Philadelphia Fed's Anna Paulson says 'modest' rate moves likely ahead to tame inflation

Philadelphia Federal Reserve President Anna Paulson said Thursday that she and her colleagues may need to raise interest rates further to bring inflation back to target.

Speaking a week after the Federal Open Market Committee raised benchmark borrowing rates by a quarter percentage point, Paulson said inflation trends are still worrying.

The rate hike, which took the key funds rate to a target range of 3.75%-4%, "brings policy closer to what I believe is needed to return inflation to 2% at a pace that balances inflation with risks to the labor market. Looking ahead, if conditions evolve as I expect, some modest further tightening may be warranted."

Though the summer showed some moderating in price pressures, she said underlying inflation is still running around 2.5%-3%, "well above our 2% target, and the gap has shown little signs of closing."

"The best I can say about underlying inflation this year is that it hasn't gotten worse," Paulson said in prepared remarks for a fintech conference in her home district. She noted that inflation has held higher even outside of the oil supply shocks from the Iran war and tariffs.

Outside of inflation, Paulson said economic output "has been solid" while the labor market is "holding steady."

The comments come as markets have raised their expectations for Fed tightening dramatically.

Another leg up this week has taken longer-duration Treasury yields to highs not seen since 2004. Traders are now pricing in a 64% chance the FOMC hikes again in October, then expect another move in January, according to the CME Group's FedWatch tool. Fed funds futures contracts are implying a rate of 4.8% by the end of 2027, which would indicate the expectation of as many as four quarter-point increases ahead.