Philadelphia Fed’s Paulson said risks to both inflation and the outlook are super-elevated, and that a rate hike could be considered if growth moves above potential or further inflation risks emerge.
Earlier:
Summary:
The following is drawn from Paulson’s further remarks, Q&A, at an Atlanta Fed conference on Tuesday evening:
- Paulson said risks to both inflation and the economic outlook are “super-elevated” right now, and that a rate hike might be considered if growth moves above potential or additional inflation risks materialise
- She said the current labour market feels like full employment but described its stability as unusual given the elevated risk environment, warning that a prolonged Iran conflict would increase risks to both inflation and unemployment
- Paulson said she saw no need to change the Fed’s policy language at the last meeting, and stressed the importance of the Fed using multiple forms of communication, with the Summary of Economic Projections being one component
- She acknowledged it remains early days in assessing artificial intelligence’s influence on productivity and inflation, suggesting the Fed is watching but not yet drawing firm conclusions
Philadelphia Federal Reserve President Anna Paulson sharpened her tone considerably on Tuesday evening, describing risks to both inflation and the broader economic outlook as “super-elevated” and making explicit that a rate hike could be considered if growth moves above its potential rate or further inflation pressures emerge.
The remarks, delivered at an Atlanta Fed conference, go beyond the cautious hawkishness of her earlier prepared remarks and represent the most direct signal yet from Paulson that the Fed’s next move could be a tightening rather than an easing. She was careful to frame a hike as conditional rather than imminent, but the conditions she cited, above-potential growth and rising inflation risks, are not remote scenarios given the current environment.
Paulson described the labour market as currently feeling like full employment, a positive assessment of underlying economic strength, but added an important qualification: the stability of the job market right now is unusual. The comment carries an implicit warning that the Fed does not regard current conditions as a reliable guide to what lies ahead, particularly given the pressures building from the Middle East conflict. She said directly that if the Iran conflict persists, it would further increase risks to both inflation and unemployment, a stagflationary combination that leaves policymakers with no straightforward policy response. Higher rates address inflation but deepen unemployment risk; holding or cutting addresses growth but risks inflation becoming entrenched.
On process, Paulson said she saw no need to alter the Fed’s policy language at the most recent meeting, suggesting the existing framework remains adequate to communicate the current stance. She also touched on artificial intelligence, noting it is still early days in understanding how AI might affect productivity and inflation, an area the Fed is watching but where it is not yet in a position to draw firm conclusions.
The June meeting, the first under incoming Fed Chair Kevin Warsh, will be closely watched for any sign of whether the hawkish shift now clearly visible among regional Fed presidents reflects the direction the new chair intends to set.
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Paulson’s characterisation of risks as “super-elevated” on both sides of the Fed’s dual mandate is a significant escalation in language from a voting member, and will reinforce the market shift away from pricing cuts toward pricing hikes. The explicit acknowledgement that a rate increase might be warranted if growth moves above potential or further inflation risks emerge puts a hike firmly within the Fed’s stated reaction function, not just a tail risk. The observation that current labour market stability is “unusual” is a subtle warning that conditions may not remain this benign, and that the Fed is aware of the fragility beneath the surface. For energy markets, Paulson’s Iran comment is directly relevant: a prolonged conflict raises both inflation and unemployment risks simultaneously, a stagflationary combination that leaves the Fed with no clean policy response.
