Philadelphia Fed President Anna Paulson says another rate hike may be needed to bring inflation back to 2%, a week after the Fed lifted its benchmark rate to 3.75%-4%. Other regional Fed presidents struck a similarly hawkish tone, and futures markets now price a 64% chance of a second hike in October.
Philadelphia Federal Reserve President Anna Paulson said Thursday that policymakers may need to raise interest rates further to return inflation to the Fed's 2% target. Her remarks follow the Federal Open Market Committee's move last week, when it raised its benchmark rate by a quarter percentage point to a 3.75%-4% range.
According to Reuters: "some modest further tightening may be warranted" if conditions evolve as she expects, Paulson said in prepared remarks. She backed last week's hike, noting the balance of risks had shifted heading into the meeting.
Inflation still running hot
Paulson said underlying inflation is running in a range of about 2.5% to 3%, well above the Fed's target, with little sign the gap is closing. She pointed to tariffs, energy prices tied to the US-Israeli war with Iran, and the AI buildout as pressures keeping prices elevated.
Still, she described the broader economy as resilient, with the labor market stable and consumption growth holding up despite those shocks.
Other policymakers echo the hawkish tone
Paulson's comments follow similar signals from across the Fed. Cleveland Fed President Beth Hammack said growth is solid and the labor market is close to maximum employment, but warned that persistent high inflation gets harder to bring down the longer it lasts. Richmond Fed President Tom Barkin said inflation risks outweigh employment risks, and Fed Governor Michael Barr said further policy adjustments are likely needed in his base case.
New York Fed President John Williams also said Thursday that another hike before year-end is reasonable to expect.
Markets price higher odds of an October move
Traders are now pricing in a 64% chance the Fed hikes again in October, followed by another move in January, according to the CME Group's FedWatch tool. Fed funds futures imply a rate of 4.8% by the end of 2027, pointing to as many as four additional quarter-point increases ahead.
Longer-duration Treasury yields have climbed to highs not seen since 2004 this week as those expectations built. The next FOMC meeting falls on October 28, just before the November 4 midterm elections.
Sources: InvestingLive, Investing.com, CNBC
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