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

Summary

Odd Lots Podcast Summary: Atlanta Fed's Raphael Bostic on Monetary Policy During Extreme Uncertainty

Release Date: May 16, 2025

In this compelling episode of Bloomberg's Odd Lots podcast, hosts Tracy Alloway and Joe Weisenthal engage in an in-depth conversation with Raphael Bostic, President of the Federal Reserve Bank of Atlanta. The discussion delves into the intricate dynamics of monetary policy amidst unprecedented economic uncertainty, influenced by factors such as tariffs, global trade tensions, and lingering effects of the COVID-19 pandemic.

1. Economic Resilience and Uncertainty

Bostic opens the discussion by addressing the current economic landscape marked by significant uncertainty. He emphasizes how this uncertainty impacts business and consumer confidence, leading to more cautious economic behaviors.

"[04:34] Bostic: ...there's just a tremendous amount of uncertainty out there. ...businesses and households aren't really comfortable making big decisions."

This pervasive uncertainty has led to decreased economic energy and resilience, potentially slowing down economic momentum for the remainder of the year.

2. Reevaluating Economic Indicators

The conversation shifts to the relationship between soft and hard economic data. Tracy Alloway points out the discrepancy between deteriorating soft data, such as consumer sentiment, and relatively strong hard data like GDP and wage growth.

"[08:18] Tracy Alloway: ...soft data is deteriorating, but the hard data remains relatively strong. Is there a risk that this time is different?"

Bostic responds by highlighting the evolving nature of economic perceptions and the importance of understanding psychological factors in economic decision-making.

"[08:44] Bostic: ...psychology is important, and it can shift people's decision making even when the information set doesn't change."

3. Impact of Tariffs and Trade Policies

A significant portion of the discussion revolves around the effects of tariffs as a supply shock and their implications for monetary policy. Joe Weisenthal raises questions about whether tariffs could set a floor for how low the Fed can adjust interest rates.

"[24:22] Joe Weisenthel: ...tariffs are a supply shock. ...does that therefore increase the terminal rate in terms of how low the Fed can ultimately go?"

Bostic explains that while tariffs exert an upward pressure on inflation, they complicate the Fed's policy decisions by introducing additional variables that must be considered.

"[25:11] Bostic: ...tariffs put an upward force on inflation. ...our policy is going to have to anticipate and potentially push against those inflationary forces."

4. Lessons from the Pandemic

Reflecting on the pandemic's aftermath, Bostic discusses how businesses learned to adjust pricing strategies without losing market share and the challenges related to labor market flexibility.

"[14:22] Bostic: ...firms have a reluctance to take actions that might cause them to have to do extra things to get back to where they are."

He notes that unlike during the pandemic, where government support kept household balance sheets strong, current conditions show that families' financial resilience might not be as robust, affecting consumer spending behaviors.

5. The Neutral Rate and Policy Navigation

The concept of the neutral rate (R*) is scrutinized in the context of current uncertainties. Tracy Alloway questions its utility in guiding policy amidst fluctuating economic indicators.

"[29:55] Tracy Alloway: ...is the neutral rate even a useful concept given the current levels of uncertainty?"

Bostic acknowledges the complexities and debates surrounding R*, emphasizing that economic models have inherent uncertainties and that real-world factors often deviate from theoretical expectations.

"[30:08] Bostic: ...economic models are models. They are stylized characterizations of how the world actually works."

6. Monetary vs. Fiscal Policy Tensions

The interplay between monetary policy and external fiscal decisions, such as trade policies, is explored. Bostic asserts that while the Fed adapts to changing policies, the magnitude of recent changes poses unique challenges.

"[40:54] Bostic: ...trade policy is not something that the Fed manages..."

He highlights the necessity for the Fed to continuously gather real-time insights from businesses to better anticipate and respond to evolving economic conditions.

7. Outlook and Policy Recommendations

Looking ahead, Bostic expresses caution, indicating that uncertainty is unlikely to resolve quickly, which may limit the number of rate cuts for the year.

"[43:07] Bostic: ...our outlook is one cut for the year. ...the uncertainty is unlikely to resolve itself quickly."

He underscores the importance of maintaining flexibility in policy decisions to navigate the ongoing economic transitions.

8. Small vs. Large Businesses

The discussion also touches upon how tariffs disproportionately affect small businesses compared to larger firms, with smaller entities bearing greater risks amid rising costs.

"[44:53] Bostic: Absolutely. ...small business leaders are the ones who are feeling most at risk."

9. Supply Chain Diversification

Finally, Bostic explores the long-term implications of tariffs on supply chain strategies, predicting a shift towards diversification to mitigate risks associated with geopolitical tensions.

"[48:56] Tracy Alloway: ...companies have to top of mind... how these things get organized."

He anticipates that this diversification will complicate economic forecasting and require more nuanced policy approaches.

Conclusion

Raphael Bostic provides a nuanced perspective on navigating monetary policy amid extreme uncertainty, highlighting the intertwined nature of global trade dynamics, consumer behavior, and economic resilience. The conversation underscores the Federal Reserve's adaptive strategies in response to evolving economic indicators and external policy shifts.

Notable Quotes:

• "[04:34] Bostic: ...there's just a tremendous amount of uncertainty out there..."
• "[08:44] Bostic: ...psychology is important, and it can shift people's decision making..."
• "[25:11] Bostic: ...tariffs put an upward force on inflation..."
• "[30:08] Bostic: ...economic models are models. They are stylized characterizations..."
• "[43:07] Bostic: ...our outlook is one cut for the year..."

This episode offers valuable insights for economists, policymakers, and anyone interested in understanding the complexities of monetary policy in today's volatile economic environment.

Transcript

[Podcast Announcer]

You're listening to an iHeart podcast.

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[Tracy Alloway]

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Wise.

[Tracy Alloway]

Joe, we're here in Atlanta.

[Joe Weisenthal]

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 left.

[Tracy Alloway]

I was gonna ask, how much fried stuff have you eaten?

[Joe Weisenthal]

I have to be really careful because I will devour the food while I'm here.

[Tracy Alloway]

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.

[Joe Weisenthal]

It was so good.

[Tracy Alloway]

All right. But we're not actually here. We're not here just to talk about Southern food. We are actually here to interview someone very important.

[Joe Weisenthal]

That's right.

[Tracy Alloway]

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 days after that, over the weekend, we had some pretty big news.

[Joe Weisenthal]

Well, that's right. So obviously it's an extraordinary, difficult time for literally everyone to understand what's going on with the economy. The Fed in particular, people have talked about 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.

[Tracy Alloway]

That is the big question. So why don't we get right to it? We're speaking with Raphael Bostic. He is, of course, the president of the Atlanta Fed. So, Rafael, thank you so much for coming on OpBots.

[Podcast Announcer]

Well, thank you for having me. And welcome to Atlanta.

[Tracy Alloway]

Thank you.

[Joe Weisenthal]

Thanks for having us.

[Tracy Alloway]

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 a little?

[Podcast Announcer]

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 is 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.

[Tracy Alloway]

Joe and I have been joking about trying to get through podcasts nowadays without saying the word uncertainty. I don't think we've succeeded.

[Joe Weisenthal]

It's literally never going to 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?

[Podcast Announcer]

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. Sentiment 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.

[Joe Weisenthal]

The fastest pace of rate hikes in decades, correct? Yeah.

[Podcast Announcer]

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 used to always say, 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 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 hits on many levels. And I'm sorry I'm saying this word that China is just a joke.

[Tracy Alloway]

You're allowed to use the word uncertainty.

[Podcast Announcer]

All right, I will. Thank you. Folks are not sure about the cost of goods. Again, people are not sure whether that will trigger a recession. I would 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 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 and 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.

[Joe Weisenthal]

Got it.

[Podcast Announcer]

And 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 and a half percent, 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.

[Tracy Alloway]

The US Economy, I think one of the reasons a lot of people expected recession going back to 2023, 2022, was the software data measures. The surveys looked absolutely terrible. And you know, if you looked at something like consumer sentiment, people seem 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.

[Podcast Announcer]

So, you know, it's funny that you say this time is different.

[Tracy Alloway]

I always hesitate to say it on a podcast, but I still do it.

[Joe Weisenthal]

Sometimes it can be different.

[Podcast Announcer]

Yeah, well, 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.

[Tracy Alloway]

Oh, I didn't know that.

[Podcast Announcer]

And so psych and econ. Yeah. And so for me, I. 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. The 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, 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, and 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, but 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 strong than you would expect to see in sentiment turning south. Today that balance sheet is in quite a different place. I talk to a lot of folks and ask bankers. For example, compared to pre pandemic, where are your customers balances during the pandemic? Everyone's like a lot higher, 30, 40% higher today. 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.

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[Joe Weisenthal]

To get to the contemporary situation and then 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, one is companies, maybe for the first time in a long time, realize 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. Do 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 staff, their facilities once demand starts picking up? And do you think that still affects the sort of marginal impulse to layoff workers?

[Podcast Announcer]

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 is 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. So 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. We're hearing 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 and 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. One 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 have heard a lot about in the last six months suggest 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 was smaller, incremental, it may not register. For others it could be one penny and that's too much. And 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. 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.

[Tracy Alloway]

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. But 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.

[Podcast Announcer]

Well, we have a very dynamic economy and 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 weeks behind. And 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. And 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 discussions in cities all across the 6th district. I say, 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.

[Joe Weisenthal]

We need a Fed tip line.

[Tracy Alloway]

Exactly how many calls have you been getting? Have you been getting calls?

[Podcast Announcer]

So, no, nobody calls me, as it turns out. But we have a team that's out on the field, and they are getting calls on a regular basis. 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? And 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. We did a survey. We do a number of surveys. We have a survey shop here, and 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 2020, when we asked them, they said, probably another 18 months. And it was this learned experience, and 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 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? What 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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[Joe Weisenthal]

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? Okay, your supply constrained on some level, perhaps also in theory, there's going to be some forced 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?

[Podcast Announcer]

I don't think of it like that. Okay, well 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 in an environment now where there's so much variation and 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 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 their hand? Nobody's hand 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. I 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. 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 when I hear from analysts, when I talk to my economists in the building, relative to the pre tariff environment, tariffs put an upward force on inflation. And 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 an R star type of thing. I think there's a lot of debate, there's a lot of debate on R in non turbulent times.

[Joe Weisenthal]

For sure.

[Podcast Announcer]

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 star demographics 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 this, 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. And 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 it's been interesting. I've talked to a number of producers 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. Yeah, 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 I actually try to shy away from thinking about those bigger issues right now and just say look, we are 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 there's the. I ain't forgiving what they say it but there are an infinite number of possible new equilibriums that you could achieve. And so what we're trying to do now is kind of figure out are there ways to narrow and get a sense of what are the ranges of possibilities given where things are going. So then we can start to think about those parameters, make judgments about what best long run policy might look like.

[Tracy Alloway]

On the neutral rate. R I was going to ask if it's even a useful concept given the current levels of uncertainty, if it's actually even possible to try to attempt to navigate by the stars.

[Podcast Announcer]

Well, you know, the chair famously had a speech on the stars and expressed some skepticism that the stars were always going to be reliable guides. I think there are really two things. And you know, I was psych major undergrad in addition to econ. One of the things I took or have taken from being in both those professions is that economic models are models. They are stylized characterizations of how the world actually works. We should all understand and appreciate that there is a confidence interval around any number that comes out from these models, even though some economists may declare them as truth. And you should never deviate from those sorts of things. It's one of the reasons why a lot of the rules are useful, but the actual numbers that come out never hit right where the rule is. And so there are other things that are going to influence what makes sense from a policy perspective. And those are the things that we have to actually acknowledge. People are not ruthless utility maximizers. Firms aren't either. And in fact, what's been interesting for me in this pandemic period is the old model. I'm calling this more, like I said, a high level was cost minimization. And that means find the place where you can produce everything at the lowest cost. Do all your stuff there's. Because that makes you the most efficient. What that doesn't do though, is acknowledge that if you're locally reliant or dependent, if anything happens in that locality, your ability to produce goods basically goes to zero. So there's a higher variance potential in your output. And we were not putting any cost value on that. And we learned that there is a cost value on that. And so the change of philosophy that might be going on right now, and we'll get to see how many people really start to set up these supply chains with the eye toward diversifying locations just for reducing variance. That's a new thing and that could be quite interesting to look at moving forward.

[Tracy Alloway]

Joe, I want a T shirt that says ruthless utility maximizer. I think I could rock that.

[Joe Weisenthal]

Most people aren't, but Tracy is actually the one person who lives.

[Tracy Alloway]

But I do want the T shirt by the economic.

[Podcast Announcer]

We'll see. We'll see what we can do. I'll look around and see if there's some economic education club that does that.

[Joe Weisenthal]

Prior to the tariffs, actually thinking back to like January, etc. We didn't know anything about what the tariff roll out. Was the US economy decelerating? Like, was it an economy that was sort of due for several more rate cuts?

[Podcast Announcer]

So my outlook at the beginning of the year was that the economy would continue to grow in a solid way and inflation would return to 2% over time. And my expectation was somewhere toward the End of this year, we would be at that point where it would be appropriate for us to have a neutral stance for policy. So I had maybe three or four rate cuts for the year with the idea that there was a lot of momentum. We're still over 2% GDP, hiring is happening at a robust clip, and we could avoid having sort of a recessionary or negative outcome. I felt like the bones of the economy were pretty solid and strong and, you know, that's why I talk about the resilience and all those sorts of things. So even with the slowdown, I thought that we would still see pretty robust growth, people would still have jobs. One of the things that was quite useful for us to see was that wage growth was returning to pre pandemic levels. So we were evolving to an environment that was fairly sustainable.

[Joe Weisenthal]

And it's what we call it, a soft landing.

[Podcast Announcer]

Yeah, I never used those words. Right. So I try to stay away from that stuff because it means different things to different people. But if that's what you want to call it, I'm happy for that. Some might say to me, I think one of the questions that I ask is to what extent, once we get through and get to some degree of steady state, we will still have those aspects of the US economy still in place at the same levels of strength and something we're going to continue to look at and look for as we go through the rest of 2025 and into 2026.

[Tracy Alloway]

So you mentioned wage growth just then, and one of the things I've been thinking about when it comes to inflation under the tariff regime is wage growth. Do you think it's fair to say that the chances of having a lot of wage growth alongside higher goods prices is lower than it was post pandemic? And if that's the case, does it perhaps give the Fed more room to look through higher goods prices if you're not worried about a big self reinforcing inflationary spiral?

[Podcast Announcer]

Yeah, so that's a very interesting question. I would say it's possible. One of the things that's been quite interesting is I think in this environment, wage growth has been a trailing indicator as opposed to a leading indicator. And so what we will see if that continues is that a lot will depend on the extent to which consumers are willing to take on price. If they're unwilling to take on price, then the dynamic that we have is pretty set. And then I think we'll see different strategies taken by firms as to how to manage their increased cost basis. And to the extent that it's necessary. You might see some reductions in the staffing level. I don't think you'd see reductions in wages. But again, a lot of this depends. There's a big difference between a 10% tariff rate, a 40% tariff rate, and 125% tariff rate as to what the cost implications are going to be and the ability of firms to absorb them in their margins, as opposed to having to pass those on. And so, again, this is another one where I think the details will matter in a pretty significant way and we'll have to see where it goes.

[Joe Weisenthal]

You know, in the wake of the original big inflation in the late 70s and early 80s, and it took a while for that to come down, but I get the strong impression over the years that for the Fed, this was like a crowning achievement of sorts, having defeated that inflation and had several years of price stability. And I also think that fast forward in the wake of the great financial crisis, particularly in the latter half of the 2010s, that something resembling what people would call full employment has been another achievement. And I think that if you go back to Powell's speech in August at Jackson Hole last year, as part of what he said, this has been an achievement to get low unemployment, and we don't want to lose that. We don't want to let it slip again, in your view, how important is that? When you think about the potential tension of the dual mandate, how do you think about preserving that achievement of maintaining a low level of unemployment, even in the face of all this uncertainty and potentially inflationary shocks from the form of tariffs?

[Podcast Announcer]

So let me say two things on this. First, I'm very pleased that during my tenure here, the two mandates have not been in conflict, they've not been in tension. So I've not really had to face that challenge. We've either had low inflation so we could worry more about the employment, or we've had really rock solid employment so we could worry about inflation. Look, I think one of the things that was quite interesting toward the end of the 2010s was the effort by the Fed, and it started before I got here, to be less preemptive around anticipating that inflation must happen, because we've never seen an environment where inflation didn't arise. And so there was a philosophy that was embraced to say, okay, we should actually see signs of inflation before we get too crazy on this. And what we wound up seeing was unemployment levels fall to numbers that were inconceivable. So at one point, unemployment was a 3.5% somewhere like that. When I first started my career as an economist, the unemployment rate that was viewed to be the natural rate of unemployment was, I think it was like 6%. And so the idea that you could get to three and a half without seeing inflation was just. It was like crazy talk, right? And so for us to then just, well, let's let it go. And then it kept going and kept going and kept going. I think that was a tremendous, you could call it an achievement, but it was a discovery that a lot of our perceptions, our understanding of what the possible could be, might be constrained by our own preconceived notions of where the world is. And in this instance, I think about all the advances that have been made in technology, in job searches. So a lot of natural unemployment is about. It takes time for the match to happen between an employer and an employee. Now you can sit over lunch on your phone and submit 100 applications to things. Businesses are using AI type tools to review resumes to really be able to pick out the people. And that match happens faster. If that's the case, then the natural rate should be lower. And now the question is how much lower? And this is something we argue about, I actually think is much lower than others in my building do. But I think the experience would show that change did happen and it happened in ways that we could get more people employed and in a sustainable way without being a problem, without that being a problem for inflation.

[Tracy Alloway]

I wanted to go back to something Joe brought up, which is the sort of, I guess, cross current of monetary versus fiscal policy. And I get that monetary is always existing alongside fiscal policy, which may change in various directions, but it does feel like the tariffs are sort of an extreme example of that in the sense that they have a big impact on the market. So they have a big impact on, on financial conditions. And they seem to be changing constantly. As we've been discussing, how is the Fed just generally thinking about, I guess, the tension between your own monetary policy versus the changes in financial conditions being wrought by the Trump administration and its impact on financial conditions.

[Podcast Announcer]

So I don't think it's different in character, but it is different in magnitude. And so, look, we take all non monetary policy as given and then I just respond in thinking about where we need to go based on where that part of policy is and where businesses are and all those sorts of things. These changes here that are being made are very much like that. Like trade policy is not something that the Fed manages and there are lots of different ways you can influence it. And so that's what we're seeing here. I think for me, one of the things that's been quite interesting to reflect on is that in your standard econ, if you do your models, it's all marginal this and marginal that. And the margin is calculus. So these are small, small changes on the status quo. And what we see today are decidedly not small changes relative to the status quo. And so the question is, does that require a different kind of conceptual model about what response functions will be for businesses and for families and households? That's the bigger question that we're having to wrestle with, which is quite different than what we usually do. But it's not so much about the idea that there's a policy and it changed how financial markets are thinking about risk. There are lots of other things that do that as well. And that's just part of the landscape.

[Joe Weisenthal]

With any luck, we might have some policy stability for a while. Lots of 90 day pauses, etc. And I have, my personal guess is that 90 day pauses could turn into more 90 day pauses at some point in the future. You mentioned at the beginning of the year, maybe this was an economy that would require three to four cuts today, May 14, assuming some policy stability. I'm mindful of the fact that our Bloomberg colleagues would love a nice clean headline. Boston Czech. And so I'm trying to do them a favor here. What does the rest of the year look like for you from a policy perspective? How many cuts are we getting?

[Podcast Announcer]

All right, so, okay, I will say so I'm required to do this. Right? So, you know, in the summary of economic perspectives, I have one cut for the year. And in part it's because I think the uncertainty is unlikely to resolve itself quickly.

[Joe Weisenthal]

Those are headlines.

[Podcast Announcer]

So we have 90 days in two settings. So you have the reciprocal tariff 90 day window, you have the China tariff 90 day window, which is at a different periodicity than that. And we have all these negotiations and we don't know how any of them. Well, we know the UK but other than that, you know, it's all, I.

[Joe Weisenthal]

Don'T even think that's formally signed anyway.

[Podcast Announcer]

Yeah, well, you would. Yeah, I just, I just read the Bloomberg headline on it and it seemed like it was done. And so until there's uncertainty, you know what we've asked our businesses, like, what kind of plans are you making for this year? And many of them are like, well, I don't really know. We're going to keep change to a minimum until we get that resolution. And so if that uncertainty continues, then I expect we're not going to see the same level of big investments or those sorts of things. And that will then push out the time before we'll be able to get to that equilibrium.

[Joe Weisenthal]

I think we both have two more short questions just real quickly on those business conversations. And this is something that's been coming up on episodes. Do you see a divergence between small and large businesses? Large businesses who have the balance sheet can lose money for a couple quarters for a small business, they make a mistake, they make an order. There's a huge tariff bill at the port. It might be existential. Have you noticed sort of a distributional effect in terms of planning and the effects?

[Podcast Announcer]

Absolutely. And I think forecasts for sales, forecasts for costs are much higher for small businesses. When we talk to small business leaders, you can see this in our survey responses. They're the ones who are feeling most at risk and we'll just have to. I mean, I think they're hoping that this is a short episode and we can get to a new steady state so they can understand how to run their businesses.

[Tracy Alloway]

I have just one more question and it's a very important one. We heard that you like birding. Do you prefer seeing hawks or doves? This is a very serious question.

[Podcast Announcer]

That's very good. You know, when I first started I got asked am I a hawk or a dove? And I said I was an owl. And I have doves in my backyard pretty regularly mourning doves.

[Tracy Alloway]

They're the stupidest birds.

[Podcast Announcer]

But it's always super exciting when a red shoulder or a red tailed hawk comes swooping in or a Cooper's. So just like when they ask parents their favorite child and they say we love them all. I love all my birds.

[Tracy Alloway]

I don't love mourning doves. They're idiotic. They're like they have a death wish and always are getting killed and building their nests of stupid places and then it becomes my problem. Okay, enough about morning doves. Raphael Bostic, thank you so much. Really appreciate the invite to Atlanta and this conversation. Thank you.

[Podcast Announcer]

Thanks for coming down to Atlanta. I look forward to talking to you again sometime in the future.

[Joe Weisenthal]

Anytime. That was a blast.

[Tracy Alloway]

Joe. That was fantastic. Getting to talk to. I guess Bostic is non voting at the moment, but getting to talk to a fed person at this really interesting juncture in economic and I guess central bank history.

[Joe Weisenthal]

It's such an interesting time for all kinds of reasons. I mean, you know, the fact that the COVID shock still looms with us in various ways.

[Tracy Alloway]

Yeah.

[Joe Weisenthal]

Clearly in particularly Just the fact that up until very recently, arguably depending on how you measure it, inflation still running above target. But this is sort of uncharted territory to some extent because of the speed of policy changes in Both directions in D.C. i wrote in a newsletter, I think it was last week after the Powell's press conference. I've never heard more, more different ways to express the concept of we don't know anything that's about to happen.

[Tracy Alloway]

That's right.

[Joe Weisenthal]

Extreme level of humility is required in this moment.

[Tracy Alloway]

Well, he certainly mentioned the word uncertainty a number of times. Yeah, it really is. Well, the other thing I was thinking is I guess the complexity of trying to do economic analysis in the current period is really, really coming through. And I thought the point that Bostic was making about productivity, depending on where people actually move manufacturing or move operations to like that level of detail seems almost impossible to predict. And yet productivity is obviously something that matters enormously for the economy.

[Joe Weisenthal]

What was it? Who are we talking to? And they were quoting Paul Krugman someone recently. And they're like, productivity isn't everything, but it's almost everything. I guess pretty much all there is is, you know, you think from the perspective of any sort of international, any company that has international ties and now we've had like two supply shocks in a way in a very short period of time. You could almost be forgiven for post Covid say, oh, you know, this is a once in a century type of thing. So I don't know how much we're going to change our businesses. But a now we've had this other one. And so at some point this idea of moving supply chains, which has already been happening to various degrees, has to be top of mind and how these things get organized. And what do you reshore and what do you friend shore and what do you put in Vietnam that has links to both US and China? They're policymaking in a state of flux for sure.

[Tracy Alloway]

Yeah. And it also gets harder for companies. Right. Like the longer this kind of goes on because you had the first wave of reshoring after the 2016 Trump administration. And now what's left to move places, especially if you have tariffs on both Vietnam and China.

[Joe Weisenthal]

You know what I've been thinking about? I would never give financial advice on a podcast because it would be terrible. But something I've been thinking about a little bit lately is that you actually might have this situation. This doesn't even really have to do with our conversation, but straight thought in my head, you actually have the situation now, which I think is kind of interesting in which if you're an American importer, you're obviously thinking at least to some extent about diversifying the base of where you source from. So do you like go more to Latin America? Do you go to other non China parts of Asia and so forth? If you're a Chinese exporter, you might be thinking about the same thing. There's already been this pressure from Chinese exporters, just a business pressure to move some of their lower end manufacturing outside of China. Now there is the fact that there's this big tariff disparity, assuming that current levels stay roughly stable. So it'll be interesting to see if there is some sort of, you know, positive impulse to non China em generally. Because it strikes me that a lot of different entities really do have an economic reason to truly diversify in a way that maybe hadn't been the case several years ago.

[Tracy Alloway]

Oh, for sure. And we saw that in the episode we did with Sarah LaFleur.

[Joe Weisenthal]

That's right.

[Tracy Alloway]

When one of her Chinese manufacturers was talking about, well, if we can't export a bunch of stuff to America, maybe we start selling mm, lafleur clothes into China. That as well. Right. It's like on both sides of the equation.

[Joe Weisenthal]

So many moving parts.

[Tracy Alloway]

You know what? I'm thinking about eating more fried things before I leave Atlanta.

[Joe Weisenthal]

Okay. So we gotta wrap it up right now. Yeah.

[Tracy Alloway]

Shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the Odd Lots podcast. I'm Tracee Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Eisenthal. You can follow me at the Stalwart, follow Raphael Bostic. He's on LinkedIn. You could check out some of his posts there. Follow our producers Kerman Rodriguez at Kerman, Armit Dashiell Bennett at dashbod and Kalebrooks Kalebrooks. For more Odd Lots content, go to bloomberg.com oddlots where we have all of our episodes in a daily newsletter and you can chat about all of these topics 24 7, including monetary policy, with fellow listeners in our Discord Discord.

[Tracy Alloway]

And if you enjoy Odd Lots, if you like it when we travel around the US interviewing regional Fed presidents, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple podcast and follow the instructions there. Thanks for listening, Sam.

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[Podcast Announcer]

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