Philadelphia Fed President Anna Paulson said Thursday that they may need to raise rates further to get inflation back on target.
Speaking a week after the Federal Open Market Committee raised its benchmark borrowing rate by a quarter of a percentage point, Paulson said inflation trends remain a concern.
Raising the key funds rate to our target range of 3.75-4% would “bring policy closer to what I think is needed to get inflation back to 2% at a pace that balances risks to inflation and the labor market. Looking ahead, if the situation develops as I expect, some modest further tightening may be warranted.”
He said that although price pressures showed some relief over the summer, underlying inflation remained hovering around 2.5% to 3%, “well above our 2% target, and there is little sign of that gap narrowing.”
“The best I can say about underlying inflation this year is that it hasn’t gotten worse, at best,” Paulson said in prepared remarks for a local fintech conference. He noted that, excluding the oil supply shock caused by the Iran war and tariffs, inflation remains high.
Outside of inflation, economic output is “strong” but the labor market is “stable,” Paulson said.
The comments came as the market grew expectations for significant Fed tightening.
It rose further this week, pushing long-term Treasury yields to their highest level since 2004. According to CME Group’s FedWatch tool, traders are currently pricing in a 64% chance that the FOMC will raise rates again in October, followed by another hike in January. The federal funds futures contract suggests interest rates will be 4.8% through the end of 2027, indicating an expected increase of up to four quarter points in the coming years.
New York Fed President William Williams said early Thursday that he believes it is “reasonable” to expect another rate hike before the end of the year.
