Fed’s Barr Says Central Bank May Hold Time As It Looks To Reduce Deflation.

Federal Reserve Governor Michael Barr said on Tuesday that another cut in the central bank’s interest rate may come somewhere amid persistent risks to US inflation.

“Based on current conditions and the data at hand, it will probably be appropriate to keep rates unchanged for some time as we evaluate incoming data, the changing outlook, and the balance of risks,” Barr said in a speech given before the New York Association for Business Economics meeting in New York.

“The most sensible course of action for monetary policy right now is to take the necessary time to assess conditions as they change,” he said, adding, “I would like to see evidence that commodity inflation is coming down sustainably before considering lowering the policy rate further, as long as labor market conditions remain stable.”

Barr said that while it is reasonable to expect that the tax pressures that have driven up inflation will ease, the price pressure situation remains a concern.

“There are many reasons to worry that inflation will continue to rise,” he said. “I see the risk of inflation continuing above the 2% target as significant, which means we need to remain vigilant.”

Barr also noted in his remarks that the job market is stable and recent data points to this fact. But at the same time, the employment situation is “in a critical state” and “the labor market could be very vulnerable to negative shocks.”

Last year, the Fed cut its overnight interest rate by three-quarters of a percentage point, to between 3.5% and 3.75%, as it sought to support a soft labor market while leaving enough room for restraint in borrowing costs to reduce still high levels of inflation.

Inflation has been depressed by President Donald Trump’s trade tax plan, which has disrupted what had been a decline in the rate of inflation. Fed officials left their target rate unchanged at a meeting in late January and were reluctant on balance to note the need for further cuts.

In his remarks, Barr also elaborated on developments in artificial intelligence. Regarding the balance, he said that although it seems to have some effect on the job market, but for the most part it is not a big factor affecting employment levels.

“Broadly speaking, rather than layoffs, there is evidence that AI adoption is leading to redundancies within firms,” ​​Barr said. However, “we must be prepared that there may be significant short-term disruptions in the labor market, even if the long-term benefits to society can be quite positive.”

Implications of AI

The adoption of AI may also influence the Fed’s policy choices.

“In the long run, I expect that AI will improve productivity and living standards,” Barr said, adding, “I expect that the rise of AI may be a reason to lower policy rates.”

Barr noted that so far among the various scenarios building AI for vision, it seems more likely that the technology will increase productivity, help research and development, but not “dramatically change” the job market. He also said that it will be a challenge for the Fed to know whether AI is causing structural or cyclical changes in the economy.

He also noted that whatever the Fed does with monetary policy, it doesn’t move the needle on investment pouring into the AI ​​sector.

“My investment sense today in AI is that he doesn’t care” where the Fed sets the cost of short-term debt, Barr said. He noted that investment in the sector increased when the Fed raised rates and increased when rates fell, amid a winner-takes-all mentality in the sector.

(Reporting by Michael S. Derby in New York; Editing by Andrea Ricci and Matthew Lewis)