Fed’s Paulson sees more cuts to boost job market

IN her first speech as head of the Philadelphia Federal Reserve, Anna Paulson said on Monday that rising risks to the job market argue for more interest rate cuts by the US central bank, as trade tariffs now appear unlikely to push up inflation as much as expected.

“Given my views on tariffs and inflation, monetary policy should be focused on balancing risks to maximum employment and price stability, which means moving policy towards a more neutral stance,” Paulson told a gathering of the National Association for Business Economics in Philadelphia.

“Labor market risks do appear to be increasing — not outrageously, but noticeably. And momentum seems to be going in the wrong direction,” so that now deserves to be the focus of policy, she said.

While Ms. Paulson did not say specifically how she’d like the Fed to proceed with rate cuts, she noted, “I view easing along the lines” of the forecasts released by the Fed at its policy meetings last month as the likely way forward.

The Fed last month cut its benchmark overnight interest rate by a quarter of a percentage point to the 4%-4.25% range. It also penciled in an additional half percentage point of easing before the end of 2025 and more cuts next year and in 2027.

Ms. Paulson said the recent rate cut “made sense,” as the central bank sought to offset risks to the job market.

She took the helm of the Philadelphia Fed in July, succeeding Patrick Harker, who retired before returning to academia. Prior to joining the Philadelphia Fed, she was research director at the Chicago Fed.

FIGURING OUT WHERE NEUTRAL RATE IS
In recent comments, Fed officials have been grappling with the monetary policy outlook. While the recent rate cut had broad support, a number of policymakers remain worried that President Donald J. Trump’s tariffs will drive up still-high inflation levels, while others are worried about the job market and believe the Fed should act strongly to support it.

Ms. Paulson said tariffs should push up inflation, but added that she doesn’t expect the gains to be persistent. She also said the current “modestly restrictive” stance of monetary policy is working to tamp down on inflation pressures, while noting that stable readings of long-term inflation expectations argue against the expectation of a persistent rise in price pressures.

But Ms. Paulson also cautioned against a go-fast approach to cutting interest rates, given uncertainty around where the so-called neutral level of monetary policy lies. As for knowing where the interest rate that neither slows nor stimulates the economy is, she said “that’s the piece where we’re really going to have to feel our way.” Ms. Paulson added that “we are going to learn” about where neutral is based on how the economy responds and “then we’ll have to respond.”

Looking ahead, she said “I anticipate that 2026 will see growth near potential, and inflation rising and then subsiding as tariffs, together with current and past monetary policy restrictiveness, work their way through.”

Ms. Paulson added that “if the economy evolves as I expect, the monetary policy adjustments we make this year and next will be sufficient to keep labor market conditions close to full employment.”

But in comments made after her formal remarks, Ms. Paulson also said the Fed’s policy path could prove different if inflation pressures don’t moderate. If inflation shows a “burst,” then “the Fed’s going to have to react appropriately, whether that’s, you know, keeping the policy rate at, you know, current levels or whether that’s increasing” the rate, Ms. Paulson said. — Reuters