2 months ago
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According to Federal Reserve Bank of Philadelphia CEO Anna Paulson, the Fed may stop cutting interest rates anytime soon.
Fed’s Paulson gave a speech on Saturday at the 2026 Allied Social Science Associations Annual Meeting in her hometown. She said that the central bank wants to see how things unfold before making further moves on rates.
Paulson laid out what she is expecting. “I see inflation moderating, the labor market stabilising and growth coming in around 2 percent this year,” she said in her speech. If that is how things materialise, “then some modest further adjustments to the funds rate would likely be appropriate later in the year.“
Fed maintains restrictive stance to fight inflation
Right now, Paulson thinks rates are “still a little restrictive,” and they are helping push inflation down.
What makes her view matter more this year is that she gets a vote on the Federal Open Market Committee. That is the group that sets interest rates. Last year, they cut rates three separate times – 25 basis points each time – for a total drop of three-quarters of a percentage point. That put rates at 3.5% to 3.75% after their December meeting.
Those cuts were not easy decisions. Fed officials had to walk a tightrope. They needed rates high enough to cool inflation but not so high that they would damage the job market. Things became more complicated when President Donald Trump started calling for bigger cuts, even though some Fed members did not want any cuts at all, with inflation still well above the 2% target.
Fed Chair Jerome Powell did not say much about what comes next at the December meeting. However, the Fed’s own forecasts indicate more easing could happen in 2026.
The labor market is strained but remains stable.
Paulson said Saturday she has “cautious optimism on inflation” but wants “greater clarity on what is pushing growth up and employment down.”
She thinks there is “a decent chance that we will end the year with inflation that is close to 2% on a run-rate basis” after price bumps from tariffs settle down.
Regarding employment, she stated, “While the labor market is clearly bending, it is not breaking.” The slowdown in hiring is caused by “both supply and demand factors,” and it will need to be closely monitored throughout the year.
On the first trading day of 2026, major U.S. stock indexes such as the Dow and S&P 500 closed higher, with gains led by chipmakers and industrials, though a traditional year‑end “Santa Claus rally” failed to materialise. Strategists suggest that investor sentiment remains opportunistic, marked by buying during market pullbacks and expectations of a more dovish Federal Reserve, including possible rate cuts later in the year.
Markets around the world are trying to figure out what comes next with interest rates. European stocks have climbed higher since the Fed’s last rate cut, and traders are betting there’s more easing on the way. Analysts say investors are still working through how inflation numbers stack up against growth forecasts, trying to guess where policy goes from here.
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