Fed’s Barr says current policy rate is only modestly restrictive

Investing.com -- Federal Reserve Governor Michael Barr stated Thursday that the Fed’s current policy rate is only "modestly restrictive" despite being well above his estimate of the long-run neutral rate.

"If I were to take my long run estimate, I would say it was quite restrictive," Barr explained, but added that the long-run neutral rate isn’t the appropriate benchmark for assessing how the policy rate is currently affecting the economy.

Barr pointed to various factors influencing his assessment, including "the way in which the economy is being affected by supply and demand shocks, given what’s going on in financial markets and in financial conditions, given what’s going on in the labor market, given what’s going on with inflation."

Fed’s Neel Kashkari expressed agreement with Barr’s remarks.

Regarding inflation, Barr noted that the Fed is not seeing a "generalized spillover of tariffs into services inflation," though he mentioned that some components of services inflation stem from higher stock prices.

On artificial intelligence, Barr predicted that AI will have "profound effects on economy in medium- and long-term" but suggested its short-term impacts "are probably not as big as people think." He acknowledged that data shows AI may be having some labor market effect already, but believed AI will mostly be "complementary" in the labor market and "significantly boost productivity."

Barr observed "a lot of resilience in US economy" while suggesting there might be "two economies right now, with upper income doing well, and lower-income struggling."

He also indicated that the long-term neutral rate "has gone up a little bit, based on productivity from generative AI."

Regarding government data collection, Barr emphasized the need for more investments to improve response rates and expressed hope that government data delayed by the shutdown would be available in a timely manner.

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