Federal Reserve Governor Michael Barr indicated on Tuesday that he is prepared to support an interest rate hike if inflation does not sufficiently ease. Speaking at a banking forum in Washington, Barr expressed concern about "broader price pressures taking hold" as inflation has remained above the Fed's 2% target for nearly 5½ years. He emphasized that if inflation does not appear to be moderating, the central bank should "act decisively to raise rates."
Barr's comments come at a crucial time, with elevated inflation and rising Treasury yields, including the benchmark 10-year note reaching levels not seen since mid-January 2025. While he noted that consumer spending has been largely resilient and the economy is performing solidly, boosted by AI investment, headline inflation was up 3.7% over the past year, or 3.3% excluding food and energy. The Fed will receive additional inflation data next week with the release of the consumer and producer price indexes.
The market's response to Barr's remarks, along with recent comments from Fed Chairman Kevin Warsh, suggests an increased likelihood of a rate hike. Market expectations, according to the CME Group's FedWatch tool, priced in about a 66% chance of an increase at the upcoming meeting. Prediction markets for a rate hike by the September 15-16 meeting saw the likelihood rise to 55.5% for a YES outcome, up from 34% a week prior. Expectations for the October meeting also increased, showing a 66.5% YES probability.
