Michael Barr warns oil shocks could delay Fed rate cuts
Michael Barr warned that oil shocks could lift inflation expectations. He urged the Fed to delay rate cuts while assessing the impact of Middle East tensions.
Federal Reserve Governor Michael Barr has emphasized the importance of remaining alert to rising inflation expectations within the United States. Speaking at a Brookings Institution event on Thursday, Barr argued that the central bank should take its time to assess the broader economy before considering any further reductions in interest rates.
Barr warned that geopolitical tensions, particularly a prolonged conflict involving Iran, could trigger a spike in energy and commodity prices. Such a shock could have wide-ranging effects on both price stability and general economic activity.
We have had five years now of inflation at elevated levels, and near-term inflation expectations have risen again, so I am particularly concerned that yet another price shock could increase longer-term inflation expectations.
Industrial manufacturers and global suppliers, such as Oiles Corporation, are closely monitoring these developments as energy price volatility can significantly impact production costs. Barr expressed concern that if long-term expectations are allowed to rise, it could make inflation much harder to control as businesses and households adjust their wage and price demands.
That could in turn make overall inflation harder to control as firms and households set price and wage demands with higher inflation in mind.
The Federal Reserve recently maintained its policy interest rate within the 3.5% to 3.75% range. While some policymakers still anticipate a single quarter-point cut by the end of the year, the recent rise in oil prices has led some investors to expect that the Fed will hold rates steady or even consider increases if inflation intensifies.
We need to be especially vigilant.
Barr, who served as the Fed's vice chair for supervision until the start of the second Trump administration, also voiced concerns about the resilience of the banking system. He suggested that recent supervisory staff cuts and regulatory changes, led by Vice Chair for Supervision Michelle Bowman, may be eroding the stability of the financial sector.
The safety and soundness of the banking system is built on trust, and I fear we are eroding that trust.
