Anna Paulson, President and CEO of the Federal Reserve Bank of Philadelphia and a voting member of the Federal Open Market Committee (FOMC) in 2026 through the bank's rotating regional president seat, declared returning inflation to 2 percent non-negotiable and opened the door to more rate increases.

Speaking in prepared remarks to open the Philadelphia Fed's 10th Annual Fintech Conference on Thursday, Paulson said she supported last week's 25 basis point hike and that some modest further tightening may be warranted if conditions evolve as she expects. Her case rests on inflation that refuses to budge.

Underlying inflation is running at about 2.5 to 3 percent, well above the target, and the best she can say is that it hasn't gotten worse. She pointed to the AI buildout as one driver, noting that import prices for computers and computer accessories have climbed 24 percent over the last 12 months.

The economy, meanwhile, is holding up. Real consumption growth accelerated to an annualized 3.4 percent in the second quarter, and the Atlanta Fed's GDPNow model points to above 4 percent in the third, even with consumer sentiment low. The labor market is holding steady, too. Unemployment sits at 4.1 percent, down from 4.3 percent in January and consistent with maximum employment in her view, and job gains averaged 74,000 per month over the summer. Modest wage growth tells her labor costs are not driving inflation.

Key Quotes:

Monetary Policy

  • The Federal Open Market Committee answers to two mandates: maximum employment and price stability.

  • Right now, it's price stability that needs attention.

  • Inflation has been too high for too long.

  • For some context — this is the 10th Annual Fintech Conference, and it's the sixth consecutive gathering where inflation has been above 2 percent.

  • Coming into the summer, I was asking myself whether policy was restrictive enough to deliver 2 percent inflation — or whether a somewhat higher federal funds rate might be needed.

  • By September, it was clear that inflation risks were growing.

  • I supported raising the federal funds rate by 25 basis points at last week's meeting.

  • This recalibration brings policy closer to what I believe is needed to return inflation to 2 percent at a pace that appropriately balances inflation risks with risks to the labor market.

  • Looking ahead, if conditions evolve as I expect, some modest further tightening may be warranted.

  • But let me be clear: returning inflation to 2 percent is non-negotiable, and I will support the policy path that gets us there while carefully weighing risks to the labor market along the way.

Inflation

  • Underlying inflation, however, remains stubbornly elevated.

  • At a moment when multiple overlapping shocks are buffeting the headline numbers, underlying inflation can provide a clearer read on where prices are actually headed.

  • Underlying inflation is running in a range of about 2.5 to 3 percent, well above our 2 percent target, and that gap has shown little sign of closing.

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

  • Underlying inflation showed little to no progress.

  • Tariff-related price pressures eased, but price pressures from the conflict in the Middle East and the AI buildout grew.

Growth & Economy

  • Despite shocks from tariffs and high energy prices, output growth has been solid, perhaps even strengthening somewhat.

  • I see a resilient economy that is showing some signs of increased momentum.

  • Despite shocks from tariffs and the conflict in the Middle East, recent consumption growth has been strong, the AI buildout is driving investment, and the labor market is stable.

  • Strong business investment, fueled by the artificial intelligence buildout, continues to power the economy.

  • Economic growth is also being supported by the consumer.

  • Consumer sentiment is low. But the spending data tell a different story.

  • After a slow start to the year, real consumption growth accelerated to an annualized rate of 3.4 percent in the second quarter, and the Atlanta Fed's GDPNow model is currently pointing to above 4 percent consumption growth in the third quarter.

  • Economic growth firmed up a little, and the labor market strengthened a touch.

Labor Market

  • Turning to the labor market, conditions here are stable and seem to have improved a bit.

  • The unemployment rate was 4.3 percent in January and currently sits at 4.1 percent — a rate consistent with what I consider to be maximum employment.

  • Until this spring, hiring in healthcare and social assistance had largely carried the labor market. Since then, hiring has broadened to include a wider range of industries, and over the summer, total job gains averaged a solid 74,000 per month.

  • Wage growth, though, has been modest, and employers report few pressures to raise wages. These are signs that labor costs are not driving inflation pressures.

AI & Productivity

  • The AI buildout is one factor keeping underlying inflation stubbornly high.

  • While the impact of AI on productivity remains unclear, its effect on prices is not.

  • The scale of AI investment is adding meaningfully to demand for everything from computer chips to construction materials and that demand is showing up in prices.

  • Import prices for computers and computer accessories are up 24 percent over the last 12 months.

  • Plans for new data centers are multiplying here in Pennsylvania and beyond, although not without controversy.

Financial Conditions

  • This momentum in aggregate consumption growth is likely being bolstered by the stock market.

  • Although I'd note that this is not a boost that is being experienced evenly.

On the Ground / Real Economy Feedback

  • My regional economic experts assure me that manufacturing strength extends well beyond AI.

  • The Philadelphia Fed's Manufacturing Business Outlook Survey continues to point to continued expansion.

  • Most firms anticipate increasing activity and investment in the months ahead.

  • Businesses tell me orders keep climbing, and that's stretching delivery times and creating backlogs.

  • One technology company noted that price pressures from the AI buildout are rippling through the entire electronics supply chain — from circuit boards to capacitors.

Fintech & Financial System

  • At our first event, the line separating fintech and traditional finance was relatively clear. Ten years later, that line has blurred.

  • Some traditional financial institutions — both large and small — are embracing innovations like cryptocurrencies and tokenized collateral.

  • Some fintech companies are pursuing traditional banking charters.

  • And everyone is trying to adapt to the world of AI.

  • These changes raise important questions about the future of our financial system.

  • And perhaps the most pressing and most challenging issue of all: artificial intelligence.

  • How can we harness this technology to build a better, safer financial system for everyone?

  • By tackling the big questions together, we can help build an innovative, stable, and secure financial system that works for everyone.