U.S. businesses and households still adjusting to the Trump administration’s tariff policies also are reeling from a surge in energy prices due to the Iran war, a Federal Reserve report showed on Wednesday, even as it noted that economic activity in most of the country increased in recent weeks and employment was steady.
“The conflict in the Middle East was cited as a major source of uncertainty that complicated decision-making around hiring, pricing, and capital investment, with many firms adopting a wait-and-see posture,” the U.S. central bank said in its latest “Beige Book” report, a roundup of qualitative economic data from across the country that policymakers use to help inform their understanding of the economy and their interest rate decisions.
“Business outlooks varied amid widespread uncertainty about future conditions,” it said, with contacts in the Boston and St. Louis Fed districts noting some optimism despite the war, while darker moods dominated in other regions.
As one contact told the Kansas City Fed, low-to-moderate-income households “can’t out-budget low wages, tariffs, and inflation.” The Fed is expected to leave its benchmark overnight interest rate on hold in the current 3.50%-3.75% range at its next policy meeting on April 28-29, as policymakers also adopt a “wait-and-see” posture.
Price growth “mostly remained moderate overall,” according to the report, which draws on surveys of and interviews with business leaders and community organizations across all 12 of the Fed’s districts.
Higher energy costs mean more expensive shipping and higher costs for plastics and fertilizers, the report said, adding that “input cost pressures beyond energy-related increases also were widespread.”
“Multiple manufacturers and retailers increased prices to cover rising input costs and previously absorbed tariff-related costs,” the Cleveland Fed reported. “Some manufacturers implemented surcharges on oil-related inputs affected by the conflict in the Middle East.”
Fraying of Consumers’ Resilience
The information in the latest report was gathered on or before April 6 and captures the unsettled economic mood since Iran’s closure of the Strait of Hormuz disrupted shipments of about a fifth of the world’s oil shipments and about a third of its fertilizer shipments.
The average price of gasoline in the U.S. has jumped to more than $4 a gallon, retail diesel prices have surged to more than $5.60 a gallon and fertilizer prices also have risen sharply.
The prior Beige Book, which reported overall optimistic expectations for economic growth and an expectation that the pace of price increases would slow, was completed before the latest hostilities in the Middle East began on February 28.
Policymakers and analysts alike had been surprised at the resilience of consumer spending despite a series of economic shocks including the jump in inflation after the COVID-19 pandemic and last year’s tariff shock. The latest Beige Book included some evidence of fraying.
A jeweler in Williamsburg, Virginia, told the Richmond Fed, “if they can save a dollar and get free shipping, they’re shopping online … it’s been my worst year so far.”
Manufacturing firms in the Fed’s New York district noted that greater uncertainty due to changing tariffs and the war was “upending pricing schedules and making customers hesitant to commit to purchases.” Even so, despite the headwinds “some firms reported strong momentum,” the New York Fed said.
Inflation Outlook
Fed policymakers say they typically “look through” temporary increases in commodity prices, and many say they still expect goods inflation from last year’s tariff shocks to ease later this year, a development that would allow them to resume cutting interest rates.
At the same time, inflation has been running above the Fed’s 2% goal for more than five years. The latest data has economists estimating a jump last month not only in headline inflation but also “core” inflation, which excludes energy and food prices, that policymakers use to gauge future inflationary pressures.
Policymakers largely see the U.S. labor market as stabilizing, with slowing job growth balanced by a shrinking workforce amid a sharp decline in immigration.
Unemployment ticked down last month to 4.3%.
The Beige Book noted that wage competition overall remained “muted,” suggesting the labor market was not adding to inflationary pressures. Several districts also mentioned the lack of widespread layoffs and low turnover, further evidence that a low-fire, low-hire labor market remains the norm in much of the country.
There also were signs that artificial intelligence continues to reshape the labor landscape.
“A few contacts reported using generative AI tools to reduce costs and pause new hiring,” the San Francisco Fed said.
(Reporting by Ann Saphir; Editing by Paul Simao)
