Philadelphia Fed President: Keeping an Open Mind on the Path of Interest Rates, Does Not Exclude Further Tightening of Policies

Anna Paulson, president of the Federal Reserve Bank of Philadelphia and a voting member of the Federal Open Market Committee (FOMC) in 2026, stated on Tuesday that she remains open to future interest rate paths, with upcoming policy adjustments primarily depending on core inflation trends. If underlying inflation remains persistently high, the Federal Reserve may need to further tighten monetary policy to ensure inflation returns to the 2% target. In a recent article, Paulson noted that there are currently two reasonable scenarios to explain the impact of the current monetary policy on inflation, and future economic data will assist the Fed in determining which scenario applies and whether policy adjustments are necessary. She pointed out that the first scenario is that if future inflation data continues to improve and market long-term inflation expectations remain stable, it indicates that the current interest rate policy is still "mildly restrictive" enough to bring inflation back to the Fed's 2% target within an acceptable timeframe. However, she also emphasized that the underlying inflation has only "slightly decreased" over the past year, which may suggest that the current rate is "not sufficiently restrictive." Paulson stated, "If underlying inflation remains stubbornly high, and we do not see further improvement over time, that in itself will indicate the need for a more restrictive monetary policy." Last week, the Fed maintained the federal funds rate target range at 3.50%-3.75% for the fifth consecutive time. Three officials voted in favor of a 25 basis point rate hike, believing that a modest tightening of policy in advance could help reduce the risk of having to resort to more aggressive rate hikes in the future. Paulson noted that supporting the decision to keep rates unchanged was "not a difficult decision" for her. In an interview, she stated that current evidence still shows monetary policy is "mildly restrictive," but further improvement in underlying inflation needs to be observed. She remarked, "If we do not see this progress, we must remain open to recalibrating monetary policy. Our goal remains to bring inflation back to 2%." Regarding recent economic data, Paulson believes that the improvement in a series of inflation indicators is encouraging but not sufficient to alter policy judgments. Data showed that the personal consumption expenditures (PCE) price index, a key inflation measure favored by the Fed, fell 0.1% month-on-month in June, while the core measure excluding food and energy increased by less than market expectations. Meanwhile, inflation-adjusted consumer spending rose 0.4% month-on-month, marking the fastest growth since July of last year. Paulson added, "The recent improvement in some inflation data is a step in the right direction, but it is just a step." She estimates that the current underlying inflation level in the U.S. remains between 2.4% and 2.8%. She highlighted that persistent underlying inflation above the target is the most concerning indicator in her current policy assessments. Paulson also remarked that the U.S. labor market remains stable overall, but the escalation of tensions in the Middle East has increased economic uncertainty and heightened some inflationary pressures. Additionally, the surge in artificial intelligence (AI) infrastructure development has led to price pressures in certain areas while also driving economic growth. When discussing a series of reform proposals recently put forward by Federal Reserve Chairman Kevin Warsh, which include establishing multiple working groups to study policy communication, balance sheet management, and considering changing the annual schedule of eight meetings to six rate-setting meetings plus two economic topic meetings, Paulson expressed an open attitude towards these ideas. She stated, "Reassessing how we work is a good thing. Just like with monetary policy, I am open to it, and I hope to further understand the pros and cons of holding six versus eight policy meetings each year and the effects that different arrangements may bring."