The Federal Reserve's path forward in 2026 is coming into clearer focus. In remarks that offer investors their first substantive glimpse into Fed thinking this year, Federal Reserve Bank of Philadelphia President Anna Paulson said modest additional interest-rate cuts could be appropriate later in 2026—but emphasized that such moves are contingent on continued progress toward the central bank's goals.

Paulson's comments, delivered on January 3, come as markets and Fed officials appear to be at odds about the trajectory of monetary policy. While the Fed's December projections called for just one quarter-point cut in 2026, financial markets are pricing in expectations for at least two reductions.

The Current Policy Stance

The Federal Reserve has already moved significantly from the peak tightness of this cycle. After holding rates at their highest level in two decades through much of 2025, the Fed delivered two quarter-point cuts in the back half of the year, bringing the benchmark federal funds rate to its current range of 3.5% to 3.75%.

That's down 75 basis points from a year ago, but still well above the near-zero levels that prevailed before the inflation surge of 2022-2024. The question facing policymakers—and investors—is how much further rates need to fall to reach what economists call the "neutral" level that neither stimulates nor restrains economic growth.

"The current policy stance is restrictive, but we've made significant progress in bringing it closer to where it needs to be. Additional adjustments may be appropriate, but they should be driven by the data, not the calendar."

— Anna Paulson, Federal Reserve Bank of Philadelphia President

Paulson's Economic Outlook

The Philadelphia Fed president painted a cautiously optimistic picture of the U.S. economy in her remarks. She sees inflation continuing to moderate, the labor market stabilizing after its 2025 cooling, and economic growth settling in around 2% for the year—roughly in line with the economy's long-run potential.

On Inflation

Paulson expressed confidence that inflation is heading in the right direction. "I see a decent chance that we will end the year with inflation that is close to 2 percent on a run-rate basis," she said, referring to the Fed's long-standing price stability target.

This represents meaningful progress from the inflation spike that forced the Fed into its aggressive tightening cycle. At its peak in mid-2024, core inflation was running above 5%. Current readings show it has fallen to around 2.5%, though the final mile toward 2% has proven stubborn.

On the Labor Market

The job market, which had been a persistent source of concern about inflationary pressures, appears to have reached a better equilibrium. Paulson characterized current conditions as "stabilized," with hiring having slowed from its torrid post-pandemic pace without triggering the kind of job losses that would signal recession.

The December employment report, due out on Friday, will provide the next major data point. Economists expect it to show nonfarm payrolls rose by 55,000 to 65,000 in the final month of 2025—a modest gain that would be consistent with a labor market that is neither overheating nor collapsing.

On Tariffs

Perhaps most notably, Paulson directly addressed the elephant in the room: the potential impact of tariffs on prices. She acknowledged that higher import costs are likely to keep goods prices elevated through at least the first half of 2026.

"Trade policy changes are creating some near-term pressure on prices," Paulson said. "We're watching this carefully, but our baseline expectation is that these effects will be transitory rather than persistent."

This assessment aligns with the Fed's traditional view that tariff-driven price increases, while painful for consumers, represent one-time level shifts rather than ongoing inflation that requires a monetary policy response.

What It Means for the January Meeting

The Federal Open Market Committee is scheduled to meet on January 28-29, with Chair Jerome Powell delivering a press conference following the announcement. Based on Paulson's remarks and recent Fed communications, markets should expect the following:

No Rate Change in January

There is virtually no expectation that the Fed will move rates at the January meeting. The central bank has clearly signaled that it wants to see more data before making additional adjustments, and just weeks into the new year, that data simply doesn't exist yet.

Continued Data Dependence

The Fed will likely emphasize its commitment to letting incoming information guide policy. With both upside risks (persistent inflation, tariff pass-through) and downside risks (labor market weakening, consumer retrenchment) in the outlook, flexibility is key.

Acknowledgment of Uncertainty

The unusual level of policy uncertainty—from trade, from fiscal policy, from the Fed's own leadership transition—will likely be a recurring theme in communications. Policymakers don't like to be surprised, and the current environment offers ample opportunity for surprises.

The Broader Fed Landscape

Paulson's voice is just one of many that will shape Fed policy in 2026. The composition of the FOMC's voting membership rotates annually, and this year brings a new mix of perspectives to the table.

In 2026, the presidents of the Federal Reserve Banks in Cleveland, Philadelphia, Dallas, and Minneapolis will hold voting seats, replacing Boston, Chicago, Kansas City, and St. Louis. This rotation brings a slightly more hawkish tilt to the committee, though individual views vary and can evolve with the data.

The Powell Question

Looming over all of this is the question of Fed leadership. Jerome Powell's term as Chair expires in May, and President Trump has indicated he expects to nominate a replacement this month. The potential for a leadership change adds another layer of uncertainty to an already complex policy environment.

Markets have generally taken the view that continuity in Fed policy is more likely than radical change, regardless of who holds the Chair position. The institutional inertia of the Federal Reserve tends to moderate the impact of any single individual, and the other governors and regional bank presidents provide a check on dramatic departures from established frameworks.

What Investors Should Watch

For investors trying to navigate Fed policy in 2026, several key indicators will be worth monitoring:

  • Monthly jobs reports: The pace of hiring will be crucial for assessing labor market conditions
  • Core PCE inflation: The Fed's preferred inflation measure, released monthly
  • Tariff announcements: Any changes to trade policy could affect the inflation outlook
  • Fed speeches: With 19 FOMC participants, there's no shortage of commentary to parse
  • The Chair nomination: When it comes, markets will quickly assess implications for policy

The Bottom Line

Anna Paulson's message is one of cautious optimism with an emphasis on patience. The Fed has made substantial progress in bringing inflation down and rates closer to neutral, but the job isn't done. Additional cuts may come, but they'll be earned through data, not delivered on a schedule.

For an economy still processing the effects of pandemic disruptions, inflation, and now shifting trade policies, that kind of measured, data-dependent approach is probably exactly what's needed. The Fed isn't in a hurry to cut further, but the door remains open if conditions warrant.