Why Inflation Will Stay Sticky Until 2027: 4 Quarter-Point Hikes Expected

Inflation is technically money but it feels like a tax. The Philadelphia Federal Reserve’s Anna Paulson understands this dynamic well. She confirmed Thursday that she and her colleagues may need to raise interest rates further to bring inflation back to target. This statement comes a week after the Federal Open Market Committee raised benchmark borrowing rates by a quarter percentage point. The hike took the key funds rate to a target range of 3.75 percent to 4 percent. Paulson says this brings policy closer to what she believes is needed to return inflation to 2 percent at a pace that balances inflation with risks to the labor market.

The math on price pressures is frustrating. Although the summer showed some moderating in price pressures, underlying inflation is still running around 2.5 percent to 3 percent. This figure is well above the 2 percent target. The gap has shown little signs of closing. Paulson noted that inflation has held higher even outside of oil supply shocks from the Iran war and tariffs. She explained that the best she can say about underlying inflation this year is that it has not gotten worse. This comment came in prepared remarks for a fintech conference in her home district.

The bond market is pricing in a specific future. Longer-duration Treasury yields have reached highs not seen since 2004. Traders are not optimistic so they are calculating. The CME Group's FedWatch tool suggests a 64 percent chance the FOMC hikes again in October. Following that, they expect another move in January. Fed funds futures contracts are implying a rate of 4.8 percent by the end of 2027. This expectation indicates the possibility of as many as four quarter-point increases ahead.