Fed’s Paulson Says Holding Rates Steady Is Appropriate for Now Until Inflation Slows Further

Anna Paulson, president of the Federal Reserve Bank of Philadelphia, said the Fed should keep interest rates unchanged for now.

Bloomberg reported on May 19 that Paulson, in prepared remarks for an event hosted by the Federal Reserve Bank of Atlanta, described current policy as “mildly restrictive” and said that stance is helping restrain inflation while keeping the labor market stable.

Keeping rates at current levels would give policymakers time to assess risks to economic activity, price stability and the labor market. She added that rate cuts would be possible only after officials confirm inflation is easing on a sustained basis, assuming the labor market remains balanced.

Paulson said the U.S. labor market remains relatively stable. The unemployment rate has stayed “very steady,” and the labor market appears broadly in balance, she said. Inflation, however, was already elevated even before energy prices surged because of the war in the Middle East.

She also said it was healthy for markets to price in not only a scenario in which the federal funds rate remains unchanged for an extended period, but also the possibility that further rate increases may be needed.

Paulson said the duration of the Middle East conflict will be a key variable for the inflation outlook. If the conflict is resolved early and oil production and maritime shipping return to normal quickly, price pressures could ease relatively fast. If the disruption drags on, inflation and labor-market risks could persist for longer.