Philadelphia Fed chief flagged more easing ahead, citing labor market concerns and tariff impacts
Federal Reserve Bank of Philadelphia president Anna Paulson used her first major economic outlook speech to signal that more interest rate cuts are likely on the horizon, as the central bank shifts focus from inflation to growing risks in the labor market.
Speaking at the National Association for Business Economics Annual Meeting in Philadelphia, Paulson said, “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.”
She added, “Labor market risks do appear to be increasing—not outrageously, but noticeably. And momentum seems to be going in the wrong direction.”
Paulson’s remarks followed the Federal Open Market Committee’s (FOMC) decision last month to cut its benchmark interest rate by 25 basis points, bringing the federal funds rate to a range of 4.00%–4.25%.
The Fed’s latest projections suggest another half-point of easing before the end of 2025, with further cuts expected in 2026 and 2027. “The recent rate cut made sense,” Paulson said, describing it as a move to offset emerging risks to the job market.
Paulson is not a voting member of the Federal Open Market Committee (FOMC) this year but will gain a vote in 2026.
Tariffs seen as short-term inflation factor
Paulson downplayed concerns that new and existing trade tariffs would drive a sustained rise in inflation. “My base case is that tariffs will increase the price level, but they won’t leave a lasting imprint on inflation,” she said.
“So long as inflation expectations are anchored, increases in prices due to supply effects do not turn into an inflation problem.” She pointed to the stability of long-term inflation expectations as evidence that monetary policy remains credible, even after several years of above-target inflation.
Narrow base for growth, reliance on high-income consumers
While the US economy has outperformed expectations—real GDP grew at a 3.8% annual rate in Q2—Paulson warned that the foundation for continued growth is narrow.
“Virtually all of the net job growth we’ve seen this year has been confined to health care and social assistance. Employment in most other sectors has been flat to down on the year,” she said.
With lower-income consumers feeling the pinch from higher prices and slower wage growth, Paulson noted that spending by high-income households, buoyed by a stock market rally concentrated in a handful of AI-driven firms, has become increasingly important.
“Some business contacts are wondering where future demand will come from. This is something to watch closely,” she said.
Cautious path forward for monetary policy
Paulson cautioned against aggressive rate cuts, citing uncertainty around the so-called neutral policy rate. “There are a wide range of plausible estimates of the neutral policy rate, and I think we will need to feel our way there, paying close attention to what economic developments tell us about the stance of policy,” she said.
Still, she indicated that if the economy evolves as expected, “the monetary policy adjustments we make this year and next will be sufficient to keep labor market conditions close to full employment.”
Federal Reserve governor Christopher Waller also expressed support for cautious interest rate cuts. “I want to move towards cutting rates, but you’re not going to do it aggressively and fast, in case you make a big mistake on which way that things go,” Waller said.
Chicago Federal Reserve president Austan Goolsbee also voiced concern over the prospect of cutting interest rates too quickly, warning that recent economic data have put the central bank in a “sticky spot” as it tries to balance inflation and employment goals.
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