The Federal Reserve's "hawkish" tone continues! Board member Barr: If inflation cools insufficiently, we should "decisively increase interest rates." The market's betting on a 66% probability of tightening in September.

Federal Reserve Board member Barr stated on Tuesday that he is prepared to support interest rate hikes if U.S. inflation fails to further ease. With Fed Chair Waller previously signaling a hawkish stance and U.S. Treasury yields continuing to rise, market expectations for a potential rate increase as early as the September meeting have intensified. He expressed concerns at a banking forum in Washington about the possibility of broader price pressures gradually forming. U.S. inflation has exceeded the Fed's 2% target for nearly five and a half years, which necessitates vigilance regarding the outlook for prices. In prepared remarks, Barr mentioned, "If future data trends can give me greater confidence that inflation is cooling along a path back to 2%, then I believe we can take a bit more time to assess the current policy stance." However, he also emphasized, "If inflation does not appear to have eased sufficiently, then I think we should take decisive action to raise interest rates." Barr's latest comments imply that he does not rule out tightening monetary policy again amid persistent inflation that has not returned to the Fed's target. As a member of the Board of Governors, Barr is a permanent voting member of the Federal Open Market Committee (FOMC), which is responsible for setting interest rate policy, so his stance on policy is important for the market's perception of future interest rate paths. Barr had previously supported the decision to keep rates unchanged at the Fed's July meeting, when the target range for the federal funds rate was maintained at 3.50% to 3.75%. However, entering September, hawkish signals have been increasing within the Fed. Barr stated that if future economic data can convincingly show that inflation is moving back to the 2% target at a credible pace, the Fed could continue to observe for a while; but if inflation subsides insufficiently, a rate hike should be decisively undertaken. This suggests that upcoming inflation data may become a crucial factor in determining if the Fed will resume rate increases. Barr maintains a relatively positive outlook on the overall performance of the U.S. economy. He pointed out that American consumer spending has remained resilient thus far. However, he is more concerned about the persistently high price pressures than about economic growth. Barr said, "Inflation remains too high, and this situation has persisted for over five years." Recent data shows that overall price levels in the U.S. increased by 3.7% over the past year; core prices, excluding food and energy, rose by 3.3% year-on-year, both significantly above the Fed's long-term inflation target of 2%. The Fed will receive more key price data before its next policy meeting. The U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) will be released next week, providing important insights for policymakers to assess whether inflation is indeed cooling. If data continues to show persistent price pressures, Barr's proposal for "decisively raising rates" may garner more policy support; conversely, if inflation shows significant easing, the Fed may opt to maintain current rate levels and observe economic performance. As Barr delivered these remarks, the market had already markedly increased its bets on a Fed rate hike in September. Comments made by Waller last week were widely interpreted by investors as leaning towards further tightening of monetary policy, prompting the market to seriously consider the possibility of a rate hike at the Fed's next policy meeting in two weeks. According to the CME FedWatch tool, as of this writing, the market estimates about a 66% probability of a Fed rate hike this month. This marks a significant shift from previous market assessments of the Fed's policy outlook. With several policymakers increasingly focused on inflation remaining persistently above target, uncertainty for the September meeting has notably increased. Barr's statement further reinforces this logic; if the upcoming data fails to demonstrate that inflation is convincingly moving toward the 2% target, support for further tightening within the Fed may grow. Meanwhile, the external environment further complicates the Fed's inflation control efforts. Concerns about the potential escalation of tensions in the Middle East have led to a significant rise in U.S. Treasury yields, with the 10-year benchmark yield hitting its highest level since mid-January 2025. Middle Eastern tensions may influence U.S. inflation prospects through energy prices. If energy supply is disrupted and pushes oil prices steadily higher, the Fed will face a more complex policy environment. On one hand, the U.S. economy and consumer spending continue to show some resilience; on the other hand, inflation remains significantly above the 2% target, while external factors like rising energy prices may further elevate price pressures. Against this backdrop, market expectations for a Fed rate hike are rapidly heating up.