Federal Reserve Governor Michael Barr has called for a cautious approach to any upcoming interest rate reductions. Barr warned that tariffs could result in persistent inflation.
In remarks prepared for an event with the Economic Club of Minnesota on Thursday, October 9, the Fed Governor noted that common sense suggests a cautious approach is suitable in the face of increased uncertainties.
With this, he urged Fed officials to exercise caution when changing policy, allowing them to gather more data, update their predictions, and gain a better understanding of the risks involved. Meanwhile, reports from sources have highlighted that the US central bank lowered its key interest rate by 0.25% last month, marking the first cut of the year.
Barr points out the uncertainties surrounding the current inflation status
Barr illustrated his strong support for a cautious approach to decision-making on further interest rate cuts. He noted that lawmakers currently encounter hardship due to concerns about reduced employment and increasing inflation.
Regarding the situation, a reliable source conducted a median estimation and discovered that officials expect two more rate cuts later this year, as forecasted in the decision released with this update.
Barr also took notice of the effects of US President Donald Trump’s tariff policies on inflation. He mentioned that, although the short-term impacts of Trump’s tariff policies on inflation have been less significant than anticipated by experts, there is still a likelihood of price hikes in the future as firms use up their current stock and work to maintain profit margins by raising prices.
He further explained that although tariffs are meant to cause temporary price hikes and should not result in lasting inflation, this is not the case if prices continue to increase each month and influence what individuals expect.
“There has not been anything ‘one-time’ or easy to predict about these tariff increases,” he added. Based on his argument, businesses and consumers might start making decisions about spending, pricing, and wages because they believe that inflation will continue to rise, creating a pattern of ongoing increases.
Barr calls on individuals to be cautious of risks associated with the job market
Concerning the jobs market, Barr said it is difficult to determine how much of a recent drop in job creation is caused by decreased demand. Afterwards, he cited signs indicating that labor supply and demand are still roughly balanced, such as the number of job openings relative to the number of unemployed workers.
However, Barr raised concerns that even though the job market status is currently balanced, this balance results from a significant drop in both the number of individuals seeking jobs and the number of new hires. This illustrates the likelihood that the job market will face greater threats if something adverse were to happen.
The Federal Reserve’s next meeting on interest rates is scheduled for October 28- 29. During a question-and-answer session after his speech, Barr hinted that they will decide whether to reduce rates again at their next meeting.
Although this decision could enhance the job market, it may also create significant inflationary problems. Hence, making this decision is a difficult task.
In the meantime, a former US Federal Reserve Governor, Larry Lindsey, has reportedly withdrawn his name from a list of candidates running for the Fed chair position. Lindsey explained his actions, stating that all he wanted was to be happy and focus on his life, and did not want to give that up for the challenges of public life.
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