Philadelphia Federal Reserve Bank President Anna Paulson reiterated on Wednesday that if the U.S. economy achieves a cooling of inflation and stabilization of the labor market as she anticipates, the Federal Reserve could lower short-term interest rates later this year.
Paulson stated, "My baseline forecast is quite optimistic—the labor market stabilizing, economic growth reaching around 2%, and the inflation rate falling back to around 2% by the end of the year."
She noted, "If all these goals are met, then it would likely be appropriate for the Fed to make a modest adjustment to the federal funds rate later this year."
These remarks are largely consistent with the content of a speech she delivered earlier this year. In December 2025, the Fed had lowered its benchmark interest rate target range by 25 basis points to 3.5%-3.75%; it cut rates by a total of 75 basis points for the full year. The policy consideration at the time was to provide support for a weakening labor market while maintaining moderate restraint on the economy to alleviate still-elevated inflationary pressures.
Paulson said she supported last year's rate-cutting measures. Projections released by the Fed in December last year indicated that, given expectations for a continued easing of inflationary pressures, only one rate cut was anticipated for this year. Currently, the White House is exerting significant pressure on the Fed to implement larger rate cuts, but most Fed officials have so far given almost no signals indicating when the next round of reductions in short-term borrowing rates might occur.
Paulson described the current monetary policy stance as "slightly restrictive." She pointed out, "The combined effect of past and current restrictive monetary policies will help bring the inflation rate fully back to the 2% target level," a goal she expects could be achieved around the end of this year.
She also reiterated her assessment of the labor market: "The labor market is clearly cooling gradually, but it is not crashing." She emphasized, "Risks in the labor market have increased, which is an important reason why I supported the Federal Open Market Committee's (FOMC) cumulative 75 basis points of rate cuts last year."
Paulson further pointed out that the labor market is a better indicator of economic momentum, mentioning that the current weak hiring conditions are inconsistent with the strong Gross Domestic Product (GDP) data.
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