Philadelphia Federal Reserve Bank President Anna Paulson said on Thursday that she and her colleagues may need to raise interest rates further to bring inflation back down to target levels.
Her remarks came just one week after the Federal Open Market Committee (FOMC) raised rates by 25 basis points. Speaking at this juncture, Paulson noted that the inflation trajectory remains concerning. The hike pushed the target range for the federal funds benchmark rate up to 3.75%-4%.
"This rate increase brings monetary policy closer to what I consider a reasonable level, one that balances inflationary pressures against labor market risks while guiding inflation back to 2%," she said. "Looking ahead, if the economy evolves as I expect, several more modest tightenings may be warranted."
She noted that although price pressures showed some easing over the summer, core inflation remains in the 2.5%-3% range, well above the 2% policy target, with little sign that the inflation gap is narrowing.
"For this year's core inflation, the most I can say is that it has not deteriorated further," Paulson said in written remarks prepared for a fintech conference in her district. She pointed out that even after stripping out the oil supply shock from the Iran war and tariff factors, inflation remains stubbornly elevated.
Beyond inflation, Paulson assessed that U.S. economic output has been solid and the labor market has held steady. Her comments came as market expectations for the Fed to tighten monetary policy have risen sharply. Treasury yields climbed again this week, with long-term yields hitting their highest level since 2004.
According to the CME FedWatch tool, traders are now pricing in a 64% probability that the FOMC will hike again in October, with the market also expecting another increase in January. Federal funds rate futures suggest rates could reach 4.8% by the end of 2027, implying the market anticipates as many as four more 25-basis-point hikes.
New York Fed President Williams also said on Thursday that one more rate hike before the end of this year would be reasonable.
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