04:02 PM EDT, 10/09/2025 (MT Newswires) -- Federal Reserve Governor Michael Barr on Thursday underscored the possibility of tariffs-linked inflationary pressures becoming more persistent, urging policymakers to move cautiously on cutting interest rates further.

In prepared remarks for delivery at an Economic Club of Minnesota event, Barr projected the core personal consumption expenditure price index -- the Fed's preferred inflation metric -- will rise above 3% year over year by the end of 2025. The latest data showed annual core PCE inflation was 2.9% in August.

Importers and companies are holding off on passing through tariff costs to customers, mostly by temporarily lowering profit margins, Barr said.

"Normalizing margins over time implies a gradual, but longer, upward trajectory for inflation, a pattern of price increases that I fear could convince many consumers that higher inflation is going to be more of a permanent phenomenon," he said. "This is important because expectations of future inflation affect spending decisions in the near term and can drive a cycle of escalating inflation, as we saw after prices began rising in 2021."

Barr cautioned against fully looking through higher inflation from import tariffs, noting "significant risks" to the Fed's price stability goal.

Barr flagged a potential deterioration in the labor market, though he said it is challenging to determine how much workforce demand has softened, especially as the ongoing federal government shutdown has delayed data, including the Bureau of Labor Statistics' September employment report.

The data blackout meant markets looked to other available sources.

Recent data from Automatic Data Processing ( ADP ) showed that US private jobs decreased by 32,000 in September, while Carlyle Group ( CG ) indicated weaker-than-expected payroll gains, at 17,000.

"With the easing in output growth and the likelihood of tariffs and labor supply weighing on the economy in the months ahead, we need to be prepared for the possibility that the softening in the labor market will become something worse, especially if there is a further adverse shock to demand," Barr said.

Barr stressed the need for the Federal Open Market Committee to be "cautious about adjusting policy" so it can gather data and update projections.

Markets widely expect the FOMC to cut interest rates by 25 basis points later this month, following a similar move in September, according to the CME FedWatch tool.

On Wednesday, minutes from the Fed's most recent meeting showed that most participants indicated it would be appropriate to further lower interest rates later this year amid growing concerns around the labor market. A few policymakers saw merit in holding interest rates steady last month due to renewed inflation concerns, according to the document.

"If we see inflation moving further away from our target, then it may be necessary to keep policy at least modestly restrictive for longer," Barr said. "If we see heightened risks in the labor market, then we may need to move more quickly to ease policy."

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