Fed's Barr: 'further policy adjustments are likely'

Bloomberg News

• Key insight: One week after the Federal Open Market Committee raised interest rates for the first time in three years, a member of the committee is making the case for further hikes.
• Expert quote: "In my view, given changes to the economy, we were out of position, and we made an adjustment in the right direction. In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion." — Federal Reserve Gov. Michael Barr
• Forward Look: The FOMC has two more meetings this year, with the next coming in late October.

The Federal Open Market Committee raised interest rates for the first time in three years last week, and at least one member believes more hikes are coming.

In a speech on Wednesday morning, Federal Reserve Gov. Michael Barr called the change to the federal funds rate a "needed" recalibration of policy to address persistently high inflation, but probably not sufficient to return price growth to the Fed's 2% target.

"In my view, given changes to the economy, we were out of position, and we made an adjustment in the right direction," Barr said. "In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion."

The FOMC voted unanimously to move the target range on the federal funds rate to 3.75% to 4% last week. According to the quarterly summary of economic projections released alongside the group's policy statement, 16 committee members who believe the benchmark rate will be moved higher still before the end of the year.

In his remarks, Barr did not indicate whether he would support a hike at the FOMC's meeting next month, the following meeting in December or sometime in the future. Among committee members who project further tightening this year, 12 expect a single 25 basis point hike, while four anticipate a half-percentage point increase, the equivalent of two hikes.

Barr said he supported the move toward more restrictive monetary policy because inflation was not moving toward a 2% annualized rate in a "timely" fashion.

"We want to support sustainable, durable growth in support of maximum employment, and price stability is crucial to that," Barr said.

Barr delivered his remarks at an affordable housing event hosted by the Federal Reserve Bank of Chicago. The speech also discussed his views on the housing market, which he said has become "increasingly unaffordable for many Americans for a number of years."

The fundamental issue with shelter costs, Barr said, is that home prices and rents have grown more sharply than household incomes. He said the dynamic was the result of restrictive land use ordinances, low productivity growth in the home construction sector, a development hangover from subprime lending-driven housing bubble of the mid-aughts, pandemic-driven materials inflations and dynamics in the mortgage market.

"Many families benefited from very low mortgage rates before 2022; these households are now less likely to move given the high rates they would face," Barr said. "This lock-in effect reduces both demand and supply and thus housing market dynamism."

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Barr also highlighted two government programs tasked, at least in part, with addressing housing unaffordability: the Community Investment Act, or CRA, and the Low-Income Housing Tax Credit, or LIHTC. 

Barr said incentives related to the CRA — a program that requires banks to invest in low-income areas in the communities they serve — "supported" more than $430 billion of loans and homeownership related investments in 2024. He added that much of this activity went toward housing developments that made use of the LIHTC.

"When banks invest in LIHTC developments, they not only receive tax credits but also earn CRA consideration for supporting housing in underserved areas," he said. "Together, the CRA creates the expectation to invest, and the LIHTC provides the tool to do it, leveraging private capital to build safe, stable, and affordable apartments that strengthen families and communities."

During his tenure as the Fed's vice chair for supervision, Barr spearheaded an interagency reform effort for the regulations related to the CRA in 2023. It was the first substantial update of policies related to the Civil Rights Era legislation in nearly 30 years. 

Yet, those reforms were ultimately unwound last year after banks challenged the rulemaking in court, arguing that reforms to expand the assessment areas beyond the immediate neighborhoods around branches — a change meant to address the rise of mobile banking — went beyond the statute of the 1977 law. 

Barr did not address the reforms to the CRA he spearheaded during his time as vice chair for supervision or the current status of the Fed's related rules during his speech. The Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. initiated a process for rescinding the 2023 CRA rule early in the second Trump administration, and last month the OCC and FDIC issued a proposal that would restrict the CRA value of grants given to nonprofits working in affordable housing and other community development projects.