Philadelphia Fed President Anna Paulson said she supported last week’s decision to hold steady and says “I am keeping an open mind about where policy goes from here.” She lays out a reaction function similar to other centrists: she sees a path by which inflation continues to decline and the Fed can stand pat, and also one in which inflation progress stalls, indicating policy isn’t tight enough. “I estimate that underlying inflation is running somewhere between 2.4 and 2.8%.” Scenario 1: “The current setting of the federal funds rate is mildly restrictive and this will bring inflation to 2% in an acceptable time frame….” Modest wage growth, restrained housing demand, pressures on low- and moderate-income consumers offset narrow pressures from AI buildout. “All of this information points to current policy being mildly restrictive.” Scenario 2: “The other possibility, however, is that current policy is not restrictive enough to deliver our target rate of 2 percent inflation…. While AI's productivity benefits may eventually help moderate inflation, those gains appear further off, while the inflationary pressures from the buildout are more immediate. Even if supply shocks fade and no new shocks hit, this information suggests policy might need to be more restrictive to achieve the Fed’s target.”(Nick Timiraos)