Philly Fed’s Paulson says rate cuts can wait, shows support for Powell

“So many people have been impressed by his leadership, myself included," Paulson said in an interview Wednesday, her first with a national outlet since taking the job last July.

Powell disclosed on Sunday that he is facing a criminal investigation related to the renovation of the Fed’s Washington headquarters—a probe Powell said was really about monetary policy and the desire by President Trump for lower interest rates.

“His statement was really strong. I think it really speaks for itself," said Paulson. Powell “has been a very effective chair," as were his predecessors, she said. “We’ve had really strong leadership at the Federal Reserve for many decades, and I think that’s been to the benefit of the American people."

The Fed bank president has attended meetings of the rate-setting committee since 2019 because she previously served as research director at the Chicago Fed. From that vantage point, she has found it “really impressive how he enables a broad open conversation," she said. “You want to set up conditions where people are able to take the actions that are good for the institution and good for the economy…. Part of the job as chair is to navigate that."

Paulson echoed several of her colleagues who have also vouched for Powell’s integrity and leadership this week. Those colleagues were divided at the end of last year over how to set rates, with Powell facing growing opposition to the rate cuts that he led his colleagues to make.

For now, Paulson suggested that she shares the prevailing view that there is no hurry to cut rates again. Paulson will become a voter on interest rates this year and supported the Fed’s move to cut its short-term benchmark rate at its last three meetings, most recently in December to a range between 3.5% and 3.75%.

She said she expected inflation would make meaningful progress declining to the central bank’s 2% goal by year’s end, but she was comfortable holding interest rates steady at the Fed’s coming meeting, Jan. 27-28. She thinks rates are still high enough that they are slightly above a neutral level that neither spurs nor slows growth, and she said that was appropriate for the time being to help finish the job bringing inflation down.

“I want monetary policy restrictiveness to be playing a role to get us all the way back to 2%," she said.

But Paulson said she could favor cutting rates modestly later this year, either after inflation data validate her expectation that price pressures are easing or if evidence emerges that job-market conditions are deteriorating unexpectedly.

She said she would be particularly focused on January price data, which will be released next month, because businesses often reset prices at the beginning of the year. In other words, if businesses are preparing larger price hikes, it should show up soon.

If her baseline outlook for steady growth, declining inflation and a stable labor market is right, “well, then we should be at neutral," an interest-rate setting she thinks is “a little lower than we are now."

Paulson’s current views put her on the dovish side of the rate-setting committee because she sees risks to the job market as “a little bit higher" than the risk of stubborn inflation.

Last year, some 95% of private-sector job growth occurred in just one sector—healthcare and social assistance. “If you think about an economy that feels solid and healthy, it seems like it would be generating jobs not just in one sector," Paulson said.

Research suggests that during periods like the current one, where the job market is slowing but economic output, as measured by gross domestic product, is expanding solidly, “it’s the labor market signal that ends up winning." But past performance is no guarantee of future outcomes, she said. For example, if the economy is “on the precipice of a productivity boom," then the economic activity could run strong with less demand for labor.

Paulson said the biggest economic surprise of 2025 for her was the extent to which the labor market cooled, “but that process didn’t accelerate. That’s really unusual." She added, “The labor market could break quickly…. So any sign of breaking versus bending is going to be something that I pay sharp attention to."

Paulson said it was critically important that the Fed ensures inflation returns to its 2% target. She is less concerned about the inflation outlook than some of her colleagues, however, because she sees evidence that goods price increases last year will reverse this year.

Business executives and owners report that they are more concerned about preserving market share than they have been in years, which makes them more reluctant to raise prices and lose customers. “It’s not like demand conditions are so strong that it’s easy to raise prices. Firms are being very careful, very thoughtful," Paulson said.

Write to Nick Timiraos at Nick.Timiraos@wsj.com