The Sahm Rule Has Triggered and the Fed Is Trapped
The numbers do not lie. As of the October 2025 employment report released just days ago, the national unemployment rate has climbed to 4.4 percent. This marks a significant ascent from the 3.7 percent low established earlier this year. For those following the Sahm Rule, a recession indicator developed by economist Claudia Sahm, the alarm is no longer ringing; the house is already on fire. The rule triggers when the three month moving average of the unemployment rate rises 0.5 percentage points or more above its minimum during the previous 12 months. Today, that indicator stands at 0.7 percentage points.
Wall Street celebrates every basis point cut. Main Street is currently being crushed. While the Federal Reserve has finally begun to lower the benchmark federal funds rate to its current 4.25 to 4.50 percent range, the relief is not trickling down. The catch is simple and brutal. Banks are widening their credit spreads. Even as the Fed cuts, the interest rates on credit cards and subprime auto loans remain anchored near 20 year highs because lenders fear a wave of defaults in a cooling economy. This creates a dangerous divergence where the wealthy benefit from cheaper margin debt while the working class remains locked in a high interest trap.
The Mathematical Reality of the Sahm Rule
Claudia Sahm herself has expressed concern that the Federal Reserve waited too long to pivot. The delay allowed the labor market to develop structural cracks. When unemployment rises, consumer spending inevitably drops. Because consumer spending accounts for nearly 70 percent of the United States Gross Domestic Product, a 0.7 percent rise in the Sahm indicator suggests that a contraction is not just possible, it is likely already underway in the manufacturing and retail sectors. The Fed is trying to perform a soft landing while the engines are already stalling.
The Credit Tier Stratification
The impact of current monetary policy is not uniform. We are seeing a phenomenon called Credit Tier Stratification. Prime borrowers with credit scores above 740 are seeing immediate benefits from rate cuts in the form of lower mortgage refinancing options. However, for low income households often relegated to the subprime or near prime categories, the cost of capital is actually increasing. Per recent data from Reuters financial analysis, delinquency rates on credit cards have jumped to 3.2 percent, the highest since the 2008 financial crisis. This forces banks to increase their loan loss reserves, which they fund by keeping interest rates high for the very people who need the cuts the most.
Why Small Businesses Are Not Hiring
Small business owners are the engine of employment. They are currently stuck in a liquidity squeeze. While the Fed Funds rate is dropping, the Small Business Administration (SBA) loan rates are still hovering near 9 percent. For a small retail outlet or a local contractor, this interest expense consumes the margin that would otherwise go toward hiring. The Federal Reserve’s hesitation throughout early 2025 has forced these businesses to prioritize debt service over growth. According to Yahoo Finance market trackers, small business sentiment has hit a three year low as the cost of carry remains prohibitive.
| Economic Indicator | November 2024 | November 2025 (Current) | Trend Impact |
|---|---|---|---|
| Unemployment Rate | 3.8% | 4.4% | Negative / Recessionary |
| Fed Funds Rate | 5.33% | 4.35% (Avg) | Easing / Delayed |
| Sahm Rule Value | 0.1% | 0.7% | Critical Warning |
| Average Credit Card APR | 21.4% | 22.1% | Wealth Gap Expansion |
The Stickiness of Core Services Inflation
The Federal Reserve is in a pincer movement. While they want to cut rates to save the labor market, core services inflation remains stubbornly above 3 percent. Rents, insurance premiums, and healthcare costs are not responding to interest rate tweaks. This is the catch that the optimistic headlines ignore. If the Fed cuts too aggressively to save jobs, they risk a second wave of inflation that will destroy the purchasing power of low income households even faster than unemployment would. It is a choice between two different types of poverty.
Low income families spend a larger percentage of their income on these non discretionary services. When the Fed cuts rates, it often weakens the dollar, which can lead to higher import prices for basic goods. This is the hidden tax on the poor. The investigative reality is that the Fed has very few tools left to help the bottom 20 percent of earners without triggering another inflationary spiral that would necessitate even higher rates in the future.
Watching the January 2026 Milestone
The next critical data point for every investor and household to watch is the January 28, 2026 Federal Open Market Committee meeting. This will be the first meeting of the new year where the Fed must decide if they will continue the easing cycle despite the Sahm Rule’s confirmation of a downturn. If the Fed pauses in January 2026 because inflation remains sticky at 2.9 percent, the labor market could see a rapid capitulation. Watch the 4.5 percent unemployment mark; if we breach that level before the year ends, the narrative of a soft landing will be officially dead.
