Fed Watch: Paulson Backs January Rate Pause, Warns of "Cracks" in Labor Market

Federal Reserve policymakers are signaling a cautious approach ahead of the January 27-28FOMC meeting. Philadelphia Fed President Anna Paulson, a voting member of the policy committee this year, indicated in a recent interview that she sees no immediate urgency to lower interest rates further this month.

Key Data Snapshot

• Current Interest Rate Target: 3.50%-3.75%
• Inflation Target: 2%
• Job Creation skew: 95% concentrated in healthcare and social assistance

Policy Path: The “Last Mile” on Inflation

Paulson, who supported rate reductions in late 2024, believes the current interest rate target of 3.50%-3.75% remains slightly restrictive—a stance she views as necessary to ensure inflation fully retreats to the 2% target.

“I hope that the restrictive nature of monetary policy continues to do its work,” Paulson stated, emphasizing that holding rates steady in January is a prudent option. She projects that substantial progress on price stability will be achieved by year-end, provided policy remains disciplined in the short term.

The Shift to Labor Market Risks

Despite her near-term hawkish stance on holding rates, Paulsons outlook reveals a growing dovish concern regarding the employment mandate. She highlighted a “very unusual” cooling in the labor market throughout the previous year, noting that 95% of private-sector job creation was concentrated within the healthcare and social assistance sectors.

“If an economy is truly robust and healthy, it shouldn't be creating jobs in just one industry,” Paulson warned. She explicitly stated that the risks to the labor market now slightly outweigh the risks of sticky inflation.

Financial markets should closely monitor the upcoming January pricing data. Paulson noted she is vigilant for signs of the labor market “breaking” rather than merely bending.

Leadership Stability

Addressing recent political friction, Paulson offered a strong endorsement of Fed Chair Jerome Powell. Amidst reports of political pressure from the executive branch regarding rate decisions, Paulson praised Powells ability to foster an environment conducive to independent decision-making, reinforcing the central bank's institutional integrity.