Philly Fed's Paulson Says Labor-Market Concerns Outweigh Inflation Risks

By Matt Grossman

Philadelphia Fed President Anna Paulson believes that the Federal Reserve's policy stance is still leaning against inflation even after recent rate cuts, she said in a speech Friday, adding that she has been attentive to risks in the labor market as hiring slows.

Paulson, who took up leadership of the Philadelphia reserve bank in July, will get her first turn voting on the central bank's policy committee at the Fed's next meeting in January, under a system that rotates votes annually among the Fed's 12 regional presidents. Her comments in a speech in Wilmington, Del., Friday morning suggested she could be sympathetic to the case for further easing next year.

"With inflation too high and the labor market bending, but not breaking, that means balancing the risk that inflation stays too high against the risk that employment deteriorates as we manage the process of getting to our goals," Paulson said, according to a published text of her remarks. "By lowering rates 75 basis points over the last three meetings, we've taken out some insurance against further labor market deterioration."

Paulson noted that while unemployment has remained fairly modest, it has edged up this year, a sign that demand for workers may be cooling slightly faster than growth in the pool of people looking for jobs. She observed that hiring has been concentrated in fields such as healthcare and social services, with fewer opportunities in other sectors, a labor market that Paulson described as "okay" but that risks further deterioration.

Meanwhile, though inflation remains above the Fed's 2% target, Paulson said she is optimistic the trend will improve next year. Tariffs have lifted prices for some physical goods, but that effect could likely fade in 2026 as the economy adjusts, Paulson said. Price increases for services and for housing have been moderating, she added, a sign that inflation overall could ease.

The Fed's third straight quarter-point rate cut brought the central bank's targeted interest rate down to a range of 3.5% to 3.75% this week, the lowest level in three years. The Fed held rates steady for most of 2025 to combat elevated inflation, then opted for a series of rate cuts starting in September as the labor market cooled.

Starting in January, Paulson will be part of the group deciding whether to continue easing rates in 2026. Fed meetings have turned more divisive recently, with Wednesday's vote drawing three dissents. At the median, officials penciled in expectations that they will cut rates once more next year, in the Fed's quarterly dot plot that shows policymakers' individual expectations.

Paulson noted Friday that consumers' expectations for future inflation have mostly remained in check, a sign that the Fed hasn't lost public trust that it will corral price increases. That trust, she argued, can enable the Fed to cushion the slowing labor market without undue alarm that inflation could reaccelerate--which can be self fulfilling once consumers come to expect it.

"Credibility gives us room to take out some insurance against bad labor market outcomes without risking too much on the inflation front," Paulson said.

Write to Matt Grossman at matt.grossman@wsj.com

(END) Dow Jones Newswires

December 12, 2025 08:14 ET (13:14 GMT)