U.S. Federal Reserve Vice Chair Michael Barr has urged a more cautious approach in implementing the next interest rate cut, stressing that tariff policies could trigger more persistent inflation.

“Logically, when uncertainty is high, the prudent move is to proceed carefully,” Barr said during his speech on Thursday (Oct 9) at the Economic Club of Minnesota.

He further stated that Fed officials “need to exercise caution when adjusting policy, ensuring that we have enough time to gather additional data, update projections, and evaluate the balance of risks more accurately.”

Last month, the U.S. central bank cut its benchmark interest rate by 0.25 percentage points, marking its first rate reduction of the year. Barr expressed support for that move but acknowledged that policymakers now face a tougher environment, balancing between a slowing labor market and rising inflationary pressures.

In projections released alongside the decision, Fed officials anticipated two additional rate cuts before the end of the year, based on the median estimate.

Barr explained that the immediate impact of Donald Trump’s import tariffs on inflation has been smaller than many analysts expected. However, he warned that price increases could emerge in the coming months as companies begin depleting old inventories and attempt to restore profit margins by raising prices.

“In theory, tariffs cause a one-time price increase and should not lead to ongoing inflation. But that could change if prices continue to rise month after month, influencing public inflation expectations,” Barr said.

“There is nothing truly ‘one-off’ or predictable about these tariff hikes,” he added. “At some point, businesses and consumers may start adjusting prices, spending, and wages based on the belief that inflation will keep rising — creating a self-reinforcing cycle that’s hard to break.”

Regarding the labor market, Barr noted that it remains uncertain how much of the recent slowdown in job growth reflects weaker demand. He highlighted several indicators suggesting that labor supply and demand are still “relatively balanced,” such as the ratio of job openings to unemployed workers.

“Nevertheless, even if the labor market appears balanced, the fact that this equilibrium is being achieved through slower job and hiring growth indicates that the labor market has become more vulnerable to negative shocks,” Barr said.

The Fed is scheduled to make its next interest rate decision on October 28–29.

“In our next meeting, we’ll have to decide whether to lower rates again, a move that might help the labor market but also risk adding more inflationary pressure,” Barr said during a Q&A session following his speech. “That’s what makes this decision especially difficult.”