High inflation justifies further ‘gradual’ rate hikes: Fed’s Paulson

The 81st Annual Field Meeting Capstone at the Federal Reserve Bank of Philadelphia featured a speech by Federal Reserve (Fed) Bank of Philadelphia Governor Anna Paulson.

Key remarks

A worsening inflation outlook will prompt more aggressive action from the Fed.

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

How the economy develops will determine the precise path 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 to gradual increases in rates.

Inflation is still a problem, according to the data.

She has backed the Fed’s recent rate decisions.

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

Bringing inflation down leaves the Fed with ‘more work to do’.

Economic strength has exceeded expectations, while the labour market remains robust and stable.

Inflation risks are high, with the effects of AI and energy on inflation difficult to assess.

Dollar consolidates gains

Near 102.25, the US Dollar Index (DXY) is consolidating at the time of writing. Its gains followed the hot Consumer Price Index (CPI) reading.

Fed’s Paulson: Inflation risks sustain hawkish rate-hike stance

At 8.1/10, Paulson’s FXS Speechtracker score signalled a distinctly hawkish message. It exceeded the historical average of 7.6/10, highlighting a tougher stance than the established baseline. Support for further “gradual” rate increases and “somewhat restrictive” policy points to a clear preference for additional tightening. Her warning that the Fed “will move more aggressively if inflation landscape worsens,” also leaves scope for faster action. With underlying inflation stuck between 2.5% and 3%, economic activity stronger than expected and inflation risks high, the Fed still has “more work to do,” she indicated. That combination typically favours the Dollar while weighing on risk-sensitive FX.

A 0.00-point daily change left the FXS Fed Sentiment Index at a still-elevated 145.28. The unchanged reading confirms that broader Fed communication remains firmly hawkish. Although Paulson’s FXS Speechtracker score exceeded the baseline, the index held steady, suggesting markets had already largely priced in a restrictive stance. Its elevated level nevertheless maintains upward pressure on the Dollar against lower-yielding peers.