Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / Why the Fed Cares About Your Gas Bill More Than You Think
Transcript
- Lucas: So the April PCE data came out last week — core PCE at 3.3 percent annualized, right in line with expectations. And the market barely blinked. Luna: Right, because it was pretty much exactly what the Fed had telegraphed. No surprise, no drama. Lucas: Exactly. But there was one number in that report that actually got the Fed's attention — and it wasn't core. It was the energy component. Luna: Which is ironic, because the Fed has always said headline inflation is volatile and they look through energy spikes. But Goolsbee said yesterday that energy inflation has been 'more persistent than expected.' Lucas: He did. And that's a shift in tone. For a long time, the official line was: energy moves around, focus on core. But when energy keeps going up month after month, it starts to feed into inflation expectations — and that's something the Fed cannot ignore. Luna: So how persistent are we talking? Give me the numbers. Lucas: Well, headline CPI is now at 332.4, up from 330.29 a month earlier. That's about a 0.6 percent monthly increase, and energy is a big chunk of that. The Fed's own preferred gauge, the PCE price index, hit 130.9 in April. And the energy subcomponent has been running hot since the Iran conflict escalated in late 2025. Luna: And CNBC ran that number — the average household is paying an extra $450 a year on gas and energy because of the war. That's real money. Lucas: It is. And the problem for the Fed is that energy prices hit consumers directly and frequently. You see a higher price at the pump every week. That shapes your view of inflation way more than a 0.1 percent uptick in medical services. So when energy inflation stays elevated, it changes the psychology. Luna: Which is exactly the 'double scar' concept we've been hearing about — the idea that people still haven't gotten over the 2021-2022 inflation shock, and now they're getting hit again. Lucas: Right. And that's why Kashkari said this week that the inflation fight takes priority, even though the labor market is 'in decent shape.' The Fed is terrified of letting inflation expectations become unanchored. Once people start expecting 4 percent inflation, it becomes a self-fulfilling prophecy. Luna: So if energy keeps pushing headline inflation higher, does that mean the Fed can't cut rates even if core comes down? Lucas: That's the tension. The Fed's mandate is maximum employment and stable prices. Stable prices traditionally means 2 percent on core PCE. But if the public feels inflation is 4 or 5 percent because of gas, they act like it's 4 or 5 percent — higher wage demands, higher price-setting behavior. So the Fed has to respond to what people feel, not just what the core index says. Luna: That's a really important distinction. They're fighting the perception as much as the reality. Lucas: Exactly. And look at the market reaction — the ten-year yield is at 4.48 percent, the two-year at 4.19. The curve is still inverted, which means the bond market doesn't believe the Fed can cut anytime soon. And the effective fed funds rate is at 3.64, flat for months. Luna: So the market is pricing in that the Fed stays on hold because of this energy-driven sticky inflation. Lucas: Precisely. And every FOMC member who's spoken recently — Goolsbee, Kashkari, others — has reinforced that. They're not panicking, but they're vigilant. The word 'patient' keeps coming up. Luna: But here's what I wonder: is energy inflation really that persistent, or is it a geopolitical shock that will fade if the Iran situation stabilizes? Lucas: That's the million-dollar question. The Fed has to make policy based on where they think inflation will be in 12 to 18 months, not where it is today. If they believe energy is transitory — a supply shock — they can look through it. But if they think it's embedding into expectations, they have to act. Luna: And the risk is they act too late, or they overtighten and break something in the labor market. Lucas: Right. And that's the delicate balance. The labor market is still tight — unemployment low, JOLTS data still showing more openings than workers. But small caps, which are more sensitive to domestic economic conditions, are down 0.4 percent over the past five days. The Russell 2000 is at 2,908. That's a signal that the economy is slowing at the margins. Luna: So the Fed is walking a tightrope. Energy inflation keeps the pressure on, but they don't want to crush growth. Lucas: Exactly. And you know, it's a good reminder that monetary policy is never just about one number. It's about the stories people tell themselves about the economy. And right now, the story is: prices are high, especially at the pump, and the Fed isn't doing much about it. Luna: That's a tough narrative for them to combat. Lucas: It really is. But one thing that helps is that we're able to have these conversations without any noise. We don't have ads interrupting to sell you something. That's a choice we've made from the start — to keep this show focused on the substance. Luna: Absolutely. And if you find value in that approach, if walking through the economy with us has made something click, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep the production ad-free. Lucas: And it genuinely helps. No pressure, just an option for those who want to sustain what we're building. Now, back to the Fed's dilemma — one thing that's interesting is how the 'double scar' is showing up in consumer sentiment data. Luna: Yeah, sentiment has been at record lows, as we've talked about. But the Fed has been saying they can ignore it because spending is still strong. Is that still holding? Lucas: For now. April retail sales were still positive, but the trend is softening. The question is whether the energy shock starts to bite into discretionary spending more broadly. If people are spending $450 more on gas, that's $450 less for restaurants, travel, electronics. Luna: So the Fed is watching not just the price level but the allocation of spending. Lucas: Exactly. And that's why they're so focused on energy. It's not just a number in the CPI basket — it's a tax on consumers that ripples through the entire economy. And with the Iran war showing no signs of de-escalation, that tax is going to persist. Luna: Which brings us back to the timing question. When does the Fed actually cut? Lucas: Not until they see sustained evidence that inflation is on a path back to 2 percent — and that includes energy. The dots from the March SEP showed two cuts this year, but that was before energy spiked again. I'd be surprised if the June dot plot shows that many. Luna: So the story of the summer is: energy holds the key. Lucas: It really does. And the Fed can't just look through it, because the public isn't looking through it. They're feeling it every time they fill up.