Philly Fed President Anna Paulson Backs Two More Rate Cuts This Year

Anna Paulson thinks tariffs won’t have a lasting effect on inflation. (Courtesy Federal Reserve Bank of Philadelphia)

Key Points

• Anna Paulson, Philadelphia Fed President, advocates for two additional quarter-point interest rate cuts by year-end.
• Paulson believes tariffs will temporarily increase prices but not cause lasting inflation, advising monetary policy to look through these effects.
• The labor market is a concern, with the unemployment rate rising to 4.3% in August and job growth concentrated in healthcare.

Anna Paulson wants the Federal Reserve to cut interest rates two more times this year.

In her first major policy speech since becoming president of the Federal Reserve Bank of Philadelphia in July, Paulson backed two more quarter-point cuts by year-end and said that tariffs will push up prices temporarily but won’t cause lasting inflation.

“My base case is that tariffs will increase the price level, but they won’t leave a lasting imprint on inflation,” Paulson said at the National Association for Business Economics annual meeting in Philadelphia on Monday afternoon. “Given this base case, monetary policy should look through tariff effects on prices.”

Paulson will become a voting member of the Federal Open Market Committee in 2026. She spent two decades at the Chicago Fed, most recently as director of research, before taking over in Philadelphia this summer.

The pass-through from tariffs to consumer prices has been smaller than many economists expected, she said. And businesses, she added, are finding creative ways to avoid passing along higher coasts because they want to preserve market share.

The labor market, the other side of the Fed’s dual mandate, concerns Paulson more. The unemployment rate rose to 4.3% in August from 4.1% in June, and nearly all net job growth this year has come from healthcare and social assistance. Employment in nearly every other sector is either flat or down.

“Momentum seems to be going in the wrong direction,” she said.

The labor market isn’t tight enough to turn tariff-driven price increases into sustained inflation, she said. Unlike during the height of the pandemic, when workers were jumping between jobs for higher wages, some business contacts now report lowering their starting wages, she said.

Paulson used an analogy involving a children’s book character named Lowly Worm who eats peas that create visible bumps on his body. Turn the page and he’s back to normal, the peas digested.

“The peas have been digested and left no lasting imprint. That’s my base case on tariffs and inflation,” she said. “But Lowly worm is eating a lot of peas, so we need to keep a close eye on him to make sure he doesn’t get indigestion.”

Looking ahead to 2026, Paulson said the Fed faces two key questions: What the neutral interest rate is and how quickly policy should move there.

“I don’t know,” she said. “And because I don’t know, we should proceed cautiously.”

The economy has shown strong growth even as the labor market slows, which usually indicates that productivity is rising. Business formation surged during the pandemic and has remained elevated.

But Paulson sees risks ahead. The current expansion, she said, has a “relatively narrow base of support.”

Write to Nicole Goodkind at nicole.goodkind@barrons.com