GOLDEN VALLEY, Minn.—Federal Reserve Vice Chair for Supervision Michael Barr said Thursday the central bank faces a difficult balancing act as both inflation and employment risks remain elevated, signaling a cautious approach to future policy moves.
Speaking at the Economic Club of Minnesota, Barr said the Federal Open Market Committee (FOMC) must navigate a slowing labor market alongside renewed inflation pressures—particularly as tariff hikes continue to push prices higher. He noted that while inflation has fallen sharply since its 2022 peak, it has been rising again in recent months, with core PCE inflation expected to end 2025 above 3%.
Barr attributed much of the recent inflation uptick to higher tariffs, which have driven up import costs and stalled progress on core services prices. He warned that if firms begin passing those costs along, inflation could persist longer than expected, potentially anchoring consumer expectations at higher levels.
The Fed governor also flagged growing vulnerabilities in the labor market. Job creation has slowed significantly since May, and while unemployment remains low at 4.3%, Barr said that masks underlying weakness, with participation and hiring momentum slipping. He cautioned that job losses could accelerate quickly if the economy faces another negative shock.
Barr supported the Fed’s September decision to cut rates by 25 basis points, calling policy “modestly restrictive” but appropriate given the risks on both sides of the Fed’s mandate. However, he said further moves should be measured, invoking the “Brainard principle” that calls for gradual policy shifts during periods of high uncertainty.
“If we see inflation moving further away from our target, then it may be necessary to keep policy at least modestly restrictive for longer. If we see heightened risks in the labor market, then we may need to move more quickly to ease policy. The FOMC can, and I believe would, act forcefully to stabilize the economy if necessary,” Barr said.
Barr concluded that the Fed will move cautiously in the coming months, closely monitoring incoming data on inflation, growth, and labor conditions before making its next policy decision.