Anna Paulson, president of the Federal Reserve Bank of Philadelphia, joined the growing number of policymakers warning that the central bank will likely need to implement additional rate increases to rein in inflation.
In remarks at the Philadelphia Fed's Annual Fintech Conference, Pauslon said she supported raising the federal-funds rate to a range of 3.75% to 4% at last week's meeting. She characterized the higher rate as a "recalibration" designed to push inflation back to the Fed's 2% target.
"Looking ahead, if conditions evolve as I expect, some modest further tightening may be warranted," said Paulson, who is currently a voting member of the policy-setting Federal Open Market Committee. "Returning inflation to 2% is a top priority, and I will support the policy path that gets us there while carefully weighing risks to the labor market along the way."
Paulson's remarks echoed those of New York Fed President John Williams, who said earlier Thursday that raising rates again in 2026 was "reasonable." Gov. Michael Barr similarly said Wednesday that he believed "further policy adjustments are likely to be needed" to ensure that inflation returns to the 2% target in a "timely" fashion.
Although the majority of Fed officials penciled in only one additional rate increase for 2026, markets are betting on more. The odds of two more hikes by the end of the year currently stand at 58%, up from 42% last week, according to the CME FedWatch tool.
Paulson, who hadn't written or spoken publicly since Aug. 4, noted that she was questioning whether monetary policy was restrictive enough to deliver 2% inflation even before the summer months. But by the September FOMC meeting, Paulson said it was clear it wasn't. She calculates that underlying inflation is running in a range of about 2.5% to 3%, well above the Fed's target.
That gap, she added, has shown little sign of closing.
"The best I can say about underlying inflation this year is that it hasn't gotten worse," Paulson added.
In Thursday's speech, Paulson blamed the buildout of artificial intelligence capabilities as a factor keeping underlying inflation stubbornly high.
"While the impact of AI on productivity remains unclear, its effect on prices is not," she added. The investment boom, she pointed out, is increasing demand for everything from computer chips to construction materials. In turn, that demand is boosting prices.
Looking more broadly, Paulson says that she sees the U.S. economy as resilient and the labor conditions are "stable" and may have even improved a bit. Underlying inflation, however, remains stubbornly elevated and that is where the risk remains.
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