Will tariffs impact US inflation? Fed’s Anna Paulson answers, warns about next rate cut, flags labour market strain

Federal Reserve President from Philadelphia, Anna Paulson, said on Thursday that she believes the tariffs will not necessarily contribute to ongoing inflation, as reduced demand is limiting price increases. However, she noted that inflation is expected to remain above 2% for the next five years, Reuters reported.

Flagging concerns over monetary policy, Paulson was quoted by the news portal, "With upside risks to inflation and downside risks to employment, monetary policy has to walk a fine line. As I think about monetary policy over the longer arc, I'll be focused on how to appropriately balance the risks to both inflation and the labour market, guided by my commitment to deliver on the FOMC's price stability mandate and get inflation all the way back to 2%.”

Paulson raised concerns over the US central bank's next rate cut, amid worries of consistently high inflation, which needs to be balanced with the risk of rising unemployment.

Every rate cut, "raises the bar for the next cut ... because each rate cut brings us closer to the level where policy flips from restraining activity a bit to the place where it is providing a boost," Reuters quoted Paulson. “So, I am approaching the December FOMC cautiously,” she said.

‘More worried about labour market,’ says Paulson

Paulson expressed greater concern about the labour market than about inflation, while also expressing optimism about learning more before the upcoming meeting.

"On the margin, I'm still a little more worried about the labour market than I am about inflation, but I expect to learn a lot between now and the next meeting," Paulson said at a Philadelphia Fed bank conference in Conshohocken, Pennsylvania.

The Federal Open Market Committee is scheduled to meet on December 9-10 to decide the benchmark interest rate.

Paulson will not vote at the meeting, which is anticipated to be highly contested as several voters have already signalled they could dissent if the Fed cuts rates and several others have hinted at dissent if the Fed does not. Paulson will take over one of the Fed's 12 voting seats on the rate-setting committee next year.

How is the US economy doing?

She said that the US economy is doing "OK," but lower- and moderate-income households are facing difficulties, while higher-paid Americans continue to spend. This situation makes the economy rely heavily on ongoing demand from the top earners, creating a somewhat narrow foundation that "may make the growth outlook particularly sensitive to equity valuations."

Paulson called the US jobs report for September, released on Thursday after a significant delay, “encouraging.” Although the unemployment rate rose to 4.4%, it indicated that the slowdown in job gains was mostly due to a decrease in labour supply, resulting in a roughly balanced job market.

She also observed that the majority of job growth up to September has been concentrated in healthcare and social assistance, which often signals an upcoming slowdown, the report noted.