High inflation warrants further ‘gradual’ rate hikes, says Fed’s Paulson

At the Federal Reserve Bank of Philadelphia's 81st Annual Field Meeting Capstone, Federal Reserve (Fed) Bank of Philadelphia Governor Anna Paulson gave a speech.

Key remarks

A worsening inflation outlook would prompt the Fed to act more aggressively.

With inflation high, further ‘gradual’ interest rate increases are appropriate.

How the economy develops will determine the precise course of interest rate policy.

A ‘somewhat restrictive’ monetary policy stance is needed.

Raising rates gradually has also allowed Fed officials time to assess the effects.

The economy has had time to adapt thanks to gradual rate increases.

The data indicated that inflation is still a problem.

Has backed the Fed’s latest interest rate decisions.

Between 2.5% and 3% is where underlying inflation remains stuck.

To bring inflation down, the Fed has ‘more work to do’.

The labour market is robust and stable, while the economy has proved stronger than anticipated.

Inflation risks remain high, with the effects of AI and energy on price pressures difficult to assess.

Dollar consolidates gains

Following a hotter-than-expected Consumer Price Index (CPI) reading, the US Dollar Index (DXY) is holding near 102.25 at the time of writing as it consolidates the resulting gains.

Fed’s Paulson Keeps Further Rate Hikes in View as Inflation Risks Persist

An FXS Speechtracker score of 8.1/10, compared with a historical average of 7.6/10, placed Fed’s Paulson above the established baseline and highlighted the distinctly hawkish tone of her remarks. By stressing that the Fed “will move more aggressively if inflation landscape worsens,” while backing further “gradual” rate increases and a “somewhat restrictive” policy stance, she indicated a clear preference for additional tightening without ruling out a faster response. With underlying inflation still stuck between 2.5% and 3%, economic activity stronger than expected and inflation risks high, her assessment that the Fed has “more work to do,” was reinforced. Taken together, these conditions would typically support the Dollar while weighing on risk-sensitive FX.

At a still-elevated 145.28, the FXS Fed Sentiment Index recorded a 0.00-point daily change, showing that broader Fed communications remain firmly hawkish. Although Paulson’s FXS Speechtracker score exceeded the baseline, the unchanged sentiment index suggests that markets had already largely factored in a restrictive policy stance. Its high reading nevertheless maintains upward pressure on the Dollar against lower-yielding peers.