Federal Reserve Governor Barr emphasizes inflation risks and states that interest rate cuts require caution, Wall Street Journal: highlights internal divisions within the Federal Reserve

On Thursday local time, Federal Reserve Governor Barr stated that after initiating the first interest rate cut last month, the Federal Reserve should remain cautious in further adjusting its policy stance, as the pace of price increases remains too rapid.

Barr pointed out that he is still concerned about the possibility of persistent inflation and emphasized that the Federal Reserve cannot be complacent about achieving the 2% inflation target. Barr reiterated his ongoing concerns about inflation trends. He noted that according to the September forecast, the median expectation of Federal Reserve officials indicates that inflation may not return to the 2% target level until the end of 2027. "Waiting another two years to achieve the target is a long time, and this possibility affects my judgment on appropriate monetary policy."

After maintaining high interest rates for eight consecutive months, the Federal Reserve lowered the benchmark interest rate by 0.25 percentage points in September to guard against a weakening labor market. Previous summer data indicated a slowdown in hiring and a slight increase in the unemployment rate.

Barr acknowledged that the job market has indeed cooled, but he stated that it is currently unclear whether this is due to weak demand or a decline in labor supply. He pointed out that despite the rise in the unemployment rate, which stood at 4.3% as of August, this level is typically consistent with a healthy job market.

Overall, Barr believes that the Federal Reserve should not adjust its policy too quickly, especially in the current context of high economic uncertainty. "The Federal Open Market Committee (FOMC) should exercise caution in adjusting policy so that we can gather more data, update forecasts, and better assess the risk balance."

Kansas City Fed's hawkish president Jeffrey Schmid, although he supported the rate cut last month, also expressed reservations about further cuts this Monday. "I believe the current policy stance is only slightly restrictive, which is an appropriate position."

Meanwhile, some other Federal Reserve officials have expressed support for continuing to lower rates. On the same day, the Federal Reserve's third-ranking official, New York Fed President Williams, stated in an interview that he supports further easing of policy considering the risks in the labor market. Not to mention Stephen Milan, who joined the Federal Reserve Board last month, advocating for faster and more aggressive rate cuts.

Currently, Federal Reserve officials have just over a week to publicly express their policy views before entering the routine "quiet period" ahead of the next FOMC policy meeting scheduled for October 28-29.

The Wall Street Journal commented that Barr's remarks indicate he may be skeptical of the market's general expectation that the Federal Reserve will continue to cut rates for the remainder of 2025, adding new uncertainty to the already divided Federal Reserve policy committee.

According to futures market bets, traders expect the Federal Reserve to cut rates two more times this year, with a probability of about 80% for each cut being 0.25 percentage points. However, Barr's remarks suggest that this path may encounter resistance within the Federal Reserve.

Barr was nominated by former U.S. President Biden to serve as a member of the Federal Reserve Board in 2022 and serves as Vice Chairman responsible for bank supervision. During his tenure, his focus has been on financial system regulation, and he has consistently aligned with Federal Reserve Chairman Powell on monetary policy votes. Although he stepped down from the vice chairman position earlier this year, he remains a member of the Federal Reserve Board

Dallas Fed's Latest Research

On the same day, the latest research from the Federal Reserve Bank of Dallas shows that the slowdown in immigration is leading to a rebalancing of the labor market, and the cooling of employment is not a sign of weakness. The slowdown in immigration means that the U.S. does not need such strong job growth to keep the unemployment rate stable, suggesting that the recent slowdown in job growth may not be a cause for excessive concern.

The analysis from the Dallas Fed indicates that as of mid-year, the so-called "breakeven" job creation rate has significantly dropped to about 30,000, far below the peak of around 250,000 in 2023. This is closely related to fluctuations in immigration trends, with the number of immigrants surging in the post-pandemic years of 2022 and 2023, but reversing starting in mid-2024.

Anton Cheremukhin, the chief research economist at the Dallas Fed, wrote in a blog post:

This recalibration indicates that today’s more moderate job growth does not imply weakness, but rather aligns with a balanced labor market condition. The unemployment rate is a more reliable signal of labor market health, as it is less affected by demographic changes compared to employment numbers. The unemployment rate has remained between 4.0% and 4.3% since mid-last year, even as monthly job growth has slowed