Atlanta Fed's Raphael Bostic on Monetary Policy During Extreme Uncertainty

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1:27Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, we're here in Atlanta. I've never, I'm embarrassed. I've never really spent any time in Atlanta so far, but it seems lovely. We're in Midtown. I had a Southern food. I was going to ask, how much fried stuff have you eaten? I have to be really careful because I will devour the food while I'm here. So I went out with our producer, Carmen, last night, and we had fried chicken, fried okra, fried green tomatoes. I think there were a few other fried things. It was so good. It was so good. All right.

2:01But we're not actually here. That's not the point. We're not here just to talk about Southern food. We are actually here to interview someone very important. That's right. The president of the Federal Reserve Bank of Atlanta. And I think it's really interesting to be interviewing someone from the Fed at this particular moment in time, because just last week we had an FOMC meeting. They decided to keep rates unchanged. But then just a couple of days after that, over the weekend, we had some pretty big news. Well, that's right. So obviously, it's an extraordinarily difficult time for literally everyone to understand what's going on with the economy.

2:35The Fed in particular, people have talked about, oh, it's in a tight spot, right? Because there perhaps are signs of economic deceleration. There's the potential inflationary impulse of the tariffs. And the tariffs themselves keep moving. That being said, I was sort of knock on wood between the recent detente, so to speak, with China. Maybe things are quieting down. maybe we'll at least have some trade policy stability for some period of time, which maybe makes things today slightly easier to understand or anticipate than they might have even been a week ago. That is the big question. So why don't we get right to it?

3:14We're speaking with Raphael Bostic. He is, of course, the president of the Atlanta Fed. So, Raphael, thank you so much for coming on All Thoughts. Well, thank you for having me and welcome to Atlanta. Thank you. Thanks for having us. So I'm going to start with the, I guess, the obvious question. But, you know, last week after the FOMC meeting, you put out a statement saying that your baseline outlook is for the economy to be less resilient than you expected at the beginning of the year. Given the news over the weekend, a potential truce, at least for 90 days, between China and the U.S., does that change your outlook?

3:47A little. I would say the overarching message that I've gotten from the people I talk to and from our survey responses and other things, and it's the reason why I was comfortable with our policy action last week, is that there's just a tremendous amount of uncertainty out there. and because of that businesses and households as well aren't really comfortable making big decisions and as a consequence the amount of energy I would have expected to see in the economy is going to be less than that expectation was at the beginning of this year it looks like it's going to be less than that for the remainder of this year and then we'll have to see how things play out to determine how much less but that uncertainty definitely is weighing on consumers and business leaders alike.

4:36Joe and I have been joking about trying to get through podcasts nowadays without saying the word uncertainty. I don't think we've succeeded. It's literally never going to happen. That word comes up in every episode. But actually, going back to Tracy's question, what does that mean, the economy less resilient? What did you mean by that term? So what we've seen through the last several years is an economy where all the analysts had expected things to start slowing down. Inflation went very high. We had challenges in terms of supply chains, which led people to worry maybe labor markets would loosen, people lose their jobs.

5:17Sentiment expressed a lot of concern. Consumers and households were all expressing their frustration with things. All those things would have suggested that you would see less economic activity. And the fastest pace of rate hikes in decades. Correct. Yeah. And that just didn't happen. Like last year, GDP was over 2%, which is faster than potential in the face. Look, I go around and talk to a lot of folks. For much of the pandemic, the second question I would get after, what are you going to do with rates is, when is the recession happening? That was the overarching sentiment. I would always say, like that's not my outlook so people should expect that the momentum will continue that momentum did in fact continue and i call that resilience right that strength and that that continued energy in the economy that allows firms to produce people to consume at robust levels then we come to today where there's a lot of uncertainty and the uncertainty is hits on many levels and i'm i'm sorry i'm saying this word that no no no no it's just a joke You're allowed to use the word uncertainty.

6:28Well, thank you. Folks are not sure about the cost of goods again. People are not sure whether that will trigger a recession. I will say in the last six months, actually in the last three months, analysts have used the word recession in their narrative about possibilities far more than they have for quite some time. And all of that, people notice. And if folks think that there's going to be a possibility that they're going to lose their job or those sorts of things, they're going to engage differently. Their perceptions of what a safety net needs to be for them, that rainy day fund, is going to change.

7:07And their willingness to spend out of savings is going to change, or even spend out of regular income. All of that would suggest less energy. That's less resilience. Got it. And, you know, less resilience does not necessarily mean recession. I would say even today, recession is not in my outlook, but it's less, right? So rather than the 2 % or 2.5%, it may be 1%, maybe a half percent. That's the thing that I'm looking to really understand is as I try to keep my finger on the pulse of the U.S. economy. I think one of the reasons a lot of people expected recession going back to 2023, 2022, was the soft data measures, the surveys, looked absolutely terrible.

7:54And, you know, if you looked at something like consumer sentiment, people seemed to think it was basically the end of the world. Fast forward to 2025, and we do have a similar dynamic happening now where the soft data is deteriorating, but the hard data remains relatively strong. Is there a risk that this time is different and maybe we're a little overconfident in the economy given what happened with the soft data a couple years ago? So, you know, it's funny that you say this time is different. I always hesitate to say it on a podcast, but I still do it. But sometimes it can be different. Yeah.

8:27Well, a lot of times it can be different, but just as often as not, right? And so part of what I try to do in my approach is never assume, never have a preconceived notion or an expectation about what's going to happen, but rather just pay attention. And what I would say on the sentiment, which is quite interesting, you know, I was a psych major undergrad. Oh, I didn't know that. And so psych and econ, yeah. And so for me, I know psychology is important. And I know psychology can shift people's decision making even when the information set doesn't change. And so understanding that psychology and how it translates into decision-making is a critical thing.

9:05The very interesting thing with sentiment today is that we have had two realities with sentiment. The conventional wisdom is that when people are feeling bad, they do less. When sentiment turns negative, things slow down. I think there's been a history to show that that has been an experience more often than not. The anomaly or the odd one was this most recent one where sentiment was really down in the dumps, you know, the vibe session and all those sorts of things. But when push came to shove, consumers continued to go out. People kept going to restaurants, going on trips, renovating their homes, all those things.

9:44And the economy remained robust. So the question we have today is which of those realities is going to play out? And the one thing I would say that's different today than in the pandemic environment is that going into the pandemic, we hadn't had a high recessionary period. And we also didn't have a situation where the government was going to provide support for the economy in such a robust way. So you might imagine that even in the face of more negative sentiment, look, the pandemic was super stressful on many dimensions. And so it didn't surprise me people were a little kind of upset and rattled, if you will.

10:25But they got a lot of support. People kept their jobs. It's very interesting. When I think about the pandemic, a lot of it is people kept getting paid. The employment rate rebounded incredibly fast, but they didn't have things to spend on. They couldn't go to restaurants. They couldn't go on vacation. So the household balance sheet was actually quite stronger than you would expect to see in sentiment turning south. Today, that balance sheet is in quite a different place. I talked to a lot of folks and asked bankers, for example, compared to pre-pandemic where your customers' balance is. During the pandemic, everyone's like a lot higher, 30, 40 % higher.

11:06Today, that's not what I'm hearing. and many of them are back to pre-pandemic levels, which might mean that families' response function may be back to a pre-pandemic setting. And we'll just have to see how that plays out.

11:33Your best bottling plant employs 3 ,300 people. How do you get 3 ,300 people working at peak efficiency? Your best store has reduced waste, water, and energy usage. How do you make every store like your best store? Your best property has every guest raving. How do you make every property like your best property? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. How many vendors does it take to meet all your organization's food needs? Just one. EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor.

12:19In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. Eventually, I want to get to the contemporary situation and thinking about the tariffs, et cetera. But before we do, you know, thinking back, one of the residual lessons of the pandemic period, and there are two big ones and they've come up a lot, many lessons. But from the corporate perspective.

12:57One is companies maybe for the first time in a long time realized that they can raise prices without losing market share. And so suddenly price increases become maybe back on the strategy book. And then the other thing is the sort of residual fear of being caught short labor, right? And so for years, there was this expectation, you put a help wanted sign in the window and you get a line out the door and labor is easy to come by. And maybe one of the reasons that's been theorized for the lack of layoffs in say 2022, 2023 is just this fear that if you cut jobs, you're not going to be able to get them back in the door when you need them.

13:36Do you think those lessons still linger with us today? When you talk to business leaders today, do they still have sort of these searing memories of not having been able to staff their facilities once demand starts picking up? And do you think that still affects the sort of marginal impulse to layoff workers? So I wouldn't put it exactly like that. I think that there is a reluctance among firms, and this is what I've heard from most firms, that they're going to hold tight today and see how things evolve. And because there's two-sided risk, because the economy might be stronger than people are projecting today, or it might be weaker, you don't want to take actions that might cause you to have to do extra things to get back to where you are.

14:26So I think there's a precautionary posture that's happening today, which is actually quite different than what happened during the pandemic. We ask our firms through our surveys, is the labor market easier for you today, or is it worse than it was a year ago and two years ago. And uniformly, the answer is easier. Easier to hire. Easier to hire. The number of people who apply for a vacant position is up, in some instances, considerably. And the quality of the applicants is also up relative to where they were in the pandemic. Back then, they put a shingle out. And if they got someone, it was someone that they probably didn't want to hire.

15:05And they were hiring them anyway, because they didn't have options, that's not the environment that we have today. And that's important. In terms of the impulse of firms to increase prices, I do think that's still real today. And one lesson that I think people did learn through the pandemic was, if you tell people costs are up, and it's obvious that that wasn't in debate, then people understand that the price might have to go up. And what businesses learned is that most consumers, most of their customers were okay with that. The question is, are they still okay with that? And to me, I would say there are two really interesting dynamics that I think are potentially emerging.

15:52One is I think firms are going to try to apply the lesson learned from the pandemic. They have an assumption or an expectation that the consumer response is going to be exactly the way it was before. We will see if it actually is. And I think the concern about the level of prices that we heard a lot about in the last six months suggests that maybe they won't, but maybe they will. And in fact, it might actually be more complicated in that for some households, it may be the size of the change. So if it's a smaller incremental, it may not register. For others, it could be one penny, and that's too much.

16:37And then the third piece to this is sector by sector, do you wind up seeing different responses? And then if you wind up with something like that, and I think that's probably where we're going to wind up, then forecasting at the aggregate level becomes incredibly challenging. I mean, you have to wind up doing a lot more. Your spreadsheets get larger. The math gets more complicated. And so I think our job will get a bit more challenging. So just on this point, at the press conference last week, Powell seemed to suggest this idea of tariff impacts may be operating at different speeds. So the impact on inflation could potentially come quicker, especially if you had a bunch of companies immediately raising prices to offset the cost.

17:23But the impact on something like the labor market could take a lot longer to actually feed through, maybe even because some businesses still have residual scars from the pandemic or whatever. How do you deal with those two different factors operating at different speeds? It seems very difficult. Well, we have a very dynamic economy. And, you know, that's just an overarching feature of the environment that we work in. I think part of what we try to do in Atlanta is try to get hints about the longer run things in real time as much as possible. Because for many of these things, if you wait for them to show up in the national data, you're two months behind, a quarter behind, sometimes a couple of weeks behind.

18:11And then there's more of a scramble. We learned in the great financial crisis that we needed to be asking much more front forward and prospective questions about what businesses are seeing, what they're feeling and how they're going to respond. So that even if the revelation happens at different speeds, the impulses and the drivers will be more contemporaneous. And if you can discern those, then you might be able to get a head start on where things are going. What I would say today is, and it gets back to what we were just talking about, I think many firms will probably try to pass through costs to the extent they see them, they will learn pretty quickly whether those cost increases are being taken on by customers or being rejected by them.

18:59And then they'll have to make a decision about what is their production function going to look like. And once they make that decision, then they'll decide what kind of workforce they need. I'm expecting that those lessons will be learned quickly. And as I go around, I talk to chambers of commerce, I do open kind of discussions in cities all across the sixth district i say if you're if you see someone doing something that's really different than what they were doing two weeks ago you need to call us and let us know because we need to be collecting that information to try to understand whether a single impulse is actually a trend and whether there are some lessons that can be learned from the collection of the masses we need a fed tip line is like exactly how many calls have you been getting?

19:44Have you been getting calls? So no, nobody calls me, but we have a team that's out in the field and they are getting calls on a regular basis. You know, when I got here, I was really, I didn't really know any of this, but we have a network of staffers whose job it is, is just to have relationships with business leaders and with community folks all over the Southeast and come and see them and talk to them in really conversational, unstructured ways for 90 minutes, two hours, just to get a sense of where are they, how are they feeling, what are they worrying about, what are they excited about, what's changed.

20:19And because the relationships are personal on some level, people do feel more comfortable picking up the phone and telling us things. And it's been something that's really helped us. So we knew fairly early on that people's horizon in the pandemic was expanding. So we did a survey. We do a number of surveys. We have a survey shop here. We did a survey of businesses and asked them, okay, in April of 2020, when do you think this will be done? They said September of 2020. In January of 2021, we asked them, they said probably another 18 months, right? And it was this learned experience. experience.

20:58And we got to see their understanding of the environment evolve in real time in ways that really, I think, helped us understand what questions we needed to ask and what kind of decisions and policy changes that we should be looking for. It's been quite interesting. And I think there's going to be some of that. There's going to be a lot of that that happens in the next several months. Look, we've just gone through a period where people were expecting tariffs. I think many people didn't expect the tariffs to roll out at the scale that we saw. And it's causing everyone to think about, okay, now if this is our new reality, how do I think about this?

21:35What am I going to do? And just as it was at the early stages of the pandemic, people are kind of doing it on the fly. And the only way to really understand how things are going, what people are doing on the fly, is to be there with them and to be continually asking them and seeing how their decision making and their changes are evolving as they get more insights. So as the tariff environment shifts, as the numbers move around, there's learning when you see, oh, their strategy was A and now their strategy is M. That's saying something about their thought process and what they're likely to do moving forward.

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23:53Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosure. So let's talk a little bit more about the intersection of tariffs and monetary policy. And something that's been on my mind in particular is tariffs are a supply shock in some way. And what I've been wondering about is, does that therefore increase the terminal rate in terms of how low the Fed can ultimately go in a cutting cycle?

24:28OK, you're supply constrained on some level. perhaps also in theory there's going to be some force development in the united states of some industrial capacity and so that's a positive activity impulse does that mean when you think about like weakness and when you think about possible rate cuts which is what everyone is expecting at some point does that increase the floor of how low you can go i don't think of it like that okay but first of all i think being able to say a blanket statement on anything like this is going to be quite challenging it would be challenging if you just picked one tariff rate for the whole world yeah in an environment now where there's so much variation and discrep price discrimination country to country and sector to sector it's really difficult to know how to add it all up and then you overlay that the numbers can change but we're expecting i i one of the things i do when i talk to folks in public settings show of hands how many people think that the tariff numbers that we see today are going to be the tariff numbers that we see a month from now does anyone raise nobody's hands goes up and in part that's by design right so we know there are negotiations going on we know it's a 90-day moratorium in some of these instances So that change that's out there means that it's going to be very challenging.

25:51I try to go back to just our basic mandate. We got price stability and we have maximum employment, maximum sustainable employment is how I like to think about it. And so what I try to do is figure out, okay, given all the things that are going on, what's that likely to do for us getting closer to our 2 % target on inflation? and what's that likely to do in terms of the movement of labor markets relative to some broad notion of full employment. Today, what I would say is what I hear from analysts when I talk to my economists in the building, they're like, relative to the pre-tariff environment, tariffs put an upward force on inflation.

26:34And so that means that our policy is going to have to anticipate and to some extent potentially push against those inflationary forces to the extent that we see them. So that will put a limit on where our current policy stance is. Now, you asked something about the broader economy-wide new fundamental as to like an R-star type of thing. I think there's a lot of debate. There's a lot of debate on sort of R-star in non-turbulent times. For sure. And so today, I think you would see the same thing. Look, I think pre-pandemic, coming out of the great financial crisis, and actually even before that, we knew there was a long secular decline in our start.

27:18Demographics and a whole host of other things were believed to be behind it. And the notion that you could see inflation move the way it has kind of caused people to have to step back and say, well, wait a minute. Maybe our notion of the immutable is not so immutable. And I think that debate is being taken on board right now. And so the other thing to think about is, look, to the extent that we are in a period where firms are redoing their supply chains and perhaps not looking for lowest cost location, that has implications for just, could potentially have implications for what a baseline new level of inflation is likely to be writ large.

28:04and if that is what happens then sure all the fundamental dynamics and measures are going to change as well but we haven't seen that and you know it's it's been interesting i've talked to a number of producers we and they have production in multiple countries and they say you can put the same plant in three different countries and they will have different levels of productivity And that is interesting. But it also means that the specifics of where they put things down, how much production happens in those places, and then where assembly and it all comes together is incredibly material. and folks don't have the answers to those things now so so i actually try to shy away from sure thinking about those bigger issues right now and just say look we're in a period of tremendous transition where we had a received wisdom cost minimization and production free and open trade and that equilibrium is being broken and when you're in disequilibrium in econ you know there's the, I forgive me what they say it, but there are an infinite number of possible new equilibriums that you could achieve.