Claudia Sahm thinks investors should rethink what they’re salivating for.

The Federal Reserve is likely to deliver its third interest rate cut of the year on Wednesday, a move widely understood to be insurance against the bottom completely falling out of the labor market. But to Sahm—a former Fed economist, recession-indicator architect, and one of the central bank’s most closely watched outside interpreters—the more consequential question isn’t what the Fed does on Wednesday. It’s what additional cuts would mean.

“If the [Jerome] Powell Fed ends up doing a lot more cuts,” she told Fortune ahead of the decision, “then we probably don’t have a good economy. Be careful what you wish for.”

That framing cuts against the dominant mood on Wall Street, where rate cuts have recently been reflexively welcomed and futures markets are already pricing in a second round of easing in 2026. But Sahm thinks investors should only want more cuts if they’re prepared to cheer for a recession.

Powell’s last stretch, and the hardest one

Sahm expects the Fed’s cut today—almost universally anticipated in futures markets—to be paired with language that raises the bar for any move in January. With the core inflation rate still sticky at 2.8%, higher than the Fed’s preferred rate of 2%, and unemployment rising, the Fed is straddling both halves of its mandate.

“It is a tough one,” Sahm said. “Whatever they do could upset the other side.”

That tension is especially sharp because Fed Chair Jerome Powell is nearing the end of his term. He has three meetings left—January, March, and April—before the administration installs a successor, but President Donald Trump will announce his pick for the new chair (widely believed to be White House advisor Kevin Hassett) around Christmas. Once he does that, Powell effectively becomes a “lame duck” Fed chair, although Sahm notes that “frankly, he has been one for some time,” since Trump, who has grown to loudly despise his nominee, was elected.

“Feels like in a way the last Powell Fed meeting,” Bloomberg’s Conor Sen wrote on X.

What matters now for Sahm is that the data—not the politics—are driving policy. She warns that could change next year with a more political Fed.

The labor-market signal the Fed is watching

What Sahm is focused on is not the headline rate cut but the underlying fragility in the job market that the Fed is trying to insure against.

Unemployment has risen three months in a row through September. Hiring has slowed to levels that historically place upward pressure on unemployment, “because you always have people coming into the labor market,” she said.

Layoffs, however, haven’t surged yet. That’s precisely why Sahm thinks relying on initial jobless claims to assess labor-market risk is dangerous.

“Initial claims don’t give you a sense of what’s coming,” she said. They’re what economists like to call a lagging indicator, meaning they tend to spike after a recession is underway, not before it. Recent weekly readings, distorted by holidays and special factors, are even less informative.

The real risk, in her view, is that the Fed waits too long.

“If the Fed waits until they see signs of deterioration,” she said, “they’ve waited too long.”

Sahm expects Powell to keep the path open for more easing but to emphasize that each additional cut requires stronger justification.

“If Powell talks about the funds rate getting close to neutral,” Sahm said, “that tells you it’s a pretty high bar to keep cutting. Every cut takes pressure off the economy, and inflation is still elevated.”

That messaging—tightening the bar while remaining data-dependent—is what Wall Street might interpret as a “hawkish cut.”

But Sahm stresses the Fed cannot box itself in. The December employment report arrives just a week after today’s press conference. Declaring victory—or declaring the cutting cycle finished—would expose Powell to being immediately flat-footed.

“If all goes well,” she said, “this could be the last cut of the Powell Fed.”