Paulson Keeps the Door Open on Rate Hikes Despite Elevated Inflation

Philadelphia Federal Reserve President Anna Paulson said she supports the recent decision to hold the federal funds rate steady at 3.5% to 3.75%, but warned that persistently elevated inflation could force the Fed's hand.

In an essay titled 'Keeping an Open Mind,' Paulson outlined two possible readings of how current policy is affecting inflation.

In one scenario, she believes the rate level is mildly restrictive and will return inflation to the 2% target in an acceptable time frame. However, in the second scenario, she estimates underlying inflation at between 2.4% and 2.8%, which suggests more restrictive policy may be needed.

Paulson emphasized that she is watching for sustained improvement in inflation data before taking any action, stating 'the incoming evidence will clarify which path we're on and what adjustments, if any, may be needed.'