Philadelphia Federal Reserve President Anna Paulson stated on Thursday that additional "modest further tightening" of monetary policy might be warranted to achieve the Fed's 2% inflation target. Her comments came a week after the Federal Open Market Committee (FOMC) raised benchmark borrowing rates by a quarter percentage point, bringing the key funds rate to a target range of 3.75%-4%.
Paulson noted that while summer months showed some moderation in price pressures, underlying inflation continues to hover around 2.5%-3%, which is still significantly above the Fed's target. She expressed concern that the gap has shown little signs of closing, emphasizing that the best that could be said about underlying inflation this year is that "it hasn't gotten worse." She also highlighted that inflation has remained elevated even when excluding the impact of oil supply shocks from the Iran war and tariffs.
Despite the ongoing inflation concerns, Paulson described economic output as "solid" and the labor market as "holding steady." Her remarks align with an increase in market expectations for Fed tightening. Traders are currently pricing in a 64% chance of another FOMC rate hike in October, with further increases anticipated in January. Fed funds futures contracts imply a rate of 4.8% by the end of 2027, suggesting expectations of as many as four additional quarter-point increases. New York Fed President John Williams also mentioned on Thursday that another rate hike before year-end is "reasonable."
