Exclusive: Fed's Barkin: Households, firms still see oil shock through a "short-term lens"

• Weekly credit card data shows gas spending is up significantly, but overall consumer spending remains healthy, suggesting households view higher prices as short-term
• Retailers serving low-to-moderate income customers report strong consumer pushback on prices (limiting increases to 1-2%), while service firms catering to high-end customers retain more pricing power
• Fed rate hikes would only be considered if inflation expectations break higher, while the current outlook is for an extended pause into 2027 with gradual progress toward the 2% inflation target

Federal Reserve's Barkin: Oil Shock Viewed as Short-Term by Businesses and Consumers

Richmond Federal Reserve President Thomas Barkin stated that businesses and households continue to treat elevated oil prices as a temporary disruption, with no significant shifts in consumer spending or inflation expectations observed yet.

Key Developments:

Following U.S. airstrikes in Iran, oil prices surged over 70%, with Brent crude briefly topping $119 per barrel before falling to around $102. U.S. gas prices jumped to a national average of $4.06—the highest since summer 2022. Despite increased gas spending, overall consumer expenditure remains healthy according to credit card data and business executive conversations.

Fed Policy Stance:

The Federal Reserve held its policy rate steady at 3.50%-3.75% at its most recent meeting, maintaining projections for a single quarter-point rate cut by year-end. Barkin outlined three potential scenarios: rate hikes would only occur if inflation expectations "break out"; rate cuts could happen if inflation quickly returns to the 2% target or if the job market weakens significantly. The March employment report due Friday will be critical in assessing labor market strength after February's job losses.

Market Implications:

Barkin identified a pricing power divide: retailers serving low-to-moderate income consumers face significant pushback, limiting price increases to 1%-2%, while service sector firms catering to affluent customers retain stronger pricing flexibility. This dynamic suggests slower progress toward the Fed's 2% inflation target.

Market expectations now anticipate an extended Fed pause through 2027 before rate cuts resume, with rate hikes off the table. Successive price shocks from tariffs and oil are expected to keep inflation above target throughout the year.