Federal Reserve Governor Michael S. Barr, a voting member of the Fed's rate-setting Federal Open Market Committee (FOMC), said on September 29, 2026 that U.S. inflation remains well above the FOMC's 2 percent target and that, in his base case, "further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion."

Delivering a speech titled "Economic Conditions and Monetary Policy" at the Detroit Economic Club in Detroit, Michigan, Barr said the investment surge behind the artificial intelligence (AI) buildout is already having "a measurable effect on prices," compounding pressure on consumers and businesses from lingering high energy prices tied to the conflict in the Middle East. He noted earlier in the month the FOMC had unanimously agreed to raise short-term policy interest rates, and argued that with risks to the inflation target increasing while risks to the labor market recede, policy needs to be recalibrated to more evenly balance the two sides of the Fed's dual mandate.

The full text of the speech is available on the Federal Reserve Board's website at https://www.federalreserve.gov/newsevents/speech/barr20260929a.htm.

A hometown lens: Detroit's rebirth and its challenges

Barr opened on familiar ground. "It's wonderful to be back in Michigan and in this great city," he said, noting that for more than a century Detroit has been at the center of the U.S. economy, driving America's growth and prosperity while also reflecting the profound forces that have transformed the economy in recent decades.

Describing himself as a longtime Michigander who has worked to promote entrepreneurship and community development in Detroit, Barr cited economic growth in the Live6 community, where he planned to visit later that day; new entrepreneurs at Newlab and the Mezz at Michigan Central; the economic revitalization of the surrounding Corktown neighborhood; and the hundreds of entrepreneurs who have worked with students and faculty in the Detroit Neighborhood Entrepreneurs Project.

The city still faces significant challenges. Unemployment in the Detroit area is estimated at around 11 percent, much higher than Michigan's rate of 5 percent and the U.S. rate of 4.1 percent. But entrepreneurship, he said, is an engine for job creation: as it did in other places around the country, new business formation in Detroit rose after the pandemic to an average of about 6,000 firms each year, adding 30,000 jobs a year to the city's economy. The share of all businesses that are new in Detroit has outpaced the share in Michigan overall.

The automobile industry remains critical for Detroit and for Michigan. Twelve percent of U.S. auto assembly and auto parts jobs are in the Detroit metro area. National auto sales have grown strongly recently, hitting an annualized rate of 16.8 million in August — a pace Barr described as solid. Automakers are investing in battery technology and in electric vehicle design and production, which is creating engineering and other high-tech jobs in the region.

National economy: solid growth despite a series of shocks

Barr said economic activity in the United States has grown at a solid pace in 2026 and has recently gained momentum. Real gross domestic product grew at roughly a 2 percent rate in the first half of the year, and he expects it will pick up a bit in the second half.

He called that growth remarkably resilient given the series of significant shocks the economy has faced: the COVID-19 pandemic, which caused massive disruptions and was met with fiscal and monetary policy support; Russia's war on Ukraine, which disrupted energy and commodity markets; price increases and trade disruptions from sharply higher import tariffs, along with continuing uncertainty about tariff levels; and, most recently, the conflict in the Middle East and its effect on energy prices. On top of these, a surge in investment to support the AIout has particularly boosted demand for certain high-tech goods.

All of these factors, Barr said, have had the effect of raising the prices consumers and businesses face — a key concern for him as a monetary policymaker. He framed the technological revolution under way in AI as a big economic issue for both Michigan and the United States, one the Federal Reserve — and the country — is still grappling to understand for U.S. businesses and workers.

Inflation: five and a half years above target

Inflation has run above the FOMC's 2 percent target for five and a half years, Barr said. As measured by the personal consumption expenditures (PCE) price index — the gauge the FOMC uses to define its 2 percent objective — inflation surged in the wake of the pandemic and with the escalation of the war in Ukraine, peaking at a 12-month rate of 7 percent in 2022. Significant monetary policy tightening by the FOMC, along with an easing of supply constraints, helped lower inflation, and by early 2025 it was running close to the objective.

Tariff increases in April 2025 pushed up goods prices, but Barr said it was reasonable at the time to forecast that tariffs would be a one-time increase in prices. Then the Middle East conflict drove energy prices and inflation higher still. While the effects of tariffs may have diminished, high energy prices are still with us, he said, and there is considerable uncertainty about when the conflict driving them may be resolved. At the same time, it is apparent that the surge of investment, and related demand from the AI buildout, is having a measurable effect on prices.

"The combined effect has meant we have been knocked off course on our progress toward our 2 percent goal," Barr said.

Although monthly inflation prints have been highly volatile during this inflationary period, trends can be discerned over longer periods, he noted: he counts only two months of data consistent with 2 percent core PCE inflation — a measure that strips out volatile food and energy prices — over the past 20 months, and he does not yet see a clear trend toward a timely return to 2 percent.

Labor market: solid, with supply and demand roughly balanced

While inflation is significantly above the FOMC's goal, strong business investment and resilient consumer spending are supporting a solid labor market. A year ago, when job growth slowed and the unemployment rate rose, there were questions about whether the labor market would hold up against the effects of the shocks. Since then, the unemployment rate has improved, and supply and demand in the labor market now appear to be in rough balance.

On the labor supply side, Barr said, lower net immigration has reduced the number of new jobs needed to keep pace with growth in the labor force. Job creation has averaged around 80,000 a month this year, close to reasonable estimates of its breakeven pace, and the unemployment rate of 4.1 percent is close to many estimates of maximum sustainable employment.

AI's effects on productivity: three time horizons

A key question for monetary policy, both in the near term and for years to come, Barr said, will be AI's effect on the productive capacity of the economy and the structure of the labor market. While there are some indications that AI may already be a factor limiting new job opportunities for entry-level workers in sectors heavily exposed to the technology, across the economy there is little evidence of significant displacement so far, and there are notable examples of AI increasing the productivity of many workers.

Past technological revolutions have tended to create more, usually higher-skilled, jobs than the ones they displaced, but AI may be more revolutionary, and its effects could be different. Barr said he finds it helpful to consider different scenarios to explore the implications of AI over different time horizons.

Short term: an investment boost and a chip price surge

In the next year or so, Barr said, the most important effects of the AI buildout on the U.S. economy are likely to be a strong boost to economic activity from business fixed investment and a surge in prices for computer chips and related equipment. Those price increases are spreading to other products that require chips and related goods and services, and supply constraints — especially for chips — are emerging. It is also likely that the big boost that valuations of technology firms are giving to major stock price indexes is in turn supporting spending by those made wealthier by these gains.

Longer term: optimism on productivity and living standards

Turning to the longer term, Barr said he remains optimistic — as he has discussed in a number of previous speeches — about the potential of AI to enhance human potential, including significantly improving productivity and raising living standards. That would mean the economy can grow faster, and real income can grow more, without feeding into higher inflation.

Medium term: the greatest uncertainty over the next two to five years

Where Barr sees the greatest uncertainty relevant to monetary policy decisionmaking — "not today, but down the road" — is how AI will affect the economy in the medium term, which he defined as the next two to five years. He laid out three key questions.

How and when productivity gains take hold. Penciling in a projection for a productivity boost from AI in the medium term makes a lot of sense to him given the massive investment and increasing indications of adoption, but it is difficult to project how and when those gains would materialize. Barr pointed to the "J curve effect" — the delay historically seen in the boost from technology investment. When a new technology is adopted, productivity may dip as firms devote resources not only to installing it but also to reorganizing their business processes, a transformation necessary for the productivity improvements to be realized. While adoption of past technologies has taken years to onboard and transform the way people work, the pace of AI adoption so far indicates this technology could spread more quickly and have a faster effect, boosting output at least in some sectors. Some firms, especially in computer coding and high tech, are seeing rapid productivity gains, but for the economy as a whole, broad productivity gains may take some time.

Whether investor returns match expectations. A second key question is whether investors will see returns on the AI buildout consistent with their expectations, or whether a reassessment could lead to a repricing. A realignment of investment in that scenario could result in a hit to growth, from both the direct effect of a drop in investment and knock-on wealth effects. Barr said interrogating assumptions and exploring scenarios will remain crucial as policymakers grapple with the implications of the technology in the years ahead.

Labor substitute or labor complement. A third key question is the extent to which AI proves to be a labor substitute or a labor complement, and at what pace labor market changes might come. Signs already suggest, Barr said, that AI may be a labor substitute in some sectors, especially for younger, less experienced workers; other evidence points to the labor-augmenting effects of AI, suggesting a more sanguine outlook for the labor market. Tasks that are easily automated, with clear guardrails and predictable outcomes, might see rapid labor substitution, while tasks requiring human judgment, management, coordination and relationships, creativity, or outputs that are hard to measure might see more labor augmentation.

If labor market changes happen quickly, it will be hard for workers to adjust and dislocations might be large, whereas a more gradual adoption might permit more orderly adjustments. That said, Barr said society should be prepared for the possibility of serious short-term disruptions in the labor market that need to be managed effectively to ensure the benefits of AI are realized over the long term. If AI proves capable of work that displaces humans, the extent of the disruption will depend in part on whether society undertakes the investments needed in new job creation, worker training, connecting workers to new jobs, and other efforts to mitigate adverse effects over the long term. "In my judgement, now is the time for society to begin to consider how to address these potential disruptions, while AI adoption is in its relatively early stages," he said, "so we can realize the long-term benefits for society."

Barr added that many other issues being raised about AI — safety, privacy, tradeoffs for local communities with respect to data center buildouts, energy and water usage, national security, and appropriate governmental policies. These issues are beyond the scope of central bankers, he said, but they are important for everyone to consider.

Implications for monetary policy

Monetary policy is not well suited to dealing with structural changes in the economy, Barr reiterated, and it could be difficult for policymakers to assess in real time whether changes to the labor market are structural or cyclical.

If the economy sees a long-lasting boost to productivity growth, wages and economic activity could grow more than would otherwise be the case without putting upward pressure on inflation. But at the same time, demand for capital would rise because of higher returns on investment, and household savings would fall due to expectations of stronger real wage growth and thus higher lifetime earnings. Balancing that shift in savings and investment would require higher interest rates in equilibrium — what monetary economists call a rise in r* — which in turn implies a higher setting for the policy rate.

In Barr's view, it is too early to know whether these dynamics are in play right now. "What is clear right now is that inflation is too high," he said.

Policy outlook

Earlier in September 2026, the FOMC unanimously agreed to raise short-term policy interest rates to support achieving the Fed's dual mandate of maximum employment and stable prices. With economic growth strong and the labor market solid, Barr said, risks to achieving the inflation target need to be addressed in a timely fashion. Risks to the inflation target have increased while risks to the labor market have receded, so policy needs to be recalibrated into a better position that more evenly balances risks to both components of the dual mandate.

In his base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion. "We want to support sustainable, durable growth in support of maximum employment, and price stability is crucial to that," he said. Any further moves would be decided by the FOMC at future meetings, with incoming inflation readings, the path of energy prices tied to the Middle East conflict, and the evolving price effects of the AI buildout among the factors Barr highlighted as most consequential for the inflation outlook.

Notes and references

Barr emphasized that the views expressed in the speech are his own and not necessarily those of his colleagues on the Federal Reserve Board or the Federal Open Market Committee.

The speech cites the following research and prior remarks:

• Michael S. Barr, "What Will Artificial Intelligence Mean for the Labor Market and the Economy?" speech delivered at the New York Association for Business Economics, New York, New York, February 17, 2026.
• Erik Brynjolfsson, Bharat Chandar, and Ruyu Chen, "No Widespread Displacement, but the AI Employment Gap for Young Workers Has Widened to 19%," Stanford Digital Economy Lab, August 12, 2026.
• David Autor, Caroline Chin, Anna M. Salomons, and Bryan Seegmiller, "What Makes New Work Different from More Work?" NBER Working Paper No. 34986 (National Bureau of Economic Research, March 2026).
• Isabella Loaiza and Roberto Rigobon, "The EPOCH of AI: Human-Machine Complementarities at Work," MIT Sloan Research Paper No. 7236-24 (November 21, 2024; revised October 1, 2025),
• Wilbur Xinyuan Chen, Suraj Srinivasan, and Saleh Zakerinia, "Displacement or Complementarity? The Labor Market Impact of Generative AI," Harvard Business School Working Paper No. 25-039 (December 2024).
• Kathryn Bonney, Cory L. Breaux, Emin Dinlersoz, Lucia S. Foster, John C. Haltiwanger, and Aditya A. Pande, "The Microstructure of AI Diffusion: Evidence from Firms, Business Functions, and Worker Tasks," NBER Working Paper No. 35141 (National Bureau of Economic Research, April 2026).
• Michael S. Barr, "Will Artificial Intelligence Broadly Raise Living Standards or Drive Income and Wealth Inequality?" speech delivered at "Next-Gen Financial Inclusion," the third annual Financial Inclusion Conference hosted by the Federal Reserve Board, July 14, 2026.

Source: Federal Reserve Board, "Economic Conditions and Monetary Policy," remarks by Governor Michael S. Barr at the Detroit Economic Club, September 29, 2026. Full text: https://www.federalreserve.gov/newsevents/speech/barr20260929a.htm (PDF: https://www.federalreserve.gov/newsevents/speech/files/barr20260929a.pdf)