Philadelphia Federal Reserve President Anna Paulson stated on December 12 that she is more concerned about potential further deterioration in the labor market than inflation risks, while projecting inflation to moderate next year.
This remark highlights an ongoing reassessment of policy priorities within the Federal Reserve, where vulnerabilities in the employment market are gradually replacing inflation as the central policy concern.
Paulson described the current labor market as "bent but not broken," noting elevated downside risks and persistently weak hiring across most sectors. She indicated that the Fed's recent rate cuts would provide some cushion for the jobs market.
The official, who will gain FOMC voting rights in 2026, maintained that the current federal funds rate range of 3.5% to 3.75% remains somewhat restrictive. She believes this rate level, combined with accumulated tightening effects, should help bring inflation back to the 2% target.
Paulson's comments came as the Fed completed its third consecutive rate cut this year while signaling slower easing in 2023. The decision saw three dissenting votes - the first such occurrence since 2019 - revealing deepening divisions within the committee.
Regarding the labor market, Paulson adopted a cautious stance. She observed that hiring remains concentrated in specific sectors like healthcare and social services, indicating broader weakness. "The labor market is holding up but downside risks have clearly increased," she noted.
The Philadelphia Fed president emphasized that the cumulative 75 basis points of rate cuts over the past three meetings have provided "some insurance" against further labor market deterioration. While monetary policy remains restrictive, she believes the easing measures will support employment.
On inflation, Paulson expressed relative optimism, stating there's "considerable likelihood" inflation will decline next year as tariff impacts on goods prices are expected to fade by mid-2024. She identified tariffs as the primary driver of this year's above-target price pressures.
"Overall, I remain more concerned about labor market weakness than upside inflation risks," Paulson concluded.
As a future FOMC voting member, Paulson noted that by the January meeting, the Fed will have more data available after previous government shutdowns disrupted critical economic information flows.
"We'll have more information then, hopefully adding clarity to inflation and employment outlooks along with associated risks," she said.
The Fed's latest policy statement contained subtle wording changes reflecting greater uncertainty about the timing of future cuts. This week's 25 basis point reduction brought the target range to 3.5%-3.75%, attempting to balance jobs market risks against still-elevated inflation.
The unusual three-way dissent, representing opposing policy views, underscored significant committee divisions. Chair Powell later stated the Fed has taken sufficient action to address employment threats while maintaining rates at levels that continue restraining price pressures.
Paulson stressed the importance of Fed credibility when assessing economic impacts from factors like tariffs and AI. She suggested different policy responses would be needed for AI-driven productivity growth versus scenarios combining high inflation risks.
"If we're credible, we won't feel compelled to reflexively raise rates just because GDP grows rapidly. We'll be able to remain patient," she concluded.
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