Philadelphia Fed President Anna Paulson said Thursday that if conditions play out as she expects, "some modest further tightening may be warranted." She votes on policy this year and argued the latest move "brings policy closer to what I believe is needed to return inflation to 2% at a pace that balances inflation with risks to the labor market."
New York Fed President John Williams underscored the same theme earlier in the day, saying officials "still have a lot of work to do" to address inflation risks that have not fully faded. That tone lines up with last week's unanimous quarter-point hike and projections that point to at least one more increase before year end. The next meeting wraps up Oct. 28, six days before the congressional mid-term elections.
Paulson said core readings that strip out food and energy are still "stubbornly elevated," and she sees little improvement this year. She put underlying measures in a 2.5% to 3% range, with scant evidence they are easing toward the 2% goal. "The best I can say about underlying inflation this year is that it hasn't gotten worse," she said, adding that "the risk of persistently elevated inflation had increased."
She described an economy that has handled shocks with solid output and a labor market near full employment, and said she sees "increased momentum." She said the drag from tariffs on what households pay has diminished, but flagged new sources of upward pressure tied to the Middle East conflict and to expanding AI-focused data center infrastructure. She also emphasized that pay increases are still subdued, indicating labor costs are unlikely to be the source of rising inflation.
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Cleveland Fed President Beth Hammack warned that a series of supply shocks raises the chances that an "inflationary mindset" could develop, saying "when the environment is more prone to shocks, or the shocks arrive one after another in a period when inflation has been elevated for years, there's a greater risk that an inflationary mindset could take hold." In Washington, Richmond Fed President Tom Barkin pointed to persistent cost pressures over the summer - spanning tariffs, higher tech prices, and rising fuel and healthcare expenses - as reasons inflation could become entrenched, which would make tighter policy necessary.
Markets have taken the hint. On stronger data and firm rhetoric, investors now put the odds of an October rate increase near 65%, up from 53% late last week. The rhetoric is also creating friction with the White House. National Economic Council Director Kevin Hassett said Wednesday, "A lot of the people who weren't appointed by President Trump are giving speeches over the last couple of days, saying we need a lot more hikes."
Officials are openly debating whether more tightening is needed, and investors have moved up their odds for an October move. Keep an eye on the Oct. 28 meeting and on remarks from voting members like Paulson - those signals will set expectations for how restrictive policy might get and how long it could stay there.
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