Fed’s Barr urges caution on rate cuts amid inflation concerns

Investing.com -- Federal Reserve Governor Michael Barr called for a cautious approach to further interest rate cuts on Thursday, emphasizing inflation risks while acknowledging vulnerabilities in the labor market.

"The FOMC should be cautious about adjusting policy so that we can gather further data, update our forecasts, and better assess the balance of risks," Barr said in a speech to the Economic Club of Minnesota, his first monetary policy remarks since June.

Barr described the Fed as being in a "challenging position" with no risk-free path forward, borrowing language from Fed Chair Jerome Powell. While he supported September’s quarter-percentage-point rate cut, much of his speech focused on inflation concerns, particularly those related to tariffs.

The Fed governor forecasts that core Personal Consumption Expenditures Price Index will rise above 3% by year-end, and noted that Fed officials don’t expect headline inflation to reach the 2% target until the end of 2027. This would mark the longest stretch of PCE inflation above 2% since a seven-year period ending in 1993.

"After the high inflation Americans have endured, two more years would be a long time to wait for a return to our target, and that possibility weighs on my judgment for appropriate monetary policy," Barr stated.

He expressed skepticism about the Fed’s ability to "completely look through tariff-driven inflation" and suggested the current policy rate remains "modestly restrictive." Barr also noted that since the Fed’s September meeting, consumer spending has remained strong, PCE inflation has strengthened, and new tariffs have been announced.

Regarding the labor market, Barr indicated that low payroll growth could signal worse conditions ahead, but also acknowledged that continued economic resilience could lead to stronger hiring. He described the current labor market as "roughly balanced" but potentially vulnerable to shocks.

Barr added that recent spending data suggests GDP growth remained strong in the third quarter, while noting it’s difficult to judge whether the federal government shutdown will significantly impact the overall economy.

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