Fed's Barr: If inflation doesn't moderate, the central bank should raise rates

Federal Reserve governor Michael Barr warned on Tuesday that if inflation does not moderate sufficiently, the central bank should raise interest rates. Speaking ahead of the Fed's policy meeting in two weeks, Barr emphasized that the outlook for inflation and the economy will be the primary focus. He stated that if data trends indicate that inflation is moderating towards the 2% target, the Fed may take a bit more time to assess its policy stance.

However, if inflation fails to show sufficient moderation, Barr indicated that the central bank should take decisive action to raise rates. The Federal Reserve will receive two more readings on consumer and wholesale inflation next week before the September 16 meeting. Despite recent mixed inflation data, Barr emphasized that inflation remains too high, attributing it to various shocks such as tariffs, the Middle East conflict, and rapid AI development.

He expressed concern about the risk of broader price pressures taking hold, a risk he is closely monitoring. Barr viewed the job market as stable with low unemployment and noted that the economy is robust, driven in part by the growth in AI-related business investment. Following his recent speech in Jackson Hole, Wyoming, Fed Chairman Kevin Warsh suggested that current interest rates may not be high enough, sparking speculation that a rate hike could be on the horizon.

Markets are now pricing in a 66% chance of a rate increase for the upcoming September meeting, up from just above 30% before Warsh's remarks.