Fed’s Paulson Douses Rate Cut Hopes, Strengthening 'Higher for Longer' Case

Philadelphia Federal Reserve President Anna Paulson delivered a hawkish reality check to financial markets on Friday, stating that meaningful interest rate reductions may not occur until late 2026. Speaking at the American Economic Association, Paulson emphasized that the current policy stance remains “slightly restrictive” and necessary to ensure inflation returns durably to the 2% target.

Divergence: Fed vs. Market Pricing

A sharp disconnect remains between the Federal Reserve's guidance and investor positioning.

Paulson noted that while the labor market is “volatile,” it has not collapsed, with jobless claims stabilizing. Furthermore, she highlighted the resilience of the US economy, pointing to a robust 4.3% GDP growth in the third quarter, which contradicts the narrative of an imminent recession that would necessitate emergency cuts.

Inflation Risks Persist

While acknowledging that 75 basis points of cuts in 2025 helped, Paulson warned that tariff policies could keep goods inflation elevated through the first half of 2026. “If goals are met, some small adjustments later this year might be appropriate,” she stated, effectively pushing back against Q1 easing expectations.

Forex Implication: This rhetoric is supportive of the US Dollar (USD). If market participants are forced to unwind dovish bets and align with the Fed's slower timeline, yield differentials will likely move in favor of the Greenback against the EUR and JPY.