Federal Reserve Governor Michael Barr stated that policymakers are well-positioned to keep interest rates steady, noting that factors such as Middle East conflicts complicate the central bank's efforts to return inflation to its 2% target. Barr emphasized that the impact of tariffs on inflation could persist beyond this year and pointed out that both non-housing services inflation and core inflation—which excludes volatile food and energy categories—remain elevated.
In a speech delivered Thursday at the Brookings Institution in Washington, Barr remarked, "Given the considerable uncertainty surrounding the potential effects of Middle East developments on the U.S. economy, along with other factors I’ve noted, it is reasonable to take time to assess the situation. Our current policy stance places us in a favorable position to remain steady while evaluating incoming data, evolving forecasts, and the balance of risks."
The Fed held its benchmark interest rate unchanged for the second consecutive time last week, a move Barr expressed support for. Policymakers cited heightened uncertainty in the economic outlook, partly due to sharp increases in oil prices stemming from conflict involving Iran and Israel.
Barr indicated that if the conflict ends quickly, its impact on inflation and economic activity would likely be limited. "However, should the conflict persist, a sustained surge in energy and other commodity prices could exert broader effects on prices and economic activity," he cautioned. "We have already experienced five years of elevated inflation, and with short-term inflation expectations rising again, I am particularly concerned that another price shock could push up longer-term inflation expectations."
Central bank officials consider managing public expectations about future inflation crucial for containing price pressures. Barr also noted that low and stable unemployment reflects a balance between job creation and a shrinking labor force. "Nevertheless, low levels of hiring may leave the labor market vulnerable to shocks, making continued vigilance over labor market conditions necessary," he added.
On regulatory matters, Barr criticized a series of initiatives promoted by Fed Vice Chair for Supervision Michelle Bowman aimed at reducing banking oversight, including plans to ease capital requirements for large banks. Barr, who previously held Bowman’s role, argued that the combined effect of these changes "would reduce the resilience of the banking system." He warned, "The safety and soundness of the banking system rely on trust, and I am concerned we are eroding that trust."
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