Fed's Paulson Says She's Keeping an Open Mind on Rates as Three Officials Push for a Hike

Philadelphia Federal Reserve President Anna Paulson said Tuesday she's keeping an "open mind" about where interest rate policy goes next, and that open mind includes the possibility of higher rates, not just cuts.

Paulson made her comments in a statement from the Philadelphia Fed, marking her first public remarks since last week's Federal Open Market Committee meeting, according to Reuters. She said she supported the FOMC's decision to hold the federal funds rate steady at a target range of 3.5% to 3.75%.

That vote wasn't unanimous. Three officials dissented and voted for a rate hike instead, according to Reuters. Inflation remains well above the Fed's 2% target, and those three policymakers apparently think the central bank isn't being aggressive enough.

Paulson isn't ready to join them yet, but she's not closing the door either. "The recent improvement in some inflation data is welcome," she said, according to Reuters, "and it is a step in the right direction, but it is only one step."

Underlying inflation is running between 2.4% and 2.8%, according to Paulson's own statement reported by Reuters. That's not catastrophic, but it's also not 2%. Paulson said that's exactly what she's watching most closely.

"This type of price pressure has been elevated for a long time, and it is what I am most focused on as I evaluate our progress toward the 2 percent target," she said, per Reuters.

Paulson laid out a simple test for herself and, by extension, for the rest of the Fed. If policy is calibrated correctly, inflation should show growing signs of coming down. If it doesn't, that's itself a signal.

"If policy is appropriately calibrated, I would expect to see growing signs that inflation is coming down," Paulson said, according to Reuters. "If instead underlying inflation remains stubbornly elevated, the passage of time without progress would itself signal that more restrictive policy is needed."

No progress means rates might need to go up, not down. That's a message Wall Street doesn't love hearing, especially after months of speculation about rate cuts.

Paulson also addressed the job market, calling it "stabilized" while repeating that inflation is "too high," according to Reuters. She's threading a needle the Fed has been trying to thread for years now: keep unemployment low without letting inflation run hot.

On energy, Paulson pointed to the on-again, off-again Middle East conflict as a case study in why the Fed shouldn't overreact to oil price swings. "Oil prices have since jumped and remain volatile, but the brief period of Middle East stability demonstrated that supply shocks can be temporary, reinforcing the case for looking through such disruptions when setting monetary policy," she said, according to Reuters.

A separate essay from Paulson, cited by Morningstar via Dow Jones Newswires, framed her broader economic outlook as largely unchanged despite a string of headline-grabbing events. "The conflict in the Middle East has repeatedly subsided and then flared up again. Old tariffs expired, new tariffs were put in place. More artificial intelligence investments were announced, and new AI models were released," Paulson wrote. Her conclusion: none of that has moved the fundamental picture much.

Fed Chairman Kevin Warsh, in his press conference after last week's meeting, declined to give forward guidance on where policy is headed, according to Reuters. That leaves individual officials like Paulson to fill in the gaps with their own public statements, and it means markets are parsing every word from twelve different voting members instead of getting a clean signal from the top.

The Fed held rates steady, three officials wanted to hike anyway, and the person now speaking publicly about it is telling you that a hike is still on the table if inflation doesn't cooperate. Anyone betting heavily on rate cuts this year is betting against Paulson's own stated framework and against three sitting FOMC members who already voted the other way.

The next scheduled data points worth watching are the upcoming inflation reports the Fed will use to judge whether its "one step" of progress becomes a trend. Until then, Paulson and her colleagues aren't committing to anything, and they're saying so out loud.