By Michael S. Derby
NEW YORK, Feb 17 (Reuters) – Federal Reserve Governor Michael Barr said on Tuesday that another central bank interest rate cut could come somewhere well down the road amid ongoing risks to the U.S. inflation outlook.
“Based on current conditions and the data in hand, it will likely be appropriate to hold rates steady for some time as we assess incoming data, the evolving outlook, and the balance of risks,” Barr said in a speech given before a gathering of the New York Association for Business Economics in New York.
“The prudent course for monetary policy right now is to take the time necessary to assess conditions as they evolve,” he said, adding, “I would like to see evidence that goods price inflation is sustainably retreating before considering reducing the policy rate further, provided labor market conditions remain stable.”
Barr said that while it is reasonable to expect that the tariff pressures that have driven up inflation will abate, the price pressure situation remains one of concern.
“There are many reasons to be concerned that inflation will remain elevated,” he said. “I see the risk of persistent inflation above our 2% target as significant, which means we need to remain vigilant.”
Barr also noted in his remarks that the job market has stabilized and recent data points to this reality. But at the same time, the hiring situation is in a “delicate balance” and “the labor market could be especially vulnerable to negative shocks.”
Last year, the Fed lowered its overnight interest rate target range by three-quarters of a percentage point, to between 3.5% and 3.75%, as it sought to support a softening job market while leaving in place enough restraint in borrowing costs to lower still-high levels of inflation.
Inflation has been pressured by President Donald Trump’s system of trade taxes, which derailed what had been a move lower in the rate of inflation gains. Fed officials left their rate target unchanged at the late January meeting and have been hesitant on balance to note a need for further rate cuts.
In his remarks, Barr also detailed developments in artificial intelligence. On balance, he said that while it appears to be having some impact on the job market, for the most part it is not a major factor weighing on employment levels.
“More broadly, rather than laying off workers, there is evidence that AI adoption is so far leading to reallocation within firms,” Barr said. Even so, “we should be prepared for the possibility that there might be serious short-term disruptions in the labor market, even if the long-term gains to society could be quite favorable.”
AI IMPACTS
AI adoption could also impact Fed policy choices.
“In the longer run, I expect AI will boost productivity and living standards,” Barr said, adding, “I expect that the AI boom is unlikely to be a reason for lowering policy rates.”
Barr noted that so far among the various scenarios AI creates for the outlook, it appears most likely that the technology boosts productivity, helps research and development, but “doesn’t radically transform” the job market. He also said it will be challenging for the Fed to know if AI is causing structural or cyclical changes in the economy.
He also noted that whatever the Fed is doing with monetary policy, it is not moving the needle on the investment that is pouring into the AI sector.
“My sense of the investments today in AI is that they are wildly indifferent” to where the Fed sets the costs of short-term credit, Barr said. He noted investment in the sector boomed when the Fed was raising rates and also boomed when rates were coming down, amid a winner-takes-all mentality in the sector.
(Reporting by Michael S. Derby in New York; Editing by Andrea Ricci and Matthew Lewis)
Comments