FED: Gov Barr: Uncertainty Means FOMC Should Move Cautiously

Gov Barr's speech on "The Economic Outlook and Monetary Policy" Thursday appears to confirm MNI's assumption that he was the most hawkish of the 8 permanent voters on the FOMC as of the September meeting. More specifically, he's probably one of the 7 on the 19-member FOMC who don't see further cuts this year, and the only permanent voter in that category. He calls for a "cautious" approach on adjusting rates and unlike many of his colleagues, doesn't suggest that some further easing toward a more neutral stance is warranted.

• Overall, "Common sense would indicate that when there is a lot of uncertainty, one should move cautiously.. I believe that principle applies now, and that 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. If we see inflation moving further away from our target, then it may be necessary to keep policy at least modestly restrictive for longer. If we see heightened risks in the labor market, then we may need to move more quickly to ease policy. The FOMC can, and I believe would, act forcefully to stabilize the economy if necessary. I think a cautious approach will help us to balance the risks to both sides of our mandate as we continue to assess the economic outlook."
• He says that "I believe the Federal Reserve's price stability goal faces significant risks". He points out the latest FOMC median projections show that PCE is not expected to return to target until end-2027, which would mark the longest period above 2% since a 7-year period that began in 1993. "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."
• He's "skepical" of the notion that tariff-related inflation should be looked through as a one-off, with pre-tariff inventory buildups for instance dampening the immediate effect on prices. And "the so far modest impact of tariffs on inflation probably means a much longer-lasting rachet upward, potentially affecting expectations in a way that makes the job of taming inflation harder...I am skeptical of assurances that we should fully "look through" higher inflation from import tariffs. While, in principle, tariffs are a one-time increase in prices and should not sustainably raise inflation, that may not be the case if prices keep rising month after month and affect expectations. There has been nothing "one-time" or predictable about these tariff increases, which have ratcheted upward this year on particular countries and particular sectors in a series of steps. At some point, businesses and consumers could start to make pricing, spending, and wage decisions based on their belief in higher future inflation, thereby driving a cycle of persistence."
• That said, he acknowledges - as has much of the broader Committee - that a softer labor market could mean that those inflation risks are mitigated. And "even if the labor market is still roughly in balance, the fact that this balance is being achieved from simultaneous slowing in labor supply growth and in hiring suggests that the labor market is more vulnerable to negative shocks...experience shows that when labor markets turn down, it can happen suddenly. With job growth near zero for the past several months, the labor market could decline precipitously if the economy is hit with another shock."