2026 Financial Markets Conference – Evening Keynote Transcript – May 19, 2026
May 19, 2026
Evening Keynote – Navigating Uncertainty: Inflation, Labor Markets, and the Stance of Monetary Policy
Transcript
Colby Smith: Hi, everyone. Thank you all for sticking it out until the last session of the conference. I'm Colby Smith, with the New York Times. I'm thrilled to introduce Anna Paulson, president of the Philadelphia Fed. July will mark her one-year anniversary on the job. Her career at the central bank began in 2001, when she joined the Chicago Fed as an economist. She later went on to serve as the research director.
President Paulson is a voting member on this year's Federal Open Market Committee. So, we'll look forward to her speech about the outlook, and I'll ask her some questions after that. So, please join me in welcoming her.
Anna Paulson: Good evening, everyone—and thank you, Colby, for that kind introduction. So, it's great to be here, and as many of you know, Congress has given the Federal Reserve—and specifically, the Federal Open Market Committee—the job of delivering stable prices and maximum employment for the American people. I'm focused on understanding economic conditions and where they are headed, so that we can position monetary policy to achieve those goals.
My team and I spend a lot of time analyzing data and listening to people. We talk to households across the economic spectrum, firms of every size and sector, nonprofits, and a wide range of financial institutions. These conversations tell the stories behind the data and provide a glimpse into the future, since the plans we hear about are not yet reflected in official statistics.
The people behind these conversations—employers, workers, families, and their communities—are at the forefront of my mind when I'm making monetary policy decisions. Right now, these conversations reflect strain and uncertainty.
Inflation is taking a toll. Many families are struggling to make ends meet, especially with the jump in gas prices. Workers are anxious about the job market—both those seeking employment, and those worried about keeping their jobs as AI reshapes the workplace.
Businesses are navigating enormous change: tariffs, evolving regulations, and now the conflict in the Middle East. All of this is creating opportunity, but also disruption. Firms are managing, but planning is hard and they worry about what comes next.
So, there's a lot going on—and the data and what we hear in conversations are not always pointing in the same direction. My goal for this evening is to share my take on the economic outlook, highlight some key risks, and discuss what this means for monetary policy. The bottom line: I believe monetary policy is appropriately positioned to navigate the current challenges. Policy is mildly restrictive, and that restrictiveness is helping to keep inflation pressures in check while the labor market remains stable.
As always, these are my own views and not necessarily those of my colleagues on the Federal Open Market Committee.
So, let me start with the obvious. Inflation is too high. Even before the conflict in the Middle East and the recent spike in oil and gas prices, inflation was elevated. At the same time, the labor market continues to be pretty stable. The consumer is resilient, and we are seeing solid growth bolstered by investment in AI infrastructure. Last year, real GDP grew 2 percent, and it's on track to do the same this year. Headline growth in the first quarter was solid, and business investment was a bright spot.
Investment growth is particularly strong in categories related to the AI build out, and that is supporting business conditions more broadly. Contacts tell us that data center construction and other AI spending is boosting activity in many communities.
Growth in consumer spending, which is roughly two-thirds of GDP, is more modest. Consumers are continuing to spend, although at a slower pace. In the first quarter, consumption grew at an annual real rate of 1.6 percent, down from 2.1 percent last year.
A dominant theme in our conversations is the pressures that families are feeling from elevated inflation. Gas prices, which are up more than 50 percent since the beginning of the year, are adding significantly to those challenges. People tell us that some of the strategies they had been using to bring in extra income to cover monthly expenses, like driving for ride sharing services or doing delivery work, no longer make economic sense once you factor in the cost of gas. We continue to hear about consumers trading down from premium brands to cheaper alternatives, and some families are relying more on credit cards and other debt to maintain spending.
Still, the overarching theme is resilience. While many families are feeling stretched by inflation, there are few signs that consumers are pulling back sharply in the aggregate.
Looking ahead, however, both households and businesses are cautious. Business contacts emphasize that uncertainty, particularly uncertainty related to the conflict in the Middle East, is taking a toll. Some projects are being put on hold until there's more clarity. Many consumers express pessimism about the economy and their own prospects. You can see this in the very low readings in surveys of consumer sentiment. In addition to pressures from inflation, people are wondering if their job will still be there tomorrow.
And yet the unemployment rate has been remarkably steady and near what I consider to be full employment for many months. It has edged up slowly, going from a historical low of 3.4 percent in April of 2023, to 4.5 percent in November of last year, to a still low 4.3 percent last month.
Going all the way back to 1948, when the official unemployment rate data began, this is the only time the unemployment rate has risen by 1 percent point or more outside of a recession. Usually, when the unemployment rate goes up, it goes up quickly—fueled by an escalating cycle of layoffs, falling incomes, and lower spending. But over the past couple of years, layoffs have been low and spending has been steady.
Given how unusual it is for the unemployment rate to increase gradually, the nervousness we hear about the labor market is understandable. One source of anxiety relates to AI and what it will mean for jobs. Some contacts tell us there's growing pressure in corporate boardrooms for companies to translate AI efficiencies into cost savings, including through layoffs. Not all of our contacts share this view, however. Many expect AI to slow hiring rather than trigger job cuts.
Whether it is driven by AI or other factors, labor market pessimism is widespread. According to the New York Fed Survey of Consumer Expectations, the mean probability that the unemployment rate will be higher a year from now was 44 percent in April, and that's up from 34 percent in January of last year. Taking this all together, the hard data suggests a labor market that is stable and consistent with full employment. But what we are hearing from people, both directly and through surveys, suggests somewhat softer labor market conditions. My base case is that the labor market will remain stable and that we will end the year with an unemployment rate in the range that has prevailed over the last few years.
And now, turning to inflation. Here the data and what we are hearing from contacts are aligned: Inflation is too high. Multiple forces have kept inflation elevated. Most recently, tariffs and the spike in energy and commodity prices associated with the conflict in the Middle East are pushing inflation higher.
At the beginning of last year, inflation had declined significantly but remained above our 2 percent target. Headline PCE inflation was 2.6 percent (year-over-year) in January of 2025, and core inflation—which excludes more volatile food and energy prices—was 2.8 percent. The last stretch of disinflation was proving bumpy, although the underlying components of inflation were generally moving in the right direction.
Since then, inflation has moved higher. Headline PCE inflation was 3.5 percent in March, and core was 3.2 percent. Last week's data on consumer and wholesale prices for April point to continuing pressures as oil and gas prices rose further. Both tariffs and the disruptions to production and shipping associated with hostilities in the Middle East are classic supply shocks. Directionally, they increase prices and reduce output.
Conventional wisdom says that monetary policy should look through the inflationary effects of a temporary supply shock. The logic is straightforward. Monetary policy works with a lag. It takes time—say, 12-18 months—for monetary policy tightening to impact inflation. By that time, the effect of a temporary shock to prices is likely to have already subsided. So, that's the conventional wisdom.
But does the conventional wisdom apply today? To answer this question, I'm assessing whether there are forces in the economy now that could amplify these shocks and lead to broader and more lasting inflationary pressures. I'm focused on three factors.
The first factor is the strength of economic activity. After the pandemic, we saw how strong demand, flush households, tight labor markets, and high resource utilization could combine to amplify supply shocks and push inflation higher. I don't see a significant cause for concern today; GDP is growing roughly at potential, the labor market is approximately in balance, and wage growth is consistent with 2 percent inflation. Businesses, and especially consumers, are cautious, and we've seen some moderation in consumption growth. I am monitoring business investment and the possibility that a strong stock market fuels consumption. But overall, the current pace of economic activity does not appear to be adding materially to inflationary pressures.
A second important factor is inflation expectations. If households and businesses anticipate that supply shocks will leave a lasting impact on inflation, then monetary policy might need to be tightened to align inflation expectations with our 2 percent goal. After five years of elevated inflation and a series of supply shocks, this is a real concern.
Surveys and market pricing show that short-term inflation expectations have, quite understandably, moved up. But longer-term expectations have remained stable, indicating that both market participants and survey respondents—professional forecasters and regular people—expect inflation to come back down. For example, market-based expectations of average inflation five to 10 years from now have been steady, fluctuating between 2 and 2.5 percent since March of 2021. This is an area I'm watching closely, but currently long run expectations are in a good place.
A third important factor is the stance of monetary policy. If monetary policy were accommodative—if it were actively pushing growth higher—then I would be more worried that the supply shocks we are experiencing could lead to persistent inflation.
But in my view, monetary policy is mildly restrictive, and that restrictiveness is helping to keep the effects of both tariffs and the price increases associated with the conflict in the middle in the Middle East in check. Taking these three factors together, I believe the current stance of monetary policy is appropriate. While there are certainly risks, for now, monetary policy, economic forces, and inflation expectations are all helping to keep price pressures from tariffs and the conflict in the Middle East from turning into a more lasting inflation problem.
So, what does this mean for the path of monetary policy? I believe monetary policy is currently well positioned to balance the risks that I've described, and to react if the risks become manifest. And more importantly, people understand how monetary policy is likely to respond as conditions evolve.
You can see this in the way market expectations for the path of the funds rate have moved with the economic news. In January, markets were pricing in about three rate cuts this year. The conflict in the Middle East and its impact on energy prices changed those expectations. Right before the April FOMC meeting, markets were anticipating perhaps one cut this year. More recently, expectations have shifted to incorporate the possibility of steady rates, or even a modest tightening.
The way the market has moved in reaction to economic news over the last few months largely aligns with my own thinking. And I should note that there are definitely times when my thinking and market moves are not aligned, so I want to be clear: I think monetary policy is in a good place now. Keeping rates steady allows us to assess how the economy is evolving, and the risk to both price stability and the labor market. Assuming the labor market remains in balance, rate cuts would only become appropriate once we've seen sustained progress on inflation. However, I think it is healthy that market participants have taken on board scenarios where the funds rate remains unchanged for an extended period, as well as scenarios where further tightening becomes necessary.
The path forward will depend on how economic conditions evolve. I expect the labor market will remain stable and that inflation will gradually return to 2 percent as the effects of recent shocks fade, but risks to inflation have increased and the timing and pace of any policy adjustments will be determined by the incoming data.
Other scenarios are certainly possible. If the conflict in the Middle East is resolved soon and shipping and oil production return to normal quickly, inflation and inflation risks are likely to subside relatively quickly. If it takes more time to resolve, inflation and inflation risks—along with risks to the labor market—are likely to be elevated for longer.
This brings me back to where I started, and the conversations that helped me understand the economy and how people are experiencing it. Inflation has been too high for too long, and families and businesses are feeling stretched. The future feels uncertain. At the same time, they are resilient—and that resilience is reflected in solid economic growth and the stable labor market.
The best way for me to respond to their concerns is to do my job, and that means being laser focused on bringing inflation back to 2 percent while preserving full employment. The current stance of monetary policy is helping us make progress towards that goal. As we move forward, I will be focused on what I learned from the data and from my conversations. The American people deserve both stable prices and a healthy labor market, and that's what I'm committed to delivering.
Thank you.
Smith: Thank you for that. I'd love to start with the inflation outlook and the stance of policy, because as you mentioned in the speech, it's been five years of above target inflation. Underlying price pressures, I think even before the war in Iran broke out, were proving sticky, and the conflict has obviously only made that situation worse. And at the same time, you talked about how the labor market is stabilizing and consumption is holding up relatively well. So, I guess I'm just curious, what gives you confidence that rates are indeed mildly restrictive at this point.
Paulson: So, I think, outside of the AI investment boom, things don't seem like they're going crazy. I talk to employers and they say they can find workers, they can hire workers; we're not seeing the kind of jumping from job to job like we saw in the post-pandemic period. Housing markets are still tight, and then the caution that I hear on the part of businesses and households, it doesn't sound like we're off to the races.
Smith: I guess another signal that everyone is, I'm sure, checking nonstop this past couple of days is the recent run-up in Treasury yields, and we now have the 30-year trading at its highest level since 2007. What signal do you think that's sending about the policy path forward, or the Fed's grip on inflation? I think in a previous speech, you talked about long-term inflation expectations as being a little bit more fragile now, and I just wonder if you think that's being reflected now in the market moves.
Paulson: So, I haven't had a chance to parse those market moves in great detail, but there's a lot of things going on. So, you've seen the short-term rate go up, right? So, some of the long-term rate is just reflecting what's happened with short-term rates, and that's what I've been focused on, just because I've been trying to parse how the Fed's reaction function is being translated to markets. And so, I'll be thinking more about what that long-term rate signals for inflation outlook, the growth outlook, and then the risk premiums that people are demanding in return for holding Treasuries.
Smith: I guess I just wonder if you see any connection to the current situation with inflation expectations. I know on certain measures they look somewhat stable, but I think the concern is that once they really do start to move, then potentially the Fed is moving too late.
Paulson: Yes. So, my understanding is that a lot of the moves, in the long run, have been driven by real rates and not by inflation.
Smith: Okay. And just in terms of the policy choices in front of the Fed, you seemed in your speech to ratify market pricing that shows no cut for this year, the potential for a hike at some point. So, I guess I'm just wondering how you perceive the prospects of a rate increase down the line, and under what circumstances that would be appropriate.
Paulson: So, I think I'm going to go back to those factors that I'm monitoring. So, if we see growth moving above potential—if we see momentum and economic activity, if we saw the unemployment rate go down, those would both be factors where I'd think maybe monetary policy is a little less restrictive than I thought, and we might need to do something.
I think the other component, in addition to those factors—so inflation expectations, I would be monitoring really carefully. And then the other thing is, are the shocks moving outside their lane?
Smith: So, where were you then on the debate about removing the easing bias in the April policy statement? Was that something that you considered supporting?
Paulson: So, for me, I feel like the stance of monetary policy—which I think I've said like 18 times now—is appropriate, and also, I didn't see a communication problem that needed to be solved. The fed funds rate had moved, taken out a couple of cuts prior to the meeting, and so I felt comfortable that folks understood the reaction function and that the Fed was taking on board the impact of shocks to prices.
Smith: I guess, is there any part of that desire to keep that signaling in, or that statement unchanged, that's in some respects reflective that you still see a path to cuts at some point this year?
Paulson: For me, it was more that it was the right policy move, and I didn't see a need to change the language.
Smith: Okay. Just a couple more on inflation, actually. Do you think there's a need for a fundamental rethink about the inflation measure that the Fed targets? Outgoing governor Stephen Miran has talked about portfolio management fees and software prices as skewing the data. Kevin Warsh, the new chair, has talked about the need to think more about things like trimmed mean. So, I'm wondering about your assessment of the Fed's grasp of the inflation situation, with the data that you have in hand, and what can or should be done to improve upon that.
Paulson: So, I think it's always healthy to take a fresh look at things, right? We've been doing the same things for a long time—take a fresh look, deepen our understanding. The economy's changed, how we measure things has changed; I think that's always appropriate, so I welcome that conversation.
Smith: But you don't see any fault in the current suite of data?
Paulson: No, I see it more like: Let's go gather more information, maybe we can improve on what we're doing.
Smith: Does that also apply to potentially forecast-based assumptions? I'm just thinking about the potential disinflationary impact of AI, of an AI productivity boom, and how that factors into your thinking about the inflation outlook. Is that something that you feel comfortable basing a rate forecast on at this moment—is it too amorphous?
Paulson: Yes, I've talked a little bit about different scenarios that I see, and to me that's still—they're very much scenarios, and any one of them seems pretty plausible.
Smith: Are you leaning one way or the other? How are you kind of sussing out the legitimacy of that argument?
Paulson: I feel like it's still early days—so, lots of conversations, trying to understand. But when you talk to people about AI, you often talk to somebody who's super enthusiastic, and then you talk to somebody who's super gloomy. So, think about "How do you aggregate that information?" I think is an ongoing issue, and so it will be helpful, I think, to have the stories manifest in the data. And right now, it's an infrastructure build out, and then a lot of potential.
So, I'm still like, scenarios I can see how I aggregate and how I pick a scenario—I think it's still too early.
Smith: In the short run, though, is there scope for inflationary pressures to build from that investment boom that we're in right now? Is that the best way to look at it?
Paulson: I think there's a scenario where investment's really strong, the stock market's really strong, people spend a lot because the stock market's strong, and there's that part. But that's not really what we're seeing right now.
Smith: And I guess I'm wondering about your comfort in basing rate decisions off of a forecast, in a way. I think a lot of officials talk about the post-pandemic inflation surge, and that forecast potentially holding back the shift to raise rates. The forecast right now is obviously very blurry, with the war; I guess I just wonder how much you feel the need to have data in hand before leaning in one direction or the other on the policy path, versus basing something on a forecast.
Paulson: I think it's always tricky, and there are always risks. Risks are super elevated right now, it feels like, to both inflation and to the outlook; and so I would say that given the past five years of elevated inflation, it makes me want a little more evidence that inflation's really coming down than if I hadn't lived through that period.
Smith: And you mentioned the path for cuts is being predicated, obviously, on how the data evolve, and I guess for you is that more than just continued disinflation occurring, and it's really about seeing signs of strain in the labor market—as in, the unemployment rate, in particular, rising?
Paulson: Certainly, if the unemployment rate rises—if we move away from full employment, and the labor market becomes more at risk—then that changes the calculus, the balance of risks, and then we have to think about how to respond to that.
Smith: Do you think the debate about the impact on supply was misguided in any way? Because we saw this sharp drop in monthly jobs growth, with a stable unemployment rate; obviously, that pace has picked back up a little bit in this period. And I just wonder how you square that with this assessment that the break-even rate had fallen quite significantly—and if that assessment was not correct, what does that suggest about the strength of the labor market right now?
Paulson: Yes, I think the labor market is—so, to me it feels like full employment. We've got a 4.3 percent unemployment rate, employers say they can find workers in most cases, wage growth seems consistent with 2 percent inflation. And yes, we had the unemployment rate go up a little bit, and we had some really low job creation months, and then we've seen some higher ones; and then we've had a lot of job creation that's been concentrated in healthcare and social assistance, and very little net job creation outside of that lane.
So, it's a really unusual configuration, and so I think it is hard to—like, you want to take your rule of thumb, and your rule of thumb doesn't really work right now. You have to really think hard about what's going on.
And so, trying to think hard about it, trying not to make too much of one month versus another month, and then trying to remember just how much volatility there is just in general in the month-to-month job flow data. They get revised multiple times, there's a whole cycle of revisions, as you know.
And so, I think that means you want to be careful.
Smith: And your expectation about a stabilizing labor market—is that based on assumption about some relatively soon conclusion in the war, or if that situation drags on, does that undermine that narrative of a stable labor market?
Paulson: I do think that if the conflict endures, that that puts both inflation and the labor market more into play. It definitely increases the risks, so we'll just have to see how that plays out.
Smith: But nothing akin to like a stagflationary-type shock—or is it just moving in that direction? I guess I just wonder what meets that kind of bar for you.
Paulson: I guess we'd have to see. I think right now, we've seen this slow creep up in the unemployment rate, up and then back down; so, I think that it would be more something that would look faster—layoffs would go up, WARN notice acts would go up.
But we haven't seen any of that. We've seen this just incredible stability. It's really unusual; it's the only time in the post-war era that we've seen this one percentage point increase in the unemployment rate outside of a recession, so I just feel like we have to be cognizant of how unusual it is, too.
Smith: No, absolutely. I want to ask you a couple of questions about communication, just because that seems to be a big priority of the new Chair. In just a few weeks, you're going to be submitting dots, ahead of the June meeting. I'm not going to ask you what you're writing down, but I am wondering what value you see in the SEP as a communications tool for the Fed, and to what extent you feel boxed in by that, if it's a net benefit. How do you see the SEP?
Paulson: I think that in general, you want the public markets to understand the reaction function; and so most of the time, the more communication we do, the better people understand the reaction function. At the same time, you take a look at a chart that has 19 different people with different perspectives, giving their rate path—sometimes that can be noisy and confusing, because it doesn't reflect the reasons for the debate in the room.
So, I think it's important to do lots of different types of communication, and the SEP is one path. I think it's a good disciplining device for the policymaker to show up and say, "I've got to put down something that I think hangs together." Now, the public doesn't get to see that; they get to see just the cloud, and you don't know which is my rate dot and which is my unemployment dot, and which is my growth dot and which is my inflation dot, and so that clouds things a little bit.
Smith: Do you think that kind of transparency should be added to the dot plot linking the forecasts?
Paulson: I guess I walked into that one. In many cases I feel like talking about your outlook works better in a narrative and works better in a conversation than just the raw dots.
Smith: How do you think about the need for transparency—and not only about the economic outlook, but the reaction function—as part of this broader debate about central bank independence, and questions about how policy is set and whatnot? Do you see that as a crucial factor in supporting that independence? Or for you, is it just strictly about, how do you best convey to markets what's coming, which helps the Fed in and of itself achieve what it wants from a policy standpoint?
Paulson: So certainly, the latter is important. I think independence stands on its own; monetary policy independence is one of those things that delivers better outcomes, in terms of inflation, in terms of growth—and so, you want that for its own sake. And then I think when people understand why you're making decisions, and it's tied to things that are about the economic outlook and the inflation outlook, that reinforces the commitment to the dual mandate—and I think that's helpful.
Smith: Yes, absolutely. Well, we're quickly running out of time here, but I did want to end on one more logistical-type question. There's been this push towards centralizing Fed operations; we've heard it from some members of the Board of Governors in Washington, and I guess I'm wondering what you make of this initiative. How do you think about it in the context of what we were just talking about—Fed independence—and where do you see the potential for there to be this kind of closer collaboration, and what's lost in the process if that occurs?
Paulson: So, I think we have a responsibility to be good stewards of the public's money, so we have to be efficient. We also have to do an excellent job. People want us to do a great job on all of our responsibilities, whether it's monetary policy, the payment system, supervision—all of it.
And so, the economy's changed, the world has changed, technology has changed; we have to be open to thinking about, what's the best way to organize ourselves? And so, some of this feels really natural. It feels like a normal thing to do to kind of think about, does that make sense? We've done it that way for a long time.
I'm in a pretty new job. I'm asking those questions all the time, and sometimes people have great answers—and sometimes it's like, we haven't thought about that for 10 years. And so, it's a good idea to ask those questions, and see if there's a better way to do things.
Smith: Have you just, in your initial analysis of this, identified specifics, in terms of how this could work, or is it more just big picture right now?
Paulson: I think it's big picture; yes. Big picture; vision.
Smith: Okay.
Paulson: Concepts.
Smith: Regime change, maybe some will say. Anyway, thank you so much, President Paulson; I appreciate it.
Paulson: Thank you.
Cheryl Venable: All right. I don't have a long speech, so don't worry. But I just wanted to take this opportunity to thank all of our panelists over the last two days. This has been fantastic. I've heard nothing but positive feedback on the conference. And so, all of you make that happen by what you do to show up and have in those conversations—and Anna, I'm going to let you off the hot seat this evening, so you can enjoy your dinner.
But before I release the two of you—and I also want to thank those that were participating online, because I know that you also make our conversations rich as well—I want to take one last opportunity to recognize the staff that made this event happen. So, in addition to the Amelia Island Resort staff, we have a team here from the Atlanta Fed that I just want to recognize. And so, when I call out your department name, I want you, if you're already standing, to wave; if you're not standing, stand up so people can recognize who you are.
So, I want to first start by recognizing the Research Department. So, all of you that are a part of the Atlanta Fed, a part of our Research Department, you are part of the planning team. I want you to stand; remain standing. Now, the Public Affairs team, that was a part of all of our media, all of the Cvent, all of the LinkedIn.
Our Events Management team. There you go. They did a lot of the heavy lifting in getting all of you where you needed to go, and all the food, and all the arrangements. And all of those that are keeping us protected, our Law Enforcement team. So, Law Enforcement—you've seen them milling about—wave, because you guys are standing already. All right.
And then, I also want to acknowledge our Jacksonville Branch staff, because this is something where we—we are out of Atlanta, but we obviously, you all understand, we have branches in various aspects of our Sixth District, and it's our partnership with our Jacksonville Branch that allowed us to do it. And I didn't see John stand. So where is he? He left. All right. Well, let's give him a round of applause anyway. He's our Branch manager. All right.
Thank you all very much. I just want to do a couple of quick logistical reminders. If you're going to the airport or need a shuttle to the airport, please see the registration desk before you leave tonight to make sure that you're signed up for a shuttle.
And then also, after the event ends, we'll be sending out a survey. We really do want your feedback. The reason why I think this conference is so successful is because the team has taken on board your feedback and continued to evolve it and make it what it is. And so, we really appreciate it. We read every one of them, and we listen to it. So, thank you all very much. Safe travels home tomorrow.