Philadelphia Federal Reserve president Anna Paulson said Thursday that inflation needs attention, which might require further interest rate hikes.
Paulson, a voting member of the rate-setting committee this year, had been in favor of holding rates steady. But she said that by last week's policy meeting, it was clear that underlying inflation wasn't showing signs of coming down.
The Fed's rate hike last week, she said in a speech in Philadelphia, "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.
"Looking ahead, if conditions evolve as I expect, some modest further tightening may be warranted," Paulson added.
She noted that while tariff-related price pressures have eased, pressures from the conflict in the Middle East and the AI build-out have increased. At the same time, Paulson said she sees a resilient economy that's showing some signs of increased momentum despite tariffs and higher oil prices. She noted that consumer spending has been strong, the AI build-out is driving investment, and the labor market is stable.
"Underlying inflation, however, remains stubbornly elevated," Paulson said. "Against this backdrop, the risk of persistently elevated inflation had increased."
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Elsewhere, New York Fed president John Williams, who had seemed to believe inflation might be coming down on its own, reportedly said this morning in London, "I don't think the data have suddenly changed on us."
He said AI demand is generating inflation in some sectors, but he is not seeing a broad, cyclical imbalance. When asked about the latest interest rate projections put out by his colleagues, he noted that the median suggested another rate hike may be appropriate by the end of the year.
"That seems to me to be a reasonable way of thinking about it, but we'll have to see," Williams said.
All this comes after Fed governor Michael Barr said Wednesday that further interest rate hikes are needed to bring down sticky inflation.
Markets are moving to price in higher chances of a second rate hike in October, with odds now better than 60%, according to CME Group.
Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.