①Richmond Fed President Barkin stated that despite rising oil prices, both businesses and households still view it as a short-term phenomenon, with no significant decline in consumption or worrying changes in inflation expectations; ②Barkin believes that the Federal Reserve’s policy shift depends on whether inflation expectations rise. Currently, there are no clear signs of a significant increase, and the market expects the Fed may remain on hold for an extended period.
Cailian Press, April 2 (Editor Niuzhanlin) Richmond Fed President Thomas Barkin stated that despite the sharp rise in oil prices, businesses and households still tend to see this shock as a short-term phenomenon. There is currently little evidence showing a notable decline in consumer spending or any concerning changes in public inflation expectations.
In a recently published interview, Barkin claimed: "My intuition is that people are still viewing this issue from a short-term perspective." This judgment is based on weekly credit card spending data and his ongoing discussions with corporate executives regarding pricing and investment issues.
"Gasoline expenditures have clearly risen significantly, but consumption in other areas remains fairly robust," Barkin said. "If you think this will only last two to four weeks, then spending an extra $10 to $15 per gallon, though not ideal, won’t fundamentally change your standard of living. But if you believe this situation will persist for a long time, then we’re more likely to see a contraction in consumption."
Since the United States launched airstrikes against Iran, triggering a global spike in oil prices, the Federal Reserve and major central banks worldwide have remained vigilant while also demonstrating patience—concerned about prolonged high oil prices driving up inflation, yet avoiding overreaction when the duration of the conflict and its impact on prices remain unclear.
However, the current geopolitical situation remains highly uncertain. This week's market reflected the possibility of rapid changes: Brent crude oil prices once surged above $119 per barrel, marking a more than 70% increase from pre-conflict levels, but later retreated to around $102 after President Trump hinted that military action might be nearing an end.
Meanwhile, according to AAA data, the average U.S. gasoline price rose to $4.06 per gallon on Wednesday, the highest level since summer 2022.
Barkin stated that various scenarios could potentially drive a shift in the Fed’s policy, but in his view, the rationale for raising interest rates largely hinges on whether inflation expectations rise. If this occurs, policymakers will need to take action to demonstrate their commitment to achieving the 2% inflation target.
"The scenario for raising interest rates would revolve around inflation expectations beginning to show a noticeable rise, but I haven’t seen that happen yet."
In contrast, reasons for cutting interest rates include: inflation quickly falling back to around 2% from its current level, which is approximately one percentage point above target, or a weakening labor market requiring support through rate cuts.
The market will closely monitor the March non-farm payroll report to be released on Friday, in order to determine whether the employment decline observed in February was an isolated event or an early sign of economic weakening.
In the absence of clear evidence, the Federal Reserve is likely to maintain a wait-and-see stance. Due to consecutive price shocks under Trump's policies, inflation is expected to return to the target level at a slower pace this year.
Barkin noted that in his interactions with corporate executives, he has observed a growing divergence: pricing power is relatively weak in the goods sector, while it remains stronger in the services sector.
He mentioned that after speaking with a retailer targeting middle- and low-income consumers, he strongly sensed that consumers have grown weary of price increases and are now resisting further hikes. He indicated that such consumers can only tolerate price increases of roughly 1% to 2%.
“Goods suppliers have repeatedly passed on tariff and oil price costs, and now they feel there is little room left to raise prices, but I do not sense the same constraint in the services sector.”
He believes that the eventual outcome could be a more gradual return of inflation to the target. This expectation is already reflected in market pricing: the market sees limited likelihood of rate hikes, while also predicting that the Federal Reserve may remain on hold for an extended period, potentially not cutting rates again until after 2027.
Editor/Liam