Federal Reserve Governor Michael Barr renewed his case for further interest rate increases on Tuesday, saying elevated energy prices and a surge in artificial intelligence-related investment have disrupted progress toward the US central bank’s 2% inflation target, according to a report by Reuters.
In remarks prepared for the Detroit Economic Club, Barr said inflation remained too high and there was not yet a clear path toward a timely return to the Fed’s target. He also noted that risks to the labour market had eased, while employment conditions remained solid, the report stated.
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Barr said monetary policy needed to be recalibrated to better balance the Fed’s dual mandate of price stability and maximum employment. He indicated that additional policy tightening would likely be required in his base-case outlook to bring inflation back to target within a reasonable timeframe.
Financial markets are pricing in a strong likelihood of another 25-basis-point rate increase at the Fed’s October 27-28 meeting, following the central bank’s rate hike earlier this month.
According to Reuters, Barr expects US economic growth to strengthen somewhat during the remainder of 2026 from the roughly 2% pace recorded in the first half of the year. He said business investment and consumer spending were helping to support labour-market conditions.
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Barr pointed to higher global oil prices stemming from the conflict in the Middle East as one factor contributing to renewed inflation pressures. At the same time, heavy investment in artificial intelligence has increased demand for certain high-technology goods, pushing up prices for businesses and consumers.
AI-related investment is likely to continue supporting economic activity over the coming year, Barr said. Over the longer term, he expects the technology to boost productivity and enable faster economic growth without generating equivalent inflationary pressure.
However, Barr cautioned that the timing and scale of those productivity gains remain uncertain. He also highlighted the possibility of significant short-term disruptions to the labour market as AI adoption accelerates, which could require policymakers to manage the transition carefully.
Barr said it was still too early to determine precisely how artificial intelligence would reshape the economy or what that would ultimately mean for the appropriate level of interest rates. For now, however, he said the key issue for monetary policymakers remained that inflation was still running too high, according to Reuters.
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