By Michael S. Derby
Nov 10 (Reuters) – Federal Reserve Bank of Philadelphia President Anna Paulson said on Tuesday the central bank has more interest rate increases ahead as it moves to lower the elevated levels of inflation.
A “further gradual tightening seems appropriate” for monetary policy, Paulson said in the text of a speech to be delivered the 81st Annual Field Meeting Capstone gathering in Conshohocken, PA.
“The exact path will depend on how conditions evolve, and I’ll be watching the data closely,” the official said. She said so-called gradual rate increases give the economy time to adjust to higher borrowing costs while at the same time, it gives Fed officials space to gauge the impact of their policy choices.
“I continue to believe monetary policy needs to be somewhat restrictive to bring inflation back to 2 percent,” Paulson said, in an environment where price pressures have overshot the Fed’s target for over half a decade and underlying inflation pressures are hanging in at between 2.5% and 3%.
Paulson, who holds a vote on the rate-setting Federal Open Market Committee this year, said combating inflation is her main priority in an economy that’s been showing unexpected strength and job market stability.
Paulson spoke on a day of shifting expectations for the future of monetary policy.
Several Fed officials struck a hawkish tone about the interest rate outlook after government data showed that consumer prices increased by a wider-than-expected margin in October, with the overall consumer price index up by 0.4% as the economy continued to deal with the impact of Trump Administration policies that have added significant upward pressure to prices.
Paulson said that the CPI report “suggests inflation pressures are still very much with us.” She said inflation is being driven up by tariffs, energy prices and AI investment.
Economists saw in the data some evidence that once concentrated price increases were spilling over into inflation more broadly, a development that Fed officials would not like to see.
Futures markets priced in strong odds of a quarter percentage point interest rate increase for the Fed’s Dec. 8-9 rate-setting Federal Open Market Committee meeting. The current federal funds target rate stands between 3.75% and 4%. Traders also expect the Fed to boost rates again at its late January monetary policy gathering.
There’s even a chance of a more aggressive pace of action to help bring inflation back to 2%. Speaking before the inflation data release, Fed Governor Christopher Waller said that a CPI reading like the one seen in the data might push him to support a half percentage point increase in rates.
Paulson said her rate outlook could change and noted “I would want to act more quickly if inflation expectations drift up, if wage pressures build, or if underlying inflation moves higher.”
(Reporting by Michael S. Derby; Editing by Jonathan Spicer )
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