Fed Governor Warns of Inflation Risks Amid Economic Uncertainty

Federal Reserve Governor Michael S. Barr offered a cautious outlook for the U.S. economy, painting a picture of a resilient economy — but one increasingly buffeted by shocks from the conflict in the Middle East, tariffs and a labor force slowdown.

In remarks at the Brookings Institution this week, Mr. Barr outlined the reasoning behind the Fed's decision to hold interest rates steady at its most recent meeting. He described the U.S. economy as broadly resilient, buoyed by strong consumer spending, productivity gains, and heavy business investment in artificial intelligence and data centers.

Mr. Barr identified three major forces weighing on the economy:

• Middle East conflict: Mr. Barr said rising energy prices, stemming from the ongoing conflict, pose a risk of broader inflationary pressure. He expressed particular concern that another price shock could push long-term inflation expectations higher, making it harder to bring inflation back to the Fed's 2% target.
• Tariffs: He said that elevated tariffs have driven up goods prices and stalled progress on disinflation. While a recent Supreme Court ruling reduced the effective tariff rate to around 10%, Mr. Barr cautioned that further changes remain possible, adding to economic uncertainty.
• Labor force slowdown: He said that a sharp drop in net immigration and reduced labor force participation brought labor force growth close to zero. Job creation has similarly stalled — an unusual situation outside of a recession — leaving the labor market potentially vulnerable to further shocks.

On financial regulation, Mr. Barr noted his dissent from several Federal Reserve Board actions over the past year. He argued that changes to stress testing, downward deviations from Basel III standards, reductions in capital surcharges for global systemically important banks, and a 30 percent cut to supervisory staff are "eroding [the] trust" essential to a safe and sound banking system. He cautioned that these changes and the potential further weakening of liquidity regulations will leave the financial system with "less resiliency" to withstand future economic stress.