Federal Reserve's Barkin: Families and businesses view the oil price shock as a short-term phenomenon, with consumer spending remaining steady

Caixin Global, April 2 News Report (Editor: Niu Zhanlin) Richmond Fed Chair Thomas Barkin said that despite a sharp rise in oil prices, businesses and households still tend to view this shock as a short-term phenomenon for now, and there is currently almost no evidence that consumer spending has clearly fallen off, or that there has been a worrying change in public inflation expectations.

In his latest published interview, Barkin said, “My instinct is that for now, everyone is still looking at this issue from a short-term perspective.” This assessment is based on weekly credit card spending data, as well as his ongoing communication with corporate executives about matters such as pricing and investment.

“Gasoline spending has obviously risen by a large margin, but consumption in other areas is still quite steady,” Barkin said. “If you think this is only something that keeps going for two to four weeks, then spending an extra $10 to $15 per gallon, while not ideal, won’t fundamentally change your standard of living. But if you think this situation will last for a long time, that’s when consumption is more likely to contract.”

Since the United States launched airstrikes on Iran and triggered a surge in global oil prices, the Federal Reserve and major central banks around the world have, on the one hand, remained on alert, and on the other hand, shown patience—both worried that sustained high oil prices would push up inflation, and also avoiding overreaction while the duration of the conflict and its impact on prices remain unclear.

But for now, the geopolitical situation is still highly uncertain. This week’s market reflected the possibility of such rapid changes: Brent crude prices once climbed to above $119 per barrel, up more than 70% from before the conflict; then, after U.S. President Trump hinted that the military action might be approaching the end, prices fell back to around $102.

At the same time, according to AAA data, the average U.S. gasoline price rose to $4.06 per gallon on Wednesday, the highest level since the summer of 2022.

Barkin said there are multiple scenarios that could drive the Federal Reserve to shift its policy. But in his view, the main reason for raising interest rates depends on whether inflation expectations rise; if that happens, policymakers would have to take action to show their commitment to achieving the 2% inflation target.

“The interest-rate-hike scenario would begin with a clear and noticeable rise in inflation expectations, but I do not see that happening at present.”

By contrast, reasons for cutting rates include: inflation quickly falling from its current level, which is about 1 percentage point above the target, back toward around 2%; or a weakening labor market that would need support through rate cuts.

Markets will closely watch the March nonfarm payroll report to be released on Friday to judge whether the employment decline seen in February was a one-off event, or an early signal of economic weakness.

In the absence of clear evidence, the Federal Reserve may still keep a wait-and-see stance. Because of successive price shocks under Trump’s policies, the process of bringing inflation back down to the target this year is expected to be relatively slow.

Barkin said that in conversations with corporate executives, he has observed an increasingly evident split: companies in the goods sector have weaker pricing power, while the services sector has relatively stronger pricing power.

He mentioned that after speaking with a retailer that serves middle- and low-income consumers, “I strongly felt that consumers are already tired of price increases—they are resisting higher prices.” He said that this group of consumers can roughly only bear price increases in the range of 1% to 2%.

“Goods suppliers have gone through the process of passing on tariff and oil price costs multiple times. Now they feel there is almost no room left to raise prices further, but I don’t have the same feeling about the services sector.”

He believes the end result may be that the process of inflation returning to the target will be slower. This expectation is already reflected in market pricing: markets believe the likelihood of rate hikes is low, but they also expect the Federal Reserve to stay on hold for a long time—potentially not cutting rates again until after 2027.

(Caixin Global, Niu Zhanlin)