MNI: Paulson Says Fed Should Move Cautiously In Debut Speech

Federal Reserve Bank of Philadelphia President Anna Paulson said Monday in her first speech as an FOMC member the central bank should move cautiously and the median projection for two more cuts this year is appropriate if economic and financial conditions evolve as expected. 

Because of the progress on underlying inflation and risks in the labor market that appear to be increasing, "monetary policy should be focused on balancing risks to maximum employment and price stability which means moving policy towards a more neutral stance," she said in prepared remarks. The median SEP forecast from September saw the fed funds rate ending the year at 3.6%. 

The Fed "will be better positioned to go slowly in the future if we adjust policy in the near term in a way that better aligns labor market and inflation risks," she said. (See: MNI POLICY: Fed Set To Keep Cutting Rates Despite Missing Data) 

"The latest available data suggest an economy that is doing pretty well, although inflation remains elevated," Paulson said, calling the central bank's current policy stance modestly restrictive. 

"I see two important questions for monetary policy to grapple with in 2026. The first question is: What is the neutral policy rate? And the second question is: How quickly should policy move to neutral? My short answer to these questions is: I don’t know, and because I don’t know, we should proceed cautiously."

LOOK THROUGH

Paulson sees tariffs increasing goods prices over the next few quarters without leaving a lasting imprint on inflation. "Given this base case, monetary policy should look through tariff effects on prices," she said. 

"So long as inflation expectations are anchored, increases in prices due to supply effects do not turn into an inflation problem," Paulson added. "Going beyond the theory, the data so far have largely been consistent with this view."

The effects of tariffs in the inflation data are clear but less than analysts would have predicted and "tariff-induced price increases have been somewhat smaller than anticipated," she said. It would be a problem if tariff induced price increases spilled over to inflation more generally, but "I don’t see conditions as supporting problematic spillovers," Paulson said. 

"For me, the bottom line is that I simply don’t see the type of conditions, especially in the labor market, which seem likely to turn tariff-induced price increases into sustained inflation." 

"But I reach this conclusion with an awareness that we need to be careful," Paulson said, noting four-plus years of above-target inflation.