Anna B. Paulson, president of the Federal Reserve Bank of Philadelphia, said in a speech at the American Economic Association’s annual meeting in Philadelphia on Saturday: “I think inflation will ease, the labor market will stabilize, and the growth rate of the economy this year will be around 2%. If all these goals can be achieved, then making some small adjustments to the federal funds rate later this year might be appropriate.”
The president of the Philadelphia Fed said that risks in the labor market remain high, and the slowdown in labor demand has outpaced the reduction in labor supply caused by the Trump administration’s crackdown on immigration.
But she pointed out that the number of unemployment insurance claims seems to have stabilized. “Although the labor market is clearly going through a period of volatility, it has not collapsed,” she said.
Despite the recent interest rate cut, Paulson estimates that the current policy is still “slightly tight”, which helps to maintain downward pressure on inflation.
She said, “The combination of tight monetary policies in the past and present will help bring inflation down to the Federal Reserve’s 2% target.”
Paulson acknowledged that the impact of tariffs on commodity prices might sustain high inflation through the first half of 2026, but she expects commodity inflation to fall back to around 2% in the second half of the year.
After cutting interest rates by a total of 0.75 percentage points at the past three meetings, Fed officials still disagree on how much more they should lower rates this year. A growing number of officials are inclined to keep rates unchanged, at least until they have more data on inflation and employment.
In the forecast for 2026, the median expectation of policymakers is a 0.25 percentage point interest rate cut, while investors anticipate at least a 2 percentage point reduction.
Policy makers are confronted with a challenging economic outlook. The unemployment rate rose to 4.6% in November, reaching a four-year high, but underlying inflation has improved. Economic growth data has also been unexpectedly strong, showing that the US economy grew at an annual rate of 4.3% in the third quarter.
But Paulson said that the recent federal government shutdown and its impact on data collection “complicated the interpretation of the economic situation.” She noted that her outlook did not take into account the latest unemployment rate data, but was “cautiously optimistic about inflation and hoped to have a clearer understanding of what factors were driving economic growth and the decline in the unemployment rate.”
Paulson restated her previous view that artificial intelligence has the potential to significantly boost productivity. In this case, the Federal Reserve need not worry that economic growth will drive up inflation. But she added that officials cannot determine in real time whether economic growth is truly driven by productivity gains.
Earlier on Saturday, Paulson published an article co-authored with others, emphasizing the importance of central bank credibility in curbing surging inflation. The article stated: “The inflation experience of the past five years does not seem to have had a lasting impact on long-term inflation expectations.”
