Fed's Paulson says monetary policy still working to cool inflation?

By Michael S. Derby

NEW YORK, Dec 12 (Reuters) - Federal Reserve Bank of Philadelphia President Anna Paulson said Friday her main concern right now is the state of the job market, in remarks that also said the current state of monetary policy should help bring down inflation to the Fed's 2% target.

"On net, I am still a little more concerned about labor market weakness than about upside risks to inflation," Paulson said in a speech prepared for a gathering held by the Delaware State Chamber of Commerce in Wilmington.

"That's partly because I see a decent chance that inflation will come down as we go through next year" with the waning of tariff impacts, which have been the main driver of price pressures overshooting the target this year.

While Paulson did not offer any forward-looking comments on central bank interest rate policy in her prepared remarks, she said "with the funds rate currently at 3.5 to 3.75 percent, I continue to see monetary policy as somewhat restrictive."

"This level of rates, together with the cumulative effect of past restrictiveness, should help bring inflation back to 2 percent," the official said.

Paulson described the labor market as "bending, but not breaking" and noted that "by lowering rates 75 basis points over the last three meetings, we've taken out some insurance against further labor market deterioration."

On Wednesday, the central bank's interest-rate-setting Federal Open Market Committee lowered its interest rate target rate range by a quarter percentage point to between 3.5% to 3.75%, as it sought to balance risks to the job market against inflation levels that are still too high. The Fed, still dealing with the aftermath of the government shutdown that deprived it of key economic data, did not provide firm guidance about the prospects for a January rate cut.

Paulson noted the Fed will be able to deliberate on rate policy on a firmer footing at the start of next year, when she will become a voting member of the FOMC.

"By the time the FOMC meets at the end of January, we will have a lot more information, which I hope will add clarity to the outlook for inflation and employment, as well as the accompanying risks," she said.

(Reporting by Michael S. Derby; Editing by Chizu Nomiyama)