By Nicole Goodkind
Federal Reserve Gov. Michael Barr said Thursday evening that the next Fed chair will take over from Jerome Powell at a difficult moment, with inflation still elevated, the labor market showing signs of strain and some financial safeguards beginning to weaken.
Barr, speaking at a Brookings Institution dinner, called Kevin Warsh, President Donald Trump's nominee to lead the central bank, "well qualified" and said he "knows the terrain." But he also noted that Warsh would inherit significant challenges.
Inflation remains a central problem, hovering near 3% for the past year, with little progress toward the Fed's 2% target. Barr said that raises the risk that inflation could become more persistent if expectations begin to shift.
"The longer inflation remains above 2%, the greater the risk that it becomes entrenched in expectations," he said.
That concern shapes how he views the recent rise in energy prices tied to the conflict in the Middle East. In the past, central banks have often looked through oil-driven inflation shocks, assuming they would fade by the time their policy decisions made their way through the economy. Barr said that approach is less appropriate now, after several years of above-target inflation.
"You want to be careful about just thinking that it's OK to look through this particular energy shock," he said.
At the same time, the labor market appears to be losing momentum. Job creation and labor force growth have both slowed, even as the unemployment rate has remained low at 4.4%. Barr said the market is still "in balance," but weak, leaving it more exposed if conditions worsen.
That complicates the Fed's next move. Keeping rates elevated to bring down inflation risks further slowing hiring. Cutting rates to support growth could allow price pressures to persist. Barr said he supported the Fed's recent decision to hold rates steady while officials assess how those risks evolve.
Barr also said Thursday that monetary policy must remain independent from political pressure and that supervision of individual banks must be kept free from political influence.
His concerns extended to the structure of the financial system. Barr, the Fed's former top banking regulator, warned that recent regulatory changes could gradually reduce banks' ability to absorb losses.
Last week, he cast the lone dissenting vote on a 6-1 board decision to advance three proposed rules that would reduce how much money banks are required to hold in reserve against potential losses. Those reserves, known as capital requirements, act as a financial cushion that allows banks to absorb losses without collapsing. Barr said the cumulative effect of recent changes amounts to a $117 billion reduction in that cushion across the banking system.
"An adjustment here, an adjustment there, I think that's totally legitimate," he said. "But when you sum them all up together, it's actually quite a substantial deviation from that standard."
The rules are intended to implement an international agreement known as Basel III, reached after the 2008 financial crisis to ensure banks worldwide maintain adequate buffers. Barr said the proposals contain a number of material departures from that agreement, and warned the changes could prompt other countries to weaken their own standards in response.
Michelle Bowman, who took over as the Fed's Vice Chair for Supervision after Barr stepped down from the role, led the effort to advance the rules. She has said the changes would better align capital requirements with actual risk and correct unintended consequences from earlier postcrisis rules.
Barr stepped down under pressure from the Trump administration but remained on the board as a governor, a position he holds until 2032.
He also pointed to a decline in supervisory staffing, saying the number of bank examiners has fallen by about 30%, with many experienced officials leaving.
Still, Barr said the banking system remains healthy.
"The banking system is sound and resilient today," he said. "What I'm worried about is the slow erosion of those standards over the next several years."
For Warsh, his message was simple: The Fed is entering a period where economic risks and institutional pressures are rising at the same time. The next Fed chair will have to proceed with caution.
Write to Nicole Goodkind at nicole.goodkind@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 27, 2026 12:01 ET (16:01 GMT)
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