Fed Watch: Paulson See 'Bending' Jobs Market; Yellen Warns of Debt Spirals

As the Federal Reserve navigates the opening of 2026, policymakers are caught between a cooling labor market and escalating fiscal tensions. Philadelphia Fed President Anna Paulson offered a cautiously dovish outlook this weekend, while former Fed Chair Janet Yellen sounded the alarm on the independence of monetary policy.

Paulson: “Bending, Not Breaking”

Speaking ahead of the Allied Social Science Associations Annual Meeting, Anna Paulson characterized the US labor market as “bending not breaking.”

The Threat of “Fiscal Dominance”

Countering the standard monetary narrative, former Treasury Secretary Janet Yellen issued a stark warning regarding the US debt trajectory. With the federal deficit projected to hit $1.9 trillion and debt-to-GDP ratios pushing towards 118% within a decade, Yellen warned of “Fiscal Dominance.”

This economic condition occurs when a central bank is forced to keep interest rates low not to manage inflation, but to prevent the government from defaulting on its debt servicing costs. Yellen highlighted President Trump's public demands for lower rates as a “precondition” for this dangerous scenario.

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