Philadelphia Fed’s Paulson says more rate increases may be needed to reach 2% inflation target

• The FOMC raised its benchmark rate to a target range of 3.75%-4% at its most recent meeting
• Underlying inflation is running at 2.5%-3%, Paulson said, well above the Fed’s 2% goal
• Traders are pricing a 64% chance of another rate hike at the October FOMC meeting

• 3.75%-4% current Fed funds target range after last week’s quarter-point hike
• 2.5%-3% underlying inflation rate versus the Fed’s 2% target
• 64% market-implied odds of an October rate hike from the FOMC
• 4.8% futures-implied Fed funds rate by end of 2027, four hikes above current level

Speaking in prepared remarks at a fintech conference in her home district, Paulson said the Fed’s most recent quarter-point increase “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.” She added that “if conditions evolve as I expect, some modest further tightening may be warranted,” according to reporting by CNBC.

Paulson says underlying Inflation still sits near 2.5%-3%

Paulson acknowledged that price pressures eased somewhat over the summer. But she said core inflation trends remain stuck well above the central bank’s stated goal.

“The best I can say about underlying inflation this year is that it hasn’t gotten worse,” Paulson said.

The best I can say about underlying inflation this year is that it hasn’t gotten worse.

Anna Paulson, President, Federal Reserve Bank of Philadelphia

She noted that the gap between the 2.5%-3% underlying rate and the Fed’s 2% target “has shown little signs of closing.” That framing suggests Paulson views last week’s hike, which lifted the funds rate to 3.75%-4%, as insufficient on its own to close the gap without further action.

Treasury yields hit levels not seen since 2004

Paulson’s comments arrived as bond markets moved further ahead of the Fed’s own guidance. Longer-duration Treasury yields climbed again this week, reaching levels not seen since 2004, a stretch of more than two decades.

Traders are now pricing a 64% probability that the FOMC hikes again at its October meeting. A further move is expected in January, according to market pricing referenced in CNBC’s report.

Fed funds futures contracts imply a rate of 4.8% by the end of 2027. That level would represent four additional quarter-point increases from the current 3.75%-4% range, a materially steeper path than the Fed has laid out in its own public commentary to date.

Williams calls another hike before year-end ‘Reasonable’

New York Fed President John Williams added to the hawkish tone earlier Thursday. He said it is “reasonable” to expect another rate hike before the end of the year.

Neither Paulson nor Williams specified whether their preferred timing lines up with the October meeting that markets are currently favoring at 64% odds, or with the January move traders also expect. Their comments and the CNBC report do not include a response from FOMC members who have publicly favored a slower pace, leaving that side of the debate unaddressed in this reporting.

The BlockWest read. A funds rate path toward 4.8% by 2027 raises the discount rate applied to every long-duration asset, digital or otherwise, and tightens the funding backdrop for leveraged crypto positions and treasury-heavy balance sheets alike. Firms holding Bitcoin or other reserve assets on corporate books should be modeling carrying costs against a higher-for-longer rate regime, not the pause many had priced in earlier this year.

The next data point arrives at the FOMC’s October meeting, where futures markets currently assign a 64% probability to another quarter-point hike, with a subsequent move already expected by traders in January.

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