Fed's Barr warns of decisive rate hike if inflation stays stubborn

Federal Reserve Governor Michael Barr has cautioned that the US central bank could be forced to raise interest rates decisively if inflation does not show sufficient signs of easing. His remarks, delivered at the Second-Chance Lending Forum in Washington, come just weeks before the Federal Open Market Committee's (FOMC) scheduled meeting on September 15-16, 2026.

Barr described the US economy as solid, pointing to a stable labour market, relatively low unemployment, and resilient consumer spending. He noted that growth has been partly supported by a boom in AI-related business investment and the expansion of AI capabilities.

However, inflation remains the central concern. Barr stated that inflation has stayed above the Fed's 2 per cent target for an extended period, calling it "too high." While acknowledging significant progress from a peak of over 7 per cent in 2022 to just above 2 per cent in 2024, he said that progress stalled in 2025.

He attributed renewed price pressures to a series of shocks, including tariffs, the Middle East conflict, and the rapid expansion of AI-related investment. Barr also flagged elevated inflation in core non-housing services, warning that prolonged above-target inflation could allow broader price pressures to take hold.

Barr left the upcoming policy decision data-dependent. He suggested that if incoming data gives confidence that inflation is moving toward the 2 per cent target, policymakers could afford to wait longer before adjusting their stance. Conversely, he issued a clear warning: "If inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates."

Despite the inflation concerns, Barr emphasised the economy's underlying strength, including strong productivity and business formation, which he said gives the Fed room to focus on price stability rather than responding to a sharp economic downturn.