Washington DC [US], September 2 : Federal Reserve Governor Michael Barr has warned that the US central bank may need to raise interest rates decisively if inflation does not moderate sufficiently, keeping a rate hike firmly on the table ahead of the September policy meeting.
Speaking at the Second-Chance Lending Forum in Washington, Barr said the US economy remains solid, with a stable labour market, relatively low unemployment and resilient consumer spending.
"The labor market is stable, with relatively low unemployment. The economy has been growing solidly," Barr said, adding that growth has been supported partly by the boom in AI-related business investment and the expansion of AI capabilities.
However, he said inflation remains the key concern for the Federal Reserve and has stayed above the central bank's target for a prolonged period.
"Inflation remains too high--and has been for over five years," Barr said.
He noted that the US had made significant progress in bringing inflation down from its peak of more than 7 per cent in 2022 to a little above 2 per cent in 2024, but that progress stalled in 2025.
Barr attributed some of the renewed price pressures to a series of shocks, including tariffs, the conflict in the Middle East and the rapid expansion of AI-related investment.
He also highlighted elevated inflation in core non-housing services, warning that inflation remaining above target for a prolonged period could allow broader price pressures to take hold.
"With inflation above target for a protracted period, there is a risk of broader price pressures taking hold, a risk I am watching closely," Barr said.
The comments come ahead of the Federal Open Market Committee's September meeting, when policymakers will again assess inflation and the appropriate monetary policy stance.
The upcoming Federal Open Market Committee (FOMC) meeting is scheduled for September 15-16, 2026, with the rate decision and press conference set for Wednesday, September 16
Barr left the decision dependent on incoming economic data. If the data provides confidence that inflation is moving towards the Federal Reserve's 2 per cent target, he said policymakers could wait longer before changing their stance.
"If trends in the data give me some confidence that inflation is moderating on a path to 2 per cent, then I think we can take a bit more time to assess our policy stance," he said.
But Barr gave a clear warning that the Fed could move in the opposite direction if inflation fails to show sufficient improvement.
"However, if inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates," he said.
At the same time, Barr said the economy continues to show strength. He pointed to resilient consumer spending, strong productivity and business formation, suggesting that the Fed has room to focus on inflation rather than responding to a sharp deterioration in economic activity.