Fed's Paulson sees modest rate cuts this year if economy improves

Investing.com -- Federal Reserve Bank of Philadelphia President Anna Paulson said Wednesday she expects the central bank could lower interest rates later this year if inflation moderates and the job market stabilizes as anticipated.

Speaking at a Chamber of Commerce for Greater Philadelphia event, Paulson described her economic outlook as "pretty benign," projecting inflation to return to around 2% by year-end while the job market stabilizes and economic growth reaches approximately 2%.

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

Her comments largely echoed statements made at the beginning of the year. In December, the Fed reduced its interest rate target range by a quarter percentage point to between 3.5% and 3.75%. Throughout last year, the central bank cut rates by three-quarters of a percentage point to support a weakening job market while maintaining enough economic restraint to reduce inflation.

Paulson characterized the current monetary policy stance as "a little restrictive," adding that this level of restraint will help bring inflation "all the way" to the 2% target by around year-end.

Regarding employment conditions, Paulson noted that "the labor market is clearly bending, it is not breaking." She pointed out that job market risks "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."

The Fed official also suggested that employment data provides a better indication of economic momentum than growth figures, noting that current tepid hiring conditions contrast with robust gross domestic product numbers.

Fed forecasts from December projected just one rate cut for this year as inflation pressures continue to ease. The central bank faces pressure from the White House for larger cuts, though most officials have provided little indication about the timing of potential future rate reductions.

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