Federal Reserve Governor Michael Barr indicated that additional interest rate increases will likely be required to achieve the central bank’s 2% inflation target. Barr made these remarks in prepared statements for a housing affordability conference, emphasizing that while economic growth is strong and the labor market is solid, inflation remains above the target and is not clearly trending downward. He supported the Federal Open Market Committee's (FOMC) recent decision to raise the policy rate, stating, "In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion."
The FOMC unanimously voted to raise the policy rate to the 3.75%-4.00% range, a move Barr described as a necessary "recalibration" given changes to the economy and increased risks to the inflation target. While he didn't specify a timeline, his comments suggest he anticipates at least two more rate hikes. This contrasts with Fed Chairman Kevin Warsh's reluctance to provide forward guidance on the rate path. The central bank's dual mandate includes achieving maximum employment and stable prices, with price stability being crucial for sustainable growth.
Barr's speech also touched on housing affordability, noting that a lack of supply and high mortgage rates have exacerbated the problem. The average rate on a U.S. 30-year fixed-rate mortgage recently rose to 7.12%, a more than two-year high. Shelter costs have seen significant inflation, with the consumer price index for rent of primary residence being 34% higher in August compared to December 2019, despite some easing in the annual rate of increase to about 2.75%. Barr highlighted the housing supply shortfall, estimated at roughly 2 million to 5.5 million units, and efforts like Community Reinvestment Act (CRA) incentives and alternative cash flow underwriting to expand affordable housing and homeownership opportunities.
The broader economic context for these policy adjustments includes shocks such as tariffs, geopolitical conflicts in the Middle East and Ukraine, and a surge in investment demand driven by artificial intelligence, all of which have contributed to upward price pressures. Annual inflation has been above the 2% target since March 2021, registering 3.4% last month as measured by the Consumer Price Index. Traders are currently pricing in a nearly 70% chance of another quarter-point hike at the FOMC's next meeting in late October.
