Fed Governor Barr urges caution in adjusting rates due to continued uncertainty

[House Financial Services Committee Holds Hearing On Oversight Of Prudential Regulators]

Federal Reserve Governor Michael Barr said on Thursday that he's skeptical that the Federal Open Market Committee should "fully 'look through' higher inflation from import tariffs."

The series of recent tariff developments have not been predictable. "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," he said in prepared text for a speech at the Economic Club of Minnesota.

As a result, "common sense would indicate that when there is a lot of uncertainty, one should move cautiously."

In mid-September, the FOMC reduced its policy rate [https://seekingalpha.com/news/4495784-federal-reserve-lowers-rate-by-25-basis-points-first-cut-since-december]by 25 basis points to 4.00%-4.25%, a move that he supported. "Monetary policy was and remains modestly restrictive, so it seemed to me appropriate to move the rate a bit closer toward neutral, pending more data and further developments on the economy, the forecast, and the balance of risks," he said.

Barr cited the "Brainard Principle" for his careful approach to future moves. The principle "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, 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," Barr said. [https://www.federalreserve.gov/newsevents/speech/barr20251009a.htm]

If inflation drifts up further, it may be necessary to keep policy "at least modestly restrictive for longer," he said. However, "if we see heightened risks in the labor market, then we may need to move more quickly to ease policy."

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