By Howard Schneider
WASHINGTON, April 1 (Reuters) - Businesses continue to act as if high oil prices will prove only a short-term disruption, with little evidence yet it has caused consumers to pull back on spending or shifted public inflation expectations in a worrisome way, Richmond Federal Reserve Bank President Tom Barkin said.
"My instinct is you've still got a short-term lens on this," Barkin told Reuters on Tuesday, basing his conclusion on things like weekly credit card spending data and his regular
conversations with business executives about pricing, investment and other issues.
"Gas spending is up a lot, obviously, but the rest of spending still looks pretty healthy," said Barkin, who is not a voter on interest rate policy this year. "If you think this is a two- or three- or four-week thing, an extra $10 to $15 isn't great but it doesn't fundamentally change your standard of living. If you think this is going to last for a long time that's when I think you're more likely to see pullback."
Since the start of U.S. airstrikes in Iran and the ensuing surge in global oil prices, Fed officials and central bankers globally have reacted with equal parts concern and patience - concern that sustained high energy prices could raise inflation they are fighting to contain, and patience against overreacting until it is clear how long the conflict might last and what the impact on prices might be.
The Fed at its most recent meeting held the policy interest rate steady in the current 3.50% to 3.75% range, with policymakers still projecting a single quarter-point rate cut by the end of the year.
But the situation is unpredictable. The potential for quick change in either direction was apparent this week when benchmark Brent crude oil briefly topped $119 a barrel, more than 70% higher than before the U.S. commenced bombing, then plunged to around $102 after President Donald Trump indicated the U.S. campaign may be nearing its end. He is to address the nation Wednesday night.
Gas prices, meanwhile, jumped again on Wednesday to a national average of $4.06, according to AAA, the highest since the summer of 2022, when a combination of pandemic-era supply shocks and strong consumer demand led to the worst surge of inflation in 40 years.
Fed officials are intent on avoiding a repeat, and the oil surge prompted investors to - briefly - anticipate the Fed would begin hiking interest rates this year rather than at some point resuming the rate reductions that had been expected.
Barkin said there are scenarios that could push the Fed in any direction at this point, but the case for a hike would in his view likely revolve around a rise in inflation expectations - the sort of development that would compel policymakers to prove they are committed to keeping price increases in line with their 2% target.
"The hike case would be around inflation expectations starting to finally move," he said. "I don't have a sense that they've broken out at this point."
The case for cuts, by contrast, would involve either inflation starting to move quickly back towards the Fed's 2% target from about a percentage point above that now, or a weakening in the job market that required support in the form of rate cuts.
PRICING POWER WEAKER IN GOODS THAN IN SERVICES
The employment report for March due Friday will be watched closely to see if the job losses posted in February prove an anomaly or were a sign of developing weakness.
Absent that, however, the Fed may be left on hold, with inflation expected to make only halting progress towards the central bank's target this year, given successive price shocks under Trump that began with tariffs and continued with oil.
Barkin said in his conversations with executives he sees a split developing between the goods sector, where retailers feel their pricing power has been limited by pushback from consumers, and the service sector, where firms that cater to better-off households in particular feel more free to raise prices.
After talking with one retailer focused on low to moderate-income customers, "I had the strong sense that consumers are exhausted by price increases," he said. "They're pushing back. I walked out with the lens that 1% to 2% (of price increases) ... that would be about as much as they could handle."
"Where there's more vulnerability is on the services side, particularly selling to high-end customers," he said.
"Goods suppliers who've been through the drill multiple times with trying to pass on tariffs and trying to pass on oil shock costs, they just don't feel they've got much left," Barkin said. "I don't have the same feeling on services."
The likely result, Barkin said, is slower progress back to the Fed's inflation target, an outlook now embedded in market expectations that see rate hikes as off the table, but also with the Fed on an extended pause well into 2027 before rate cuts are expected.
"I see a gradual path, not a quick path. That's my instinct."
(Reporting by Howard Schneider;Editing by Dan Burns and Chizu Nomiyama)
