Philadelphia Fed President Paulson content with rates at current level, but keeping an open mind

• Paulson believes underlying inflation is around 2.4%-2.8%, excluding energy shocks and tariffs, while the Fed's primary measure showed 3.3% in June
• She supports maintaining 'mildly restrictive' policy but will remain open to recalibrating rates if inflation progress stalls
• The policymaker is keeping an open mind about potential changes Chairman Kevin Warsh discussed, including reducing the frequency of FOMC meetings from eight per year

Summary

Key Takeaway: Philadelphia Federal Reserve President Anna Paulson expressed confidence that the current federal funds rate of 3.5%-3.75% is adequate to return inflation to the Fed's 2% target, though she remains open to policy adjustments if progress stalls.

Main Points

In her first CNBC interview, Paulson stated that maintaining "mildly restrictive" monetary policy is necessary to bring underlying inflation back to target levels. She voted with the Federal Open Market Committee (FOMC) majority last week to hold rates steady, describing it as "not a close call" despite a 9-3 split among committee members.

Inflation Data: Paulson estimates underlying inflation—excluding energy shocks, tariffs, and other temporary factors—is currently between 2.4%-2.8%. This contrasts with the June PCE (Personal Consumption Expenditures) reading of 3.3% reported by the Commerce Department.

Forward Guidance: While confident in the current stance, Paulson emphasized the need to see continued progress on inflation reduction. If inflation fails to move lower from current levels, she indicated willingness to "recalibrate monetary policy," signaling potential rate increases remain on the table.

Policy Discussion: Paulson expressed openness to structural changes proposed by Chairman Kevin Warsh, including potentially reducing the frequency of FOMC meetings from the current eight per year, calling such discussions "healthy."

Market Implications: The Fed's continued rate hold reflects growing confidence that current policy is sufficiently restrictive, though the divided vote and conditional forward guidance suggest officials remain data-dependent and prepared to adjust if inflation progress disappoints.