Federal Reserve's Barkin: Households and businesses view the oil price shock as a short-term phenomenon; consumer spending remains robust

Richmond Fed Chair Thomas Barkin said that although oil prices have surged sharply, businesses and households still tend to view the shock as temporary, and there is currently little evidence that consumer spending has fallen meaningfully or that the public’s inflation expectations have shifted in a worrying way.

In his latest published interview, Barkin said, “My intuition is that, for now, people are still looking at this issue through a short-term lens.” This judgment is based on weekly credit card spending data, as well as his ongoing conversations with business executives about pricing, investment, and other matters.

“Gasoline spending is clearly up a lot, but consumption in other areas is still fairly steady,” Barkin said. “If you think this is something that will last only two to four weeks, then paying an extra 10 to 15 cents 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 you’re more likely to see consumer contraction.”

Since the United States carried out airstrikes against Iran and triggered a global surge in oil prices, the Federal Reserve and central banks worldwide have both maintained vigilance and shown patience—worried that persistently high oil prices could push inflation higher, while also avoiding overreaction while the duration of the conflict and its impact on prices remain unclear.

But for now, the geopolitical situation remains highly uncertain. This week’s market action highlighted the possibility of rapid change: Brent crude prices briefly rose to more than $119 per barrel, up over 70% from before the conflict; then they fell back to around $102 after U.S. President Donald Trump suggested that the military action may be nearing the end.

Meanwhile, according to AAA data, the national average price of gasoline in the United States 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 a shift in Federal Reserve policy, but in his view, the main driver of the case for further rate hikes is whether inflation expectations rise; if that happens, policymakers would have to act to demonstrate their commitment to achieving the 2% inflation target.

“A rate-hike scenario would be centered on a clear rise in inflation expectations, but for now I’m not seeing that happening.”

By contrast, the case for rate cuts includes: inflation dropping quickly from its current level—about 1 percentage point above target—to around 2%, or weakness in the labor market that would require support via rate cuts.

The market will closely watch the March jobs report to be released on Friday to determine whether the employment decline seen in February was a one-off event or an early sign of economic weakening.

In the absence of clear evidence, the Federal Reserve may still keep its wait-and-see stance. Due to repeated 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 business executives, he has observed an increasingly clear divergence: companies in the goods sector have weaker pricing power, while the services sector is relatively stronger.

He said that after speaking with a retailer serving lower- and middle-income consumers, “I strongly felt that consumers are already tired of price increases—they are resisting them.” He said such consumers can roughly only absorb price increases of about 1% to 2%.

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

He believes the end result could be that the process of inflation returning to target will be slower. This expectation is already reflected in market pricing right now: the market thinks the likelihood of further rate hikes is low, but at the same time expects the Federal Reserve to remain on hold for the long term, even not until after 2027 when it would cut rates again.

（Source: Caixin Finance）