Fed's Paulson keeps 'open mind' on rate policy outlook amid high inflation

By Michael S. Derby

Aug 4 (Reuters) - Federal Reserve Bank of Philadelphia President Anna Paulson said on Tuesday she was keeping an "open mind" about what lies ahead for monetary policy in an outlook that could call for ‌higher rates.

"The recent improvement in some inflation data is welcome" and "it is a step in the right direction, ‌but it is only one step," the official said in a statement from her bank.

When it comes to what the central bank will do next with monetary ​policy in the current environment, Paulson said: "I am committed to keeping an open mind as I assess the evidence and determine the appropriate path for policy."

"My highest priority is delivering 2% inflation while sustaining full employment," she added.

Paulson said in a CNBC appearance after her statement's release that if the Fed needs to take a stronger response to lowering inflation, it "could be higher rates, could be, you ‌know, same rates for longer."

It was her ⁠first public comment since last week's interest-rate-setting Federal Open Market Committee meeting.

Officials then held their overnight interest rate target range steady at between 3.5% and 3.75% amid inflation pressures that remain well above the ⁠Fed's 2% target. Paulson said she supported the Fed's call to hold its target rate steady.

The persistence of inflation above target helped drive three officials to dissent and vote in favor of a rate hike. Fed Chairman Kevin Warsh, in a press conference following the Fed's meeting, ​declined to ​provide guidance on where he thinks monetary policy should be heading.

In ​her statement, Paulson said the data suggests Fed policy ‌is putting some restraint on the economy and that she will be watching the data to help her form her decision on monetary policy.

"If policy is appropriately calibrated, I would expect to see growing signs that inflation is coming down," Paulson said, adding, "if instead underlying inflation remains stubbornly elevated, the passage of time without progress would itself signal that more restrictive policy is needed."

Paulson said the job market has stabilized and inflation is "too high."

On the energy front, "oil prices have since jumped and remain volatile, but the ‌brief period of Middle East stability demonstrated that supply shocks can be ​temporary, reinforcing the case for looking through such disruptions when setting monetary policy."

Paulson ​explained on CNBC why the central bank should be ​careful about using monetary policy to deal with supply shocks.

"We saw there that when we had ‌the lull in the conflict in the Middle East, ​oil prices came down" and there ​was relief on inflation pressures, Paulson said. "If I had tried to affect that through monetary policy...I would have been...too late, it wouldn't have hit at the right time, so... that's the logic for looking through supply shocks," she said.