Overview
Philadelphia Federal Reserve President Anna Paulson warned Friday that the conflict in Iran is introducing fresh challenges for the U.S. economy, emphasizing the potential for that turmoil to affect both inflation and growth. She made the comments in the text of a speech to be delivered at an event held by the San Francisco Fed, while refraining from drawing direct conclusions about immediate changes to monetary policy.
Middle East conflict and economic risks
Paulson stated plainly that "The conflict in the Middle East has created new risks to both inflation and growth." The remark framed her broader discussion of how evolving global developments can complicate the Federal Reserve's task of balancing price stability with sustainable expansion.
Inflation stance
She noted that headline inflation has remained above the central bank's 2% objective for an extended period, even as the Fed has made "significant progress" toward reducing price pressures. Paulson added that longer-run inflation expectations are "consistent" with the 2% goal, although she cautioned that "they may also be a little more fragile."
AI, productivity and policy uncertainty
Paulson's prepared remarks turned to the potential economic effects of artificial intelligence, and how a surge in AI-driven productivity could look in real time. She highlighted the difficulty policymakers face in discerning what is causing a contemporaneous rise in productivity, and how that uncertainty complicates an appropriate monetary response.
She argued that a rapid increase in economic growth tied to productivity gains would be hard for the Fed to react to if inflation were already above its target. "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.
By contrast, she made clear that when inflation is running above 2% and has been doing so for some time, the balance shifts. "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."
Concluding note
Paulson's remarks juxtaposed two distinct sources of uncertainty for the U.S. outlook: geopolitical developments in the Middle East that have added risk to both inflation and growth, and fast-moving technological advances that could spur productivity in ways the Fed may struggle to interpret in real time. She stopped short of prescribing any immediate policy changes in response.