Federal Reserve Governor Michael Barr said further rate hikes are likely needed because inflation is not clearly headed back to the Fed's 2% goal, pointing to high energy prices and AI-driven investment as the culprits. He expects growth to pick up in the second half of 2026 even as the labor market stays solid.
Federal Reserve Governor Michael Barr made a renewed case for further rate hikes on Tuesday, saying high energy prices and a surge in AI-related investment have knocked the central bank off course on its path back to 2% inflation. According to Reuters: "I don't yet see a clear trend toward a timely return to 2%," Barr said in remarks prepared for the Detroit Economic Club.
Inflation risk outweighs labor risk
Barr said risks to hitting the inflation target have increased while risks to the labor market have receded, with business investment and consumer spending keeping employment solid. He said the Fed needs to recalibrate policy so that further adjustments bring inflation down in a timely fashion, balancing both sides of its dual mandate.
Markets price another October move
Financial markets are betting heavily that the Fed will follow its rate hike earlier this month with another quarter-percentage-point increase at its October 27-28 meeting. That would extend a tightening cycle already reflected in the Fed's own projections: officials lifted the benchmark rate by 25 basis points earlier this month, to a range of 3.75% to 4.00%. The dot plot from that meeting shows 16 of 18 FOMC participants expect at least one more increase before the end of 2026.
AI spending cuts both ways
Barr said the conflict in the Middle East has pushed up global oil prices, while the AI buildout has boosted demand for certain high-tech goods, raising costs for businesses and consumers. He expects AI investment to keep driving strong economic activity over the coming year and is optimistic the technology will eventually lift productivity and allow faster, non-inflationary growth, though he said the timing of those gains is uncertain. He added that we should be prepared for the possibility that there might be serious short-term disruptions in the labor market as AI adoption spreads. Right now, what is clear is that inflation is too high, he said.
Sources: Investing.com, InvestingLive, Crypto Briefing
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