Michael Barr, Fed Governor, Says Rates Must Be Raised Firmly If Inflation Doesn't Stabilize

[Mexico City = Shim Young-jae, Correspondent] Michael Barr, a member of the U.S. Federal Reserve (Fed), stated that if inflation does not sufficiently slow down, the benchmark interest rate must be raised firmly. Conversely, if economic indicators provide confidence that inflation is slowing toward the target of 2%, there may be more time to evaluate the monetary policy stance.

According to the Fed, Barr made these remarks during a speech at the 'Second Chance Lending Forum' held in Washington, D.C. on the 1st (local time), indicating that inflation forecasts and the monetary policy stance will be discussed again at the September Federal Open Market Committee (FOMC) meeting. He diagnosed that while the U.S. economy and labor market are showing stable signs, inflation has been excessively high for over five years.

"Firm Rate Hike If Inflation Does Not Slow Enough"

Barr assessed that the current U.S. labor market maintains a relatively low unemployment rate and is stable. He explained that the U.S. economy continues to show solid growth.

He mentioned that the surge in investments related to artificial intelligence (AI) and the building of AI capabilities are partially driving economic growth. Productivity and new business formations have also shown strong performance over the years, and consumer spending has generally maintained resilience so far.

The issue lies with inflation. Barr stated, "The inflation rate is still too high and has remained at such levels for over five years."

According to him, the U.S. inflation rate peaked above 7% in 2022 and has fallen to just above 2% in 2024. However, progress in stabilizing prices stalled in 2025.

Barr explained that continuous shocks, such as tariffs, Middle Eastern conflicts, and rapid AI infrastructure development, have shaken the inflation trend again. He pointed out that the core service inflation rate, excluding housing costs, remains at a high level.

He warned that if inflation exceeds the Fed's target for an extended period, there is a risk of widespread price pressure establishing itself, and he is closely monitoring this situation.

Ahead of the September FOMC, he also presented future policy judgment criteria.

Barr stated, "If we gain some confidence through the flow of economic indicators that the inflation rate is slowing on a path toward 2%, I think we can take a little more time to evaluate the policy stance. However, if it appears that inflation is not sufficiently slowing, I believe we must act firmly to raise rates."

Addressing Financial Access Issues for Individuals with Criminal Records

The main theme of this speech was expanding employment and financial access for individuals with criminal or arrest records.

Barr explained that individuals with past incarceration or contact with the judicial system face higher employment barriers than others. As a result, some turn to entrepreneurship instead of employment, and he emphasized the importance of securing financial access for them.

According to research cited by Barr, the likelihood of employment decreases by about 7-26% after an initial criminal charge, and this impact persists even six years later. A 2018 study found that the unemployment rate for individuals with past incarceration experiences was about five times higher than that of the general population.

He also identified occupational licensing as a barrier. According to Barr, about one in four jobs in the U.S. requires a government-issued occupational license. In some states, applicants can be restricted from obtaining licenses due to criminal records, regardless of whether the crime is related to the occupation or poses a substantial risk to public safety.

The Fed's 2023-2024 Survey of Household Economics and Decisionmaking (SHED) also showed disparities.

Among individuals without criminal records, 75% reported living financially well or comfortably. In contrast, only 60% of those with felony convictions and incarceration experiences gave the same response.

Individuals with past convictions were less likely to have bank accounts or credit cards. Instead, they were found to utilize alternative financial services, such as payday loans or pawnshop loans, more frequently.

Those with incarceration experiences reported a 16 percentage point lower confidence in obtaining credit approval. However, the rate of actual credit applications in the past year was 10 percentage points higher.

Barr explained that this difference seems to stem from supply constraints rather than a lack of demand for credit. He suggested that cash flow-based assessments and the use of alternative financial data could help expand financial access for those with insufficient or poor credit histories.

"Entrepreneurship Can Increase Income by 24%"

Barr also highlighted entrepreneurship as a way to support the economic independence of individuals with criminal records.

According to research he cited, individuals with past incarceration who start businesses may earn 24% more annually than those employed in traditional jobs. Entrepreneurship has also been shown to reduce recidivism rates within five years compared to being unemployed.

Research findings indicated that about 20-30% of individuals with criminal records are self-employed business owners. A 2021 study found that among U.S. small business owners, approximately 1.1 million, or about 4% of the total, have criminal records.

However, Barr explained that these individuals are more likely to be disconnected from the large corporate mentors, fellow entrepreneurs, and professional networks that other entrepreneurs utilize. Such networks can serve as pathways for credit, funding, and business opportunities.

The U.S. Small Business Administration (SBA) has finalized regulations to remove many criminal record restrictions from small business loans and loan guarantee programs in 2024. As a result, barriers that automatically excluded individuals on parole or probation from SBA loan programs have been eliminated.

Barr also introduced the example of the Texas prison entrepreneurship program (PEP). The community development financial institution (CDFI) of this program was established to provide business funding for entrepreneurs with criminal records. PEP graduates have established over 500 businesses, with some generating annual revenues exceeding $1 million.

Potential for AI in Credit Evaluation and Entrepreneurship Support

Barr mentioned the potential for technology, including AI, to expand financial access and entrepreneurship opportunities.

He explained that cash flow assessments using AI and assessments based on alternative financial data could enhance access to financial products for consumers with insufficient credit histories or low traditional credit scores. This is particularly important for those lacking credit information due to incarceration experiences.

AI is also being utilized to provide financial advice or answer general consumer questions. Barr emphasized that while AI can quickly provide information without the burden of judgment, it must ensure the accuracy of information and comply with consumer and investor protection laws.

He suggested the potential for AI in the entrepreneurship process as well. AI could serve as a writing tool that provides structured frameworks for business plans and reviews legal structures or market analyses of companies.

AI tools could assist in analyzing industry reports and market data to understand market and competitive conditions. Previously, such tasks required paid research or expert consultations.

However, Barr clarified that AI cannot replace the process of contemplating and executing actual business plans. AI should be utilized as a tool to complement rather than replace the capabilities of entrepreneurs.

He explained that small businesses are already using AI for automating tasks, improving customer experiences, and identifying growth opportunities. AI is performing some roles of marketing managers, social media managers, and financial planners for business owners who find it difficult to hire separate personnel.

Barr stated that if services are accessible, affordable, and equipped with safeguards, AI could support not only individuals with criminal records but also the overall entrepreneurship and growth of small businesses in the U.S.

He emphasized that enhancing financial access can help individuals with criminal records succeed as workers, consumers, and entrepreneurs, and reducing barriers that obstruct their opportunities would also strengthen the U.S. economy.

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