Federal Reserve Governor Michael Barr warned about a long and drawn-out battle against inflation, hinting that investors seeking rate cuts may have to wait a while longer.
Tariffs Driving Inflation Again
Speaking at the Economic Club of Minnesota Luncheon on Thursday, Barr said that it might take until the end of 2027 for price increases to return to the central bank's 2% target. “The median FOMC participant estimates that headline PCE inflation will not return to our 2 percent target until the end of 2027,” he said.
Barr notes that this is the “longest period of PCE inflation above 2 percent since a seven-year stretch that ended in 1993,” while adding that it has been driven in-part by the sharp rise in tariffs this year.
“This rate has risen sharply this year, reaching about 11 percent in August, and is likely to rise further in the near term,” he said of the effective tariff rate. “The tariff hikes have boosted core goods inflation, and at the same time progress on core services inflation has stalled.”
Looking ahead, Barr signaled that the Federal Reserve may need to keep interest rates higher for an extended period if inflation continues to drift away from target. “If we see inflation moving further away from our target, then it may be necessary to keep policy at least modestly restrictive for longer,” he said.
Although he backed a 25 basis point cut in September, Barr stressed the need for caution. “Common sense would indicate that when there is a lot of uncertainty, one should move cautiously,” he said. “I believe that principle applies now.” He concluded by saying that its a “long time to wait, and that possibility weighs on my judgment for appropriate monetary policy.”
Markets Continue To Anticipate More Cuts
The markets continue to anticipate more rate cuts, with a 94.6% and 81.5% probability of 25 basis-point cuts in October and December, respectively, according to the CME Group’s FedWatch tool.
Macro expert Craig Shapiro of The Bear Traps Report, however, has taken notice of Barr’s hawkish stance in his speech, which he finds surprising.
This week, financial analyst Gordon Johnson accused the Federal Reserve of “grossly negligent” behavior for failing to curb inflation. He said, “we have a reckless Federal Reserve that is grossly negligent in its failure to stop costs from rising,” and thereby making the case of holding rates steady.
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