Federal Reserve Paulson: If the economic situation is favorable, interest rates may be cut further later this year

The Zhitong Finance App learned that Philadelphia Federal Reserve Chairman Anna Paulson (Anna Paulson) said that it may be appropriate to cut interest rates further by a small margin in late 2026, but this outlook depends on whether the economic situation remains moderate and favorable.

Paulson said, “I see that inflation is cooling down and the labor market is stabilizing. The economic growth rate this year is about 2%. If all of these conditions are realized, then it may be appropriate to make some gentle further adjustments to the federal funds rate later this year.”

The Philadelphia Federal Reserve Chairman pointed out that the risks facing the labor market are still high, and the slowdown in labor demand has outpaced the reduction in labor supply brought about by the Trump administration's tightening immigration policies. However, she also mentioned that the number of initial jobless claims seems to have stabilized, and “the labor market is clearly curved, but not broken.”

Although the Federal Reserve cut interest rates last month, Paulson estimates that the current monetary policy stance is still “slightly restrictive,” which will help continue to put downward pressure on inflation. She said, “The combination of past and current monetary policy restrictions will help bring inflation back completely to” the Federal Reserve's target level of 2%.

Paulson acknowledged that the impact of tariffs on commodity prices may continue to drive up inflation in the first half of 2026, but she expects commodity inflation to fall back to a level consistent with the 2% target in the second half of the year.

After cutting interest rates by a total of 75 basis points in the last three meetings last year, Fed officials are still divided on how much interest rates should be cut this year. More and more officials are inclined to keep interest rates unchanged at least until more data on inflation and employment are available. In the forecast for 2026, the median expectation given by policy makers was to cut interest rates by 25 basis points, while the market expected to cut interest rates at least twice.

Policymakers are facing a challenging economic outlook. In November of last year, the US unemployment rate rose to 4.6%, a four-year high, while potential inflation improved. Meanwhile, economic growth data was surprisingly strong, showing that the US economy expanded at an annualized rate of 4.3% in the third quarter.

However, Paulson said that the federal government shutdown and its impact on data collection “made the interpretation of the economic situation more complicated.” Her economic outlook — which she notes does not refer to the latest unemployment rate data — is reflected in “being cautiously optimistic about inflation, while hoping to understand more clearly what factors are driving up economic growth while employment is weakening.”

Paulson reiterated her previous view that artificial intelligence (AI) could drive a significant jump in productivity. In this case, the Federal Reserve will not need to worry that higher economic growth will drive up inflation. However, she added that policymakers will face difficulties in determining in real time whether growth is due to increased productivity.

Paulson also presented a paper she co-authored, stressing the importance of central bank credibility in containing soaring inflation. The paper stated, “The inflation experience of the past five years does not seem to have left a lasting impact on long-term inflation expectations.”