Fed’s Barr says more rate hikes likely as energy and AI lift inflation

Federal Reserve Governor Michael Barr on Tuesday made a renewed case for further interest rate increases, saying high energy prices and a surge in AI-related investment mean the US central bank has been “knocked off course” on progress toward its 2% inflation goal, Reuters reported.

Recalibrating policy

“I don’t yet see a clear trend toward a timely return to 2%,” Barr said in remarks prepared for the Detroit Economic Club. Inflation is too high and risks have increased, he said, while the labor market remains solid. “We need to recalibrate policy to get us in a better position that more evenly balances risks to both components of our dual mandate,” he added.

In his base case, “further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” Barr said. Markets have been pricing a substantial chance of another quarter-point hike at the Fed’s 27–28 October meeting after a rate increase earlier in September.

Energy, AI and growth

Barr linked elevated inflation to the Middle East conflict’s effect on global oil prices and to AI buildout demand for high-tech goods. He expects GDP growth over the rest of 2026 to “pick up a bit” from a roughly 2% pace in the first half, with business investment and consumer spending supporting the labor market. Longer term he is optimistic AI could lift productivity, but he said timing is uncertain and short-term labor-market disruptions may need managing. “What is clear right now is that inflation is too high,” he said.