Fed's Paulson signals further gradual interest rate hikes to curb inflation

Federal Reserve Bank of Philadelphia President Anna Paulson said on Tuesday that further interest rate increases would be needed to bring inflation back to the central bank's 2% target, signalling support for a continued tightening of monetary policy, Reuters reported.

Paulson said a gradual approach to rate increases would allow the economy to adjust to higher borrowing costs while giving policymakers time to assess the impact of their decisions. However, she stressed that monetary policy would need to remain somewhat restrictive as inflation continues to run above the Fed's target.

According to Reuters, Paulson said inflationary pressures remain elevated, with underlying inflation holding between 2.5% and 3%. Price pressures have remained above the central bank's target for more than five years, making the fight against inflation her primary policy priority.


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Paulson, who has a voting position on the Federal Open Market Committee (FOMC) this year, pointed to the resilience of the US economy and stability in the labour market as factors supporting further monetary tightening.

Her comments came amid renewed concerns about the inflation outlook after government data showed that US consumer prices rose more than expected in October. The consumer price index (CPI) increased 0.4% during the month, adding to concerns that inflationary pressures could become more widespread.

Several Federal Reserve officials adopted a hawkish stance on the interest rate outlook following the inflation report, which highlighted the impact of tariffs, energy prices and artificial intelligence-related investment on prices.

Paulson said the latest CPI data indicated that inflationary pressures remained persistent. Economists also identified signs that price increases, previously concentrated in specific sectors, could be spreading across the broader economy.

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Interest rate futures markets reflected growing expectations of another quarter-percentage-point increase at the Fed's December 8-9 policy meeting. The federal funds target rate currently stands in the 3.75%-4% range, with traders also anticipating another increase at the central bank's late-January meeting, Reuters reported.

The possibility of a larger rate increase has also entered the discussion. Federal Reserve Governor Christopher Waller had indicated before the release of the October inflation data that a stronger-than-expected CPI reading could prompt him to support a half-percentage-point hike.

Paulson said the pace of monetary tightening could accelerate if inflation expectations rise, wage pressures intensify or underlying inflation moves higher. She indicated that policymakers would remain guided by incoming economic data as they determine the appropriate path for interest rates.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)