Fed's Barr says tariffs, geopolitics weigh on rural areas

• Key takeaway: Federal Reserve Gov. Michael Barr said tariffs and the Iran war are short-term pressures on rural communities, while artificial intelligence will have longer-term, mixed effects.
  
• Expert quote: 'Given rapidly changing circumstances, it is too early to know the path for prices as events in the Middle East unfold." — Federal Reserve Gov. Michael Barr
  
• What's at stake: Rising trade tensions and the conflict in the Middle East could keep costs high for rural businesses, with lasting effects on farm incomes, food prices and broader inflation if disruptions persist.

Federal Reserve Gov. Michael Barr said Tuesday that trade policy and geopolitical tensions are short-term pressures weighing on rural communities, though their full impact remains unclear.

Speaking at a rural economic-themed event hosted by the central bank, Barr pointed to shifting tariff policies and conflict in the Middle East as factors increasing operating costs for small businesses.

"Rapidly changing trade policy and geopolitical events have affected rural communities dependent on foreign markets and foreign suppliers," Barr said.

Regarding tariffs, Barr said some farm-income sources, particularly soybean exports,  have been notably stymied, while operating costs have increased. More than 40% of U.S. soybean production has historically been exported, he said, but those relationships have been "significantly disrupted by tariff policy."

"U.S. soybean exports to China during the first three quarters of 2025 were 38% lower than the same period in 2024," Barr said.

Tariffs on steel and aluminum have also raised costs for farmers by increasing prices for agricultural machinery, he added.

Barr also cited U.S. involvement in the Iran war as another challenge for rural communities, as higher fuel costs push up prices for goods and services.

"Most recently, supplies and prices for fertilizer have been affected by conflict in the Middle East," Barr said. "More than a third of global exports of urea pass through the Strait of Hormuz, and the disruption has led to a sharp price increase in this important fertilizer, up about 55% since the beginning of the year."

Diesel prices have risen about 50% over the past year, complicating operations for cattle and dairy farmers, Barr said.

"Transportation costs across the beef supply chain also rise with fuel prices, contributing to higher consumer prices and squeezing returns for producers," he said. "Similarly, higher diesel prices are burdensome for dairy farmers because fuel is used at every stage of milk production and transport.

"Given rapidly changing circumstances, it is too early to know the path for prices as events in the Middle East unfold."

Geopolitical tensions involving Iran have been top of mind for Federal Reserve officials, some of whom have said in recent weeks that monetary policy should remain unchanged until the economic impact becomes clearer.

Federal Reserve Chair Jerome Powell, speaking at an event in March, said policymakers are closely monitoring how consumers respond to rising gas prices tied to the conflict, even though the central bank typically looks past short-term supply shocks.

"You have to carefully monitor inflation expectations, because a series of these supply shocks can lead the public, businesses and households to start expecting higher inflation over time," Powell said at an event at Harvard University. "At the end of a certain number of years, inflation is now just higher, and that can happen."

Barr also said longer-term trends, including artificial intelligence, will have "enduring consequences for rural communities."

He said AI-driven data centers are bringing tax revenue and infrastructure investment to rural areas but also create challenges, including "high energy and water demands, strain on local infrastructure and uncertainty about the quantity and quality of long-term jobs created."

During a fireside chat following Barr's remarks, Federal Reserve Bank of Richmond President Tom Barkin said some constituents in his district — particularly in Loudoun County, Virginia — are frustrated with the growth of data centers despite the tax benefits.

"They weren't as excited about the tax base," said Barkin, "They've got a tax base, but they're really exercised about power wires and electrical displacement and all of those sorts of things."

Barkin said many residents view AI data centers as limited job creators outside of construction.

"The community leaders like it because there's a tax base that comes with it," he said. "I think a lot of the communities that I'm in, they don't quite get the value."

Federal Reserve Bank of Boston President Susan Collins also noted that some businesses in her district are using AI to replace labor.

"A lumber mill uses AI to sort planks to reduce their labor costs because they couldn't hire expertise," Collins said.