NEW YORK, March 27 - Philadelphia Federal Reserve President Anna Paulson said on Friday that conflict in the Middle East has raised fresh risks for the U.S. economy while stopping short of signaling any immediate change to monetary policy.
Delivering remarks prepared for an event hosted by the San Francisco Fed, Paulson stressed the twin concerns posed by the geopolitical turmoil: higher uncertainty around inflation and the prospect of slower growth. "The conflict in the Middle East has created new risks to both inflation and growth," she said.
Paulson acknowledged the progress the central bank has made in bringing down price pressures but noted that inflation has remained above the Federal Reserve's 2% objective for an extended period. She characterized the central tendency of longer-run inflation expectations as "consistent" with the 2% target, while cautioning that "they may also be a little more fragile." She also referenced the tangible yet incomplete movement toward lower inflation by saying there has been "significant progress" in reducing price pressures.
Beyond the near-term geopolitical risks, Paulson devoted a portion of her remarks to the uncertain economic implications of advances in artificial intelligence. She discussed the possibility that AI-driven jumps in productivity could boost economic growth, a development the central bank would find hard to respond to when inflation is running above its objective.
"If inflation were at the 2% target, I would feel more comfortable being patient, keeping monetary policy on hold and waiting to see if a hypothetical growth surge puts upward pressure on inflation," Paulson said. "But if inflation is above 2% and has been for some time, I would be more cautious," she said. "I would be inclined to weight the possibility of overheating more heavily in determining appropriate policy."
Her comments framed a policy challenge: a productive expansion propelled by technology could raise output quickly, yet the Fed must weigh that outcome against the existing persistence of inflation above target. Paulson emphasized the difficulty of disentangling, in real time, the drivers of any observed jump in productivity and how that uncertainty complicates decisions on rates and policy stance.
Paulson did not indicate immediate changes to monetary policy in her prepared remarks. Instead, she outlined the competing considerations facing policymakers as they assess how geopolitical shocks and technological shifts intersect with inflation dynamics and growth prospects.
Contextual note: The speech balanced observations on external shocks and structural technological shifts with the central constraint facing the Fed today: elevated inflation relative to its 2% goal.