FOMC Member: Interest rates should not be cut before sustained improvement in inflation; option to raise rates is still on the table

Anna Paulson, President of the Federal Reserve Bank of Philadelphia, stated on Wednesday that she does not support cutting interest rates before inflation shows sustained improvement, and noted that moderate rate hikes are also an option if the economy overheats.

In a prepared speech at a conference hosted by the Atlanta Fed, Paulson said: "Current policy is mildly restrictive, which helps to suppress inflationary pressures while the labor market remains stable."

She stated that keeping interest rates unchanged could provide policymakers with time to assess economic trends and the balance of risks between price stability and employment.

The Federal Reserve decided to stand pat in its April meeting, but some officials objected to the wording in the post-meeting statement that hinted at the possibility of rate cuts, with three policymakers explicitly opposing the phrasing, indicating internal分歧 on policy paths.

Rising Inflation Risks, Labor Market Still Resilient

Paulson pointed out that inflation was already high before the conflict in Iran pushed up energy prices, and current inflation-related risks "have risen". She also stated that the U.S. unemployment rate has remained "unusually stable," indicating that the labor market is largely in equilibrium.

"If the labor market continues to be balanced, then lowering interest rates would only be an appropriate choice after we see sustained improvement in inflation," Paulson said.

On the consumer side, she noted that high energy prices are exerting pressure on household budgets, with some consumers shifting from high-end brands to lower-priced alternatives, and other families increasingly relying on credit cards to maintain spending. Despite this, she emphasized that "there is almost no sign that consumers as a whole are significantly contracting."

Market Begin to Digest Expectations of Higher Interest Rates for a Longer Period

Global bond yields have risen significantly recently, with market expectations of interest rate hikes increasing. In response, Paulson said, "Market participants are beginning to incorporate scenarios where interest rates remain unchanged for a longer period, or even tighten further, which is healthy."

She stated that moderate rate hikes could be considered if economic growth exceeds potential levels or other inflation risks emerge.

Paulson also warned that future trends largely depend on the duration of the disruption of oil, gas, and commodity supplies due to conflicts in the Middle East. "If the conflict can be resolved quickly, inflation and its risks may ease more quickly; but if the conflict lasts longer, inflation risks and pressures on the labor market may remain high for a longer period," she said.

As one of the members of the Federal Open Market Committee (FOMC) with voting rights this year, Paulson's stance is seen by the market as an important reference signal for the current policy direction of the Fed.