Fed Watch – 4/3/2026

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi, I’m Lauren Saidel-Baker, and thank you for joining us for this April 3rd edition of Fed Watch. The big question the Fed is facing, will this shock to oil prices cause a rate hike or a rate cut? We’re seeing the argument for both, so I really want to drill into that. And then after, we’re also going to talk about retail sales, the numbers that came out this week, just to get that continued gauge of the US consumer.

But the big question, higher oil prices. Now we’ve talked about these in the past at ITR. We’ve talked about past precedents for why we think this spike in oil prices is going to be temporary. But either way, this is an inflation driver. This is certainly going to strain some segments of our consumer. It’s going to add costs to businesses. So what is the net result for the Fed? On face value, clearly the answer is that more inflation means rates should be higher, right?  If we do see higher oil prices feed through to these other drivers, to these other cost pressures, that’s a reason for rates to go up, not down. However, we’re also starting to see some arguments being made that these higher oil prices could actually slow growth more than they fuel inflation. And that would be an argument for rate cuts. Right now, odds are off for any move from the Fed this year. We do expect just a continued holding of the current interest rate. But there’s definitely going to be more attention, both politically from external forces to the Fed, as well as within those members of the Federal Reserve of the FOMC, who are starting to see both sides of this more academic argument. At the end of the day, if oil price rise is only temporary, we’ve talked about this in the past about, say, the Ukraine war as a pretty good case study for how we can get a short-term spike in oil prices that then comes down to something more like a normal pre-conflict level. In that case, these arguments will likely be moved because there won’t be so much pass-through into pricing. There won’t be so much drain on growth that we would need to see a move to either side. So the two could offset here in the near term. And our forecast is that by mid this year, certainly by the second half, we’ll start to see some more normalcy in oil prices. Again, a lot of these price shocks are caused by the fact that supply can be squeezed in the very short-term demand. That’s a little bit more stable. So we’re getting some speculation here. We’re getting some just risk premium being put on pricing much more so than we’re shifting those underlying supply demand fundamentals to a permanent degree. Even at these higher rates, even if prices are temporarily above, say, break-evens, we’re not seeing a lot of new exploration. Companies know that this is likely not a fundamental shift in the pricing structure. So we’re not getting new exploration. We probably won’t see too much new production turn on. But that said, we all see those prices at the gas pump. That is squeezing some segment of our consumers. And we got to read into the pre-war level of consumer spending on Wednesday when we got the retail sales numbers.

First of all, if you’ve been following the ITR forecast for retail sales, no change to that forecast. It’s been in place for quite some time now. We are really sticking with this expectation that growth is ahead, yes. But most of that growth is fueled by higher prices, not necessarily higher volumes. So the numbers that we saw on Wednesday, they were relatively strong. They did beat consensus expectations after several months of very lackluster monthly results. So I’m sure that today and this week you’re reading some very positive headlines. Let’s take a little bit of the shine off of those headlines.  There are still some cautionary signals in the leading indicators. We are seeing, again, much of this rise being fueled by inflation, not necessarily real volume. So what that means for consumers is that we’re not seeing a collapse. We’re not seeing a real pullback in spending. Even if it costs a little bit more to fill up my car at the gas pump, I’m not necessarily stopping at that gas pump. Instead, I’m continuing down the road to the store that maybe I had set out on this journey for. The risk here really though is some folks, when they’re going to the store, they’re spending more. We see that as how it’s reflected in nominal retail sales numbers, but they’re coming away with maybe a similar quantity of goods or in some cases maybe even less if this pricing is to blame. A few of the components that have been held down recently on pricing, things like food and beverage, things like gas that had been until very recently, one of the more slow to rise pricing components, those are both at risk with this temporary rise in pricing, with this straight being shut, with this conflict overall, both in terms of oil prices, but we also see fertilizer prices really spiking. The Strait of Hormuz is again a pinch point for fertilizer and a lot of the inputs that go into that. That really could be hitting us just as the US is entering our growing season or our planting season and needs this fertilizer now more than ever. So just price alone should cause those components to bounce in the very near term. Don’t take that as any long-term signal. And in fact, on Wednesday, we did see that grocery spending, again, this Wednesday data was through February, so before the conflict really got underway, grocery spending had been down. Expect that to start to bounce back here in the relatively near future. Another segment that did relatively poorly against the overall backdrop here was furniture. We’ve been talking about the housing market, about some of the challenges there that are keeping buyers out of the market, the real dislocation between the type of supply that’s out there, the type of inventory, and the types of homes that people actually want to buy. So if we do see fewer home sales, that means you’re not filling that home with new furniture. I expect that one to show a little bit more subdued results in the near term.  Where we did see things go relatively well though on those retail sales numbers, things like department stores, clothing, personal care, that’s a perennial opportunity that we’ve been talking about here at ITR.

Hopefully you’re familiar with that messaging. So looking forward, well, what could we see from the consumer? I don’t think we’re yet at the pinch point that we need to cut back in other areas in order to sustain spending on the energy side of things. Keep in mind, energy costs for households are already on the rise. In fact, household energy costs have more than doubled since 2000. So we can talk about the electricity demand, how much residential rates have gone up, where data centers are coming into town, just how much more draw down on the grid all of this electrification has caused. That is a non-temporary, that’s a much more structural driver that is going to strain our energy costs in the near term. But we’re coming from a point today where our total spending on energy is at a much lower share of our wallet than it has been in the past. So we have some ability to absorb this before other spending categories do get hit. Of course, we’ll be following all of that as we continue on this road through 2026.  We hope you’ll join us right here on ITR Fed Watch for that. Until then, take care.