Paulson backs the July hold but warns persistently elevated inflation could force the Fed's hand
Philadelphia Federal Reserve President Anna Paulson, president and CEO of the Federal Reserve Bank of Philadelphia, said Tuesday she backed last week's decision to hold the federal funds rate steady at 3.5% to 3.75%.
She made clear, however, that more restrictive policy remains an option if inflation fails to keep moving toward the central bank's 2% target.
Her comments, delivered in a published essay and her first public interview since the July 30 Federal Open Market Committee (FOMC) vote, landed in the same week that a four-week run of increases pushed the 30-year fixed mortgage rate to a year-high, according to Freddie Mac data.
"The recent improvement in some inflation data is welcome," Paulson said in an essay titled "Keeping an Open Mind."
"It is a step in the right direction, but it is only one step." She said gathering more information about the trajectory of underlying inflation, the variable she is most focused on, is her immediate priority.
Two scenarios driving the rate debate
Paulson outlined two possible readings of how current policy is affecting inflation.
In the first, the rate level is mildly restrictive and will return inflation to the 2% target in an acceptable time frame. She pointed to moderate wage growth, constrained housing activity, and early signs of weakening consumer demand.
One telling data point: the chief executive of a large consumer goods manufacturer told her his firm was holding prices fixed because shoppers had become acutely price sensitive.
In the second scenario, current policy is not restrictive enough. Inflation has run above target for more than five years, and even stripping out tariff and energy effects, Paulson estimates underlying inflation at between 2.4% and 2.8%.
The Fed's preferred gauge — the Personal Consumption Expenditures (PCE) index — registered 3.3% on a core basis in June 2026, per the Commerce Department, down from 3.4% in May but still well above target.
"Persistently elevated inflation suggests more restrictive policy may be needed," she said.
The Fed’s July hold may be just the calm before the storm.
— Mortgage Professional America Magazine (@MPAMagazineUS) July 31, 2026
Veteran broker Melissa Cohn says the market’s sharp selloff signals investors were bracing for a hike — and that September is shaping up as the moment for the Fed to act.https://t.co/RczSsOrCqD
What the 9-3 split signals for brokers
The July 30 vote was 9-3 in favor of holding. Beth Hammack of the Cleveland Fed, Neel Kashkari of the Minneapolis Fed, and Lorie Logan of the Dallas Fed dissented in favor of an immediate quarter-point increase, the first three-way dissent since 2016.
Mike Fratantoni, SVP and chief economist at the Mortgage Bankers Association (MBA), told Mortgage Professional America the split carried an unmistakable message.
"The FOMC's decision to hold the federal funds target at its current level, coupled with the three dissents at this meeting, with each of these dissenting members preferring to hike rates now, indicates that the Fed is likely moving into a hiking cycle soon," Fratantoni said.
New York Fed President John Williams similarly signaled this week that the central bank stands ready to hike if price pressures fail to return to target by 2028.
With second-quarter GDP growth falling short of forecasts while core inflation stays well above the Fed's target, the path to meaningful rate relief for borrowers continues to narrow.
Paulson said she is watching for sustained improvement in inflation data before taking any action. "The incoming evidence will clarify which path we're on and what adjustments, if any, may be needed," she said.
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