on core inflation despite current softening?
Main Topic
The former proponent of the Sahm Rule, who had previously leaned toward steady policy rates, has publicly revised her stance and now recommends the Federal Reserve raise the policy rate by 25 basis points in September. The change in position stems from concerns that recent signs of disinflation are partly illusory and that several upside risks to inflation have increased.
At the center of the argument is the behavior of core Personal Consumption Expenditures (PCE) inflation. While some headline measures have eased from earlier peaks, core PCE annualized remains near 3%, substantially above the Fed’s 2% long‑run target. The former Sahm Rule advocate warns that recent month‑to‑month moderation could reflect seasonal re‑normalization after winter and early‑year price spikes, rather than a durable change in the underlying inflation trend. Seasonal patterns in the PCE index have historically produced elevated rates early in the year followed by a partial easing; interpreting this easing as a lasting structural improvement risks underestimating persistent pressures.
Beyond seasonality, several structural and policy factors may reintroduce upward momentum. First, geopolitical tensions in the Middle East have raised energy costs; if these remain elevated for an extended period, the pass‑through to non‑energy core prices could gradually intensify. Empirically, energy price shocks often transmit to transportation, logistics and then broader goods and services over many months. Research and historical episodes suggest that a 10% rise in gasoline prices can raise core inflation by roughly 0.2 percentage points over the subsequent year. If energy prices stay high, the cumulative effect on core inflation becomes materially larger.
Second, trade policy volatility and tariffs could again exert upward pressure on goods prices. Last year’s tariff increases contributed to a notable rise in core goods inflation; while that effect waned once higher import costs were fully absorbed into final prices, renewed tariff escalation or retaliatory measures—such as disputes with Canada—could reverse that disinflationary trend. The recent trade frictions demonstrate that tariffs remain an active policy tool and therefore a potential source of future price shocks.
Third, AI‑related investment is an underappreciated near‑term inflationary factor. Large cloud providers and enterprises are accelerating capital expenditure on AI infrastructure—servers, storage, and specialized chips. In the short horizon relevant to monetary policy, surging demand for storage and compute components has pushed some hardware prices up, contributing to measures of producer and investment goods inflation. While productivity gains from AI may reduce costs over longer horizons, in the next 12–18 months this strong investment impulse looks inflationary rather than disinflationary.
Combining these elements leads to a reassessment of policy risks. The former Sahm Rule proponent frames a modest September hike as an insurance policy: not a reversal to an aggressive tightening cycle but a risk‑management step to reduce the probability that inflation remains persistently above target over the coming year. In numerical terms, she suggests an initial 25 basis point hike in September, with the possibility of cumulative increases of 50 to 75 basis points by year‑end if upside risks materialize or data fail to show sustained progress toward 2%.
Importantly, this stance does not claim that current data are definitively deteriorating. Indeed, many recent indicators show some cooling from earlier peaks. But the crux of the argument is that existing evidence provides only conditional support for a pause; it does not robustly eliminate the non‑trivial probability that inflation will re‑accelerate once transient influences dissipate or new shocks arrive. In that context, a measured tightening is intended to preserve optionality and anchor inflation expectations, rather than to preemptively choke demand based on a single CPI release.
Monetary policymakers face a genuine tradeoff. If the Fed waits and the upside risks prove real, it could require larger and more disruptive tightening later to re‑establish credibility. Conversely, tightening now risks over‑restricting an economy already showing signs of moderation. The policy decision therefore hinges on whether officials place greater weight on current readings or on plausible adverse scenarios driven by energy, trade policy, and technology investment dynamics.
Finally, communication matters. Advocates of a modest hike emphasize that whichever path the Federal Reserve takes, the institution must clearly explain the rationale. If the majority of policymakers believe the disinflation will continue, they should specify the evidence that justifies that view. If, as the former Sahm Rule proponent believes, the distribution of outcomes has shifted toward greater upside risk, the Fed should articulate why a small preemptive adjustment is prudent to maintain credible progress toward the target.
Key Insights Table
| Aspect | Description |
|---|---|
| Core PCE | Remains near 3% annualized, above the 2% target. |
| Policy Recommendation | A modest 25bp hike in September, with potential to reach 50–75bp by year‑end if risks persist. |
| Upside Risks | Prolonged energy price increases, renewed tariff pressures, and AI‑driven chip demand. |
| Rationale | Use modest tightening as insurance to reduce the probability of persistent inflation above target. |
| Uncertainty | Seasonal effects complicate short‑run interpretation; policy must weigh current data vs. scenario risks. |
Afterwards...
Looking forward, the debate over whether to raise rates in September will crystallize around how incoming data balance between transitory and structural drivers of inflation. Policymakers will watch energy prices, tariff developments, and pricing patterns in technology hardware closely. If seasonal moderation continues and upside shocks abate, the Fed may opt for a pause. If not, a modest tightening path intended as insurance could help preserve the credibility of the inflation target and limit the need for more aggressive action later.
Whatever path the Fed selects, transparent explanation of the underlying judgement—why authorities believe inflation will or will not return to 2%—will be essential for anchoring expectations and guiding financial markets.
Related coverage: Bitcoin and Ethereum price swings, large crypto liquidations, regional geopolitical developments affecting oil prices, and ongoing debates about Fed timing and magnitude of rate moves.
