Market Analysis: Fed’s Paulson Signals Gradual Easing Amid Labor Market Risks

Anna Paulson, the new President of the Federal Reserve Bank of Chicago, delivered her first policy remarks with a tone that can be characterized as measuredly dovish. While acknowledging that the U.S. economy remains resilient, she emphasized the growing vulnerabilities in the labor market and the need for a careful recalibration of monetary policy.

Paulson’s endorsement of a gradual path of rate reductions suggests a shift toward a more accommodative stance, but without abandoning prudence. Her comments highlight that although the economy is still operating near full employment, the momentum in job creation and hiring is beginning to cool — a signal that the labor market could weaken if restrictive policy remains in place for too long.

By describing the September rate cut as a “logical decision,” Paulson implicitly supports the Fed’s current easing bias. However, her caution regarding the uncertainty of the neutral rate underscores that policymakers remain wary of over-adjusting before inflation shows clearer signs of returning sustainably to target.

On inflation, Paulson’s assessment was notably balanced. She acknowledged that new tariffs could exert mild, temporary upward pressure on prices, but downplayed the likelihood of a prolonged inflationary surge. Importantly, she noted that long-term inflation expectations remain stable, which provides the Fed with some flexibility to proceed with gradual easing.

From a broader perspective, Paulson’s outlook aligns with the Fed’s desired soft landing narrative — maintaining economic growth and labor market strength while bringing inflation closer to target. Her projection that the U.S. economy will approach potential growth by 2026, with inflation slowly easing, reinforces confidence in a controlled disinflationary path rather than a hard landing scenario.

Market Implications:
Paulson’s remarks may strengthen expectations for continued rate cuts through 2025, albeit at a measured pace. Bond yields could face moderate downward pressure as investors price in a slower but steady easing cycle. Equity markets, particularly rate-sensitive sectors, may interpret her tone as supportive, while the dollar could soften slightly if dovish momentum builds across other Fed communications.

In essence, Paulson’s first speech sets a clear tone of strategic patience — signaling readiness to ease, but with data-driven restraint aimed at balancing inflation control with labor market stability.

A.Naderi