Federal Reserve Governor Michael Barr said the US central bank should be prepared to raise interest rates if inflation fails to move convincingly towards its 2% target, warning that price pressures could become increasingly difficult to contain after remaining above target for more than five years.
Barr said policymakers could afford to wait for further evidence if incoming data showed that inflation was beginning to moderate. But he signalled that the Federal Reserve may need to respond more forcefully if progress stalls.
“If trends in the data give me some confidence that inflation is moderating on a path to 2%, then I think we can take a bit more time to assess our policy stance,” Barr said Tuesday in remarks prepared for an event in Washington. “However, if inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates.”
Barr's remarks come as Federal Reserve officials debate how to respond to persistent inflation, which has been reinforced by a recent rise in oil prices linked to the Iran war, a new round of tariffs and growing demand associated with the construction of artificial intelligence data centres.
While several policymakers still expect inflation to ease without further monetary tightening, divisions have emerged within the central bank.
At the Federal Reserve's July policy meeting, three regional bank presidents, Neel Kashkari of Minneapolis, Beth Hammack of Cleveland and Lorie Logan of Dallas, dissented in favour of raising interest rates.
Barr now joins other officials who have indicated that further progress on inflation will be necessary before policymakers can become more comfortable with the current policy stance.
The next major test for policymakers will come on September 11, when the latest US consumer price index report is released. The Federal Reserve will then hold its next policy meeting on September 15 and 16.
Expectations of a possible rate increase strengthened last week after Federal Reserve Chairman Kevin Warsh said in a major speech in Jackson Hole, Wyoming, that inflation was not slowing sufficiently and that policymakers would need to respond if price pressures failed to ease.
The comments prompted investors to increase their expectations that the central bank could raise interest rates as early as this month.
Much of Barr's address focused on the employment difficulties faced by people with criminal records and the barriers they encounter when seeking stable work.
He pointed to entrepreneurship as one potential avenue for improving economic opportunities and financial outcomes for people who have struggled to re-enter the workforce.
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