MNI: Barr Says Fed Should Be Cautious About Further Rate Cuts

The Federal Reserve’s price stability goal faces significant risks and, given uncertainty about the economic outlook and the state of the Fed's labor market goal, a cautious approach to rate cuts will help the central bank balance risks to both sides of the dual mandate goals, Fed Governor Michael Barr said Thursday. 

"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," Barr told the Economic Club of Minnesota in prepared remarks.

"We are currently in a challenging position, because the risks to both sides of the FOMC’s mandate—employment and inflation—are elevated," said Barr, who expects core PCE inflation to end the year over 3%. 

Common sense suggests a high level of uncertainty should warrant cautious policy action, he said. (See: MNI POLICY: Fed Set To Keep Cutting Rates Despite Missing Data) 

"The Brainard principle, developed by economist William Brainard, holds that when there is considerable uncertainty about the consequences of a policy action, the recommended course is to move more gradually than would otherwise be the case. I believe that principle applies now."

LOOK THROUGH SKEPTIC

The Fed governor expressed concerns that, if the median official in the September SEP is correct, then headline PCE inflation will not return to the Fed's 2% target until the end of 2027, more than two years from today and six and a half years since inflation began rising in 2021. "This would be the longest period of PCE inflation above 2% since a seven-year stretch that ended in 1993," he said. 

That "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 said. 

Barr is skeptical of assurances that the central bank should fully “look through” higher inflation from import tariffs. "The tariff hikes have boosted core goods inflation, and at the same time progress on core services inflation has stalled," he said. 

Still, with the easing in output growth and the likelihood of tariffs and labor supply weighing on the economy in the months ahead, Barr said the central bank needs to be prepared for the possibility that the softening in the labor market will become something worse, especially if there is a further adverse shock to demand.