Federal Reserve Governor Michael Barr laid out two distinct policy paths for the upcoming September meeting during a Tuesday forum in Washington, with rate increases on the table if inflation fails to demonstrate meaningful easing.

Speaking at the "Second Chance Loan Forum" hosted by Prosperity Now and the Collateral Consequences Resource Center, Barr devoted most of his address to obstacles faced by individuals with arrest or conviction records in employment, banking, credit access, and entrepreneurship. However, he first outlined his assessment of current economic conditions and considerations for the September 15-16 Federal Open Market Committee meeting. The federal funds rate target range currently sits at 3.50% to 3.75%, with no decision yet made on whether adjustments will occur this month.

Inflation Assessment and Two Policy Paths

Barr noted that labor markets remain stable with relatively low unemployment, and economic growth continues at a solid pace. He highlighted artificial intelligence-related business investment and capacity building as key growth drivers, alongside several consecutive years of strong productivity and new business formation. Consumer spending has so far maintained notable resilience.

Yet he simultaneously emphasized that inflation remains excessively high and has persisted above target for more than five years. Price growth has moderated from a peak exceeding 7% in 2022 to slightly above 2% in 2024, but this progress has stalled during 2025. Barr specifically identified tariffs, Middle East conflicts, and the rapid expansion of AI capacity as contributing factors, while noting that core non-housing services inflation remains elevated.

The Governor warned that when inflation stays above target for extended periods, the risk increases that broader price pressures become entrenched, and he is monitoring this closely.

For the upcoming FOMC meeting, Barr outlined two potential approaches. If incoming data gives him sufficient confidence that inflation is following a path toward the 2% target, he could support taking additional time to assess the current policy stance. However, if disinflation appears insufficient, the response should be decisive rate increases.

Market pricing on Tuesday morning reflected approximately 66% odds of a 25-basis-point rate hike at this month's meeting, according to media reports. The latest price data shows an overall 3.7% increase over the trailing twelve months, with core inflation at 3.3% when excluding food and energy. Consumer Price Index and Producer Price Index readings due next week will provide the committee with one more round of data before the meeting.

Fed Chair Kevin Warsh also emphasized at the Jackson Hole symposium on Friday that there must be conviction that underlying inflation is moving clearly and sufficiently quickly toward target, otherwise "there is more work to do."

Employment and Financial Barriers for Formerly Incarcerated Individuals

Barr connected full employment to a labor market open to all participants, including those who have been incarcerated or interacted with the justice system. He cited research showing that employment propensity declines by approximately 7% to 26% following an initial criminal charge, with effects still visible six years later. A 2018 study revealed that unemployment rates among formerly incarcerated individuals approach nearly five times that of the general population.

People of color often experience more severe impacts from criminal records. Despite years of "ban the box" and "clean slate" legislation, employment gaps persist.

Occupational licensing presents an additional hurdle. Nearly one-quarter of American jobs require government-issued occupational licenses, and several states permit licensing boards to disqualify applicants based solely on criminal records, even when the offense is unrelated to the profession and poses no substantive public safety risk. Barr noted research suggesting that reducing licensing burdens could lower recidivism rates and improve employment outcomes.

On the financial side, those with records face significant limitations. A 2022 Consumer Financial Protection Bureau report found that bail bonds, remittance fees, and related costs push this population into cycles of high-cost debt, delinquency, and lower credit scores. Federal Reserve survey data from 2023-2024 shows that 75% of individuals without criminal records describe their financial situation as doing okay or living comfortably, compared to only 60% among those convicted and incarcerated once.

Those with convictions hold bank accounts and credit cards less frequently while using payday loans and pawnshop lending more often. Formerly incarcerated individuals report 16 percentage points lower confidence in being approved for credit, yet their actual application rates over the past year are 10 percentage points higher. Barr concluded from this disparity that the problem lies in insufficient mainstream credit supply rather than inadequate demand.

He suggested that cash flow underwriting and alternative financial data could open pathways for people with thin credit files and lower scores.

Entrepreneurship and Second Chance Lending

Approximately 20% to 30% of individuals with records identify as self-employed. A 2021 study estimated that around 1.1 million small business owners nationwide, representing nearly 4% of all small business owners, have criminal records. Estimates indicate that formerly incarcerated individuals who start their own businesses can earn 24% more annually compared to traditional employment, and entrepreneurship shows stronger effects on reducing five-year recidivism rates than conventional paid work relative to unemployment.

Barr identified three core elements necessary for entrepreneurship: credit access, business networks and connections, and skills or technical assistance. In 2024, the Small Business Administration finalized rules eliminating multiple criminal record prohibitions in its small business lending and guarantee programs, while also removing automatic disqualification for those on parole or probation. The rationale cited the prevalence and viability of business ownership among people with records.

He highlighted the case of a community development financial institution affiliated with the Texas Prison Entrepreneurship Program, whose graduates have launched more than 500 businesses, some generating annual revenues exceeding $1 million. The nationwide network of Small Business Development Centers does not directly lend but assists with business plans, financial projections, and loan preparation materials, while referring clients to SBA-approved lenders, CDFIs, and micro-lenders.

Chambers of commerce and local economic development organizations supplement these efforts by providing networks and informal credit endorsements. Barr emphasized that these channels should be equally accessible to entrepreneurs with records. Some cross-state training programs report high completion rates, and businesses founded by their graduates employ other individuals with records.

Underwriting Data, Pilot Programs, and AI Tools

Barr expressed hope that the forum would help entrepreneurship programs better serve individuals with records. Existing evidence demonstrates that such programs reduce recidivism, but systematic evaluation remains lacking regarding broader individual-level economic effects, savings to social costs, and credit qualification data that could directly support underwriting decisions.

He advocated for expanding pilot programs and conducting long-term program evaluations to identify replicable practices and attract funding accordingly.

On the technology front, Barr mentioned AI-supported cash flow underwriting or alternative data underwriting as providing a "second look" opportunity for formerly incarcerated individuals with thin credit files. AI can also quickly answer common financial questions, provided content remains accurate and compliant with consumer and investor protection regulations.

For business owners, AI can assist with drafting business plans, organizing legal structures, conducting market analysis, and reviewing industry reports. Many small businesses already use AI for marketing, social media, or financial planning functions they cannot afford dedicated staff to handle.

Barr stressed that AI supplements entrepreneurial skills rather than replacing thinking and business plan execution. For AI to be effective, it requires broad access, affordable pricing, and safety standards, he concluded.