Fed’s Paulson reiterates more rate cuts could follow moderating in inflation

By Michael S. Derby

Jan 14 (Reuters) – Federal Reserve Bank of Philadelphia President Anna Paulson reiterated Wednesday her expectation that the central bank could lower short-term interest rates later this year if the economy meets her expectations of moderating inflation and job market stabilization.

“My baseline outlook is pretty benign” with inflation moving back to around 2% by year-end amid a stabilization in the job market coupled with growth hitting around 2%, Paulson said in a speech prepared for delivery before an  event held by the Chamber of Commerce for Greater Philadelphia. 

“If all of that happens, then some modest further adjustments to the funds rate would likely be appropriate later in the year,” Paulson said.

The official’s remarks largely echoed those of a speech given at the start of the year. In December the Fed lowered its interest rate target range by a quarter percentage point to between 3.5% and 3.75%. For the year the Fed lowered its target by a three quarters of a percentage point as it sought to throw a life line to a weakening job market while still keeping enough restraint on the economy to lower still-high inflation pressures.

Paulson noted she supported last year’s rate cuts. Fed forecasts for December eye a single cut for this year amid expectations inflation pressures will continue to retreat. The Fed is facing considerable pressure from the White House for bigger cuts, and most officials have thus far done little to signal when another downward move in short-term borrowing costs might arrive.

Paulson said the current stance of monetary policy is “a little restrictive. So, the combination of past and current monetary policy restrictiveness will help to bring inflation all the way” to 2%, a level she expects to see around year’s end.

Paulson also repeated that when it comes to the job market, “the labor market is clearly bending, it is not breaking.” The risks there “have risen and that has been an important factor in my support for the 75 basis points of cuts that the FOMC did last year.”

Paulson also noted that the job market is a better barometer of economic momentum than growth data, noting the tepid hiring conditions squared up against what have been robust gross domestic product numbers.

(Reporting by Michael S. Derby; Editing by Chizu Nomiyama )