By Ann Saphir
Sept 29 (Reuters) – Federal Reserve Governor Michael Barr on Tuesday made a renewed case for further interest rate hikes, noting that high energy prices and a surge in AI-related investment have meant “we have been knocked off course” on progress toward the US central bank’s 2% inflation goal.
“I don’t yet see a clear trend toward a timely return to 2%,” Barr said in remarks prepared for delivery to the Detroit Economic Club. Inflation is too high and the risks have increased, he said, and the labor market is solid with risks decreasing.
“We need to recalibrate policy to get us in a better position that more evenly balances risks to both components of our dual mandate,” he said.
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.
“In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” Barr said.
GDP growth over the balance of 2026, he said, is likely to “pick up a bit” from its 2% pace in the first half of the year, and business investment and consumer spending are supporting the labor market.
Barr noted that the conflict in the Middle East has driven up global oil prices, and the artificial intelligence buildout has boosted demand for certain high-tech goods, raising prices for businesses and consumers.
AI investment will likely continue to drive strong economic activity over the coming year, Barr said. While he said he is optimistic that over the longer term the technology will increase productivity growth and allow for faster non-inflationary economic growth, Barr said the timing of those productivity gains is uncertain.
Meanwhile, he said, “we should be prepared for the possibility that there might be serious short-term disruptions in the labor market that need to be managed effectively to ensure the benefits of AI are realized over the long term.”
While it’s too early to know exactly how AI will affect the economy and the correct setting of the Fed’s policy rate, he said, “what is clear right now is that inflation is too high.”
(Reporting by Ann Saphir; Editing by Paul Simao)
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