Fed Governor Michael Barr said the central bank should raise rates at its Sept. 15-16 meeting unless new data show inflation moderating, as the unresolved Iran war keeps crude elevated and pushes 10-year Treasury yields to record highs under the Trump administration.
A hawkish push from the Federal Reserve's board is converging with an energy shock that refuses to fade, making the Sept. 15-16 policy meeting the closest call of the year as 10-year Treasury yields climb to the highest levels of President Trump's term.
"If inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates," Governor Michael Barr said Tuesday in a speech in Washington, flagging the space the September meeting gives officials to weigh policy choices. He added that if trends in the data give confidence inflation is moderating toward the Fed's 2 percent target, "then I think we can take a bit more time to assess our policy stance."
Three of Barr's colleagues voted to raise rates when the Fed held steady in July, and financial markets are betting the central bank will lift its benchmark overnight rate, currently set in the 3.50 percent to 3.75 percent range, by a quarter of a percentage point this month. The August inflation report due Sept. 11 will shape the outcome.
Barr said the Fed had brought inflation down to a bit above 2 percent by 2024, but that progress stalled last year under the weight of tariffs, the Middle East conflict and the artificial-intelligence build-out. The war with Iran, which began at the end of February when officials and investors assumed the disruption would be measured in weeks, remains unresolved six months later. Brent crude has risen about 22 percent since the conflict started, from $72 to $88 a barrel, and the Strait of Hormuz — through which one-fifth of the world's oil and natural gas shipped before the war — remains largely closed to commercial traffic.
Central banks have generally let energy shocks pass rather than respond to them, on the theory that the price increase fades and raising rates would only slow an economy the shock itself is already slowing. The problem for the Fed is that this one hasn't faded, and it has hit an economy where inflation already has run above target for five years — the longer that continues, the more likely businesses and workers start building higher prices into their plans.
The European Central Bank raised rates in June and is expected to do so again at its meeting next week, treating the run-up in energy prices as a risk to inflation expectations rather than something to wait out. Fed officials have been watching core inflation, which strips out volatile food and energy prices; that measure was firmer than expected for the first five months of the year, and even though June and July looked better, Chairman Kevin Warsh said last week they hadn't convinced him the underlying trend was improving.
Treasury Secretary Scott Bessent made the case for holding steady, telling CNBC on Monday that "we've seen a supply shock" and that "traditionally, you don't raise into a supply shock unless you see second- or third-order effects, and we are seeing the core inflation has remained very, very restrained."
Warsh hasn't said how the Fed will respond, in keeping with his view that the central bank should take cues from markets rather than guide them. Speaking Monday as co-host of the G-20 finance leaders' summit in Asheville, N.C., alongside Bessent, Warsh said the era of a global savings glut — the idea that capital would sit idle for want of opportunities — had given way to "a global investment surge." Strategists at JPMorgan Chase said investors read the comment as supporting expectations for higher long-term rates for reasons that have little to do with the Fed.
Rising energy costs tend to lift yields either way: investors expect either higher inflation or the Fed to raise rates to prevent it. Markets think the Fed will raise rates, if not in September then by December, raising the stakes no matter what the central bank does this month. If it lifts rates, investors will want to know whether additional increases are coming, which could push long-term rates higher still. If it holds, they will want to know how that squares with a chairman who said inflation isn't improving and that borrowing and lending conditions aren't restraining the economy.
This article is for informational purposes only and does not constitute investment advice.
