Barr: inflation is too high and further rate rises are likely in his base case
Serguey Asael Shinder2 min readFederal Reserve Governor Michael Barr said on 29 September in Detroit that "what is clear right now is that inflation is too high", and that in his base case "further policy adjustments are likely to be needed" to bring it down to target in a timely fashion. Earlier in September the FOMC unanimously raised short-term rates.
Barr described growth as solid, at roughly a 2% annual rate in the first half of 2026, with job creation of about 80,000 a month, close to its breakeven pace, and unemployment at 4.1%, close to many estimates of maximum employment. Inflation, by contrast, has been above the 2% target for five and a half years. He counted only two months of data consistent with 2% core PCE inflation over the past 20 months and said he does not yet see a clear trend back to target. Tariffs pushed goods prices up in 2025, the Middle East conflict then drove energy prices higher, and the AI investment surge is "having a measurable effect on prices", with chip prices spreading to other products and supply constraints emerging.
Most of the speech was about AI. Barr sees little evidence of broad job displacement so far, though AI may already be limiting entry-level openings in exposed sectors. In the near term the buildout boosts investment and prices; in the longer term he is optimistic about productivity. The uncertainty he highlighted is the next two to five years, where a "J curve" could delay gains. And he drew a monetary conclusion: a lasting productivity boom would raise demand for capital and lower household saving, which would require higher interest rates in equilibrium, a higher r*, and so a higher policy rate. He said it is too early to know whether that is under way.
Why it matters
The common assumption is that an AI productivity boom lets the Fed ease. Barr's argument points the other way: if AI really lifts returns on capital, the neutral rate rises with it. Combined with his view that inflation is off course now, that is a case for rates staying higher for longer on two separate grounds.