Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 2: Joe, we're here in Atlanta.
Speaker 3: I've never I'm embarrassed. I've never really spent any time
Speaker 3: in Atlanta so far, but it seems lovely. We're in midtown.
Speaker 3: I had a southern food.
Speaker 2: I was going to ask, how much fried stuff have
Speaker 2: you eaten?
Speaker 3: I have to be really careful because I will devour
Speaker 3: the food while I'm here.
Speaker 2: So I went out with our producer Carmen last night
Speaker 2: and we had fried chicken, fried okra, fried green tomatoes.
Speaker 2: I think there were a few other fried things. It
Speaker 2: was so good, so good, all right, But we're not
Speaker 2: actually here. We're not here just to talk about southern food.
Speaker 2: We are actually here to interview someone very important of
Speaker 2: the Federal Reserve Bank of Atlanta. And I think it's
Speaker 2: really interesting to be interviewing someone from the FED at
Speaker 2: this particular moment in time, because just last week we
Speaker 2: had an FMC meeting they decided to keep rates unchanged.
Speaker 2: But then just a couple of days after that, over
Speaker 2: the weekend, we had some pretty big news.
Speaker 3: Well, that's right. So obviously it's an extraordinary difficult time
Speaker 3: for literally everyone to understand what's going on with the economy.
Speaker 3: The FED in particular, people have talked about it's in
Speaker 3: a tight spot right because they're perhaps are signs of
Speaker 3: economic deceleration. There's the potential inflationary impulse of the tariffs,
Speaker 3: and the tariffs themselves keep moving. That being said, I
Speaker 3: was sort of knock on wood between the reason they
Speaker 3: tunt so to speak with China. Maybe things are quieting down,
Speaker 3: Maybe we'll at least have some trade policy stability for
Speaker 3: some period of time, which maybe makes things today slightly
Speaker 3: easier to understand or to debate than they might have
Speaker 3: even been a week ago.
Speaker 2: That is the big question. So why don't we get
Speaker 2: right to it. We're speaking with Raphael Bostik. He is,
Speaker 2: of course the president of the Atlanta FED. So Raphael,
Speaker 2: thank you so much for coming on all thoughts.
Speaker 4: Well, thank you for having me, and welcome to Atlanta.
Speaker 3: Thank you thanks for having us.
Speaker 2: So I'm going to start with the I guess the
Speaker 2: obvious question, but you know, last week after the FOMC meeting,
Speaker 2: you put out a statement saying that your baseline outlook
Speaker 2: is for the economy to be less resilient than you
Speaker 2: expected at the beginning of the year. Given the news
Speaker 2: over the weekend a potential truce at least for ninety
Speaker 2: days between China and the US, does that change your
Speaker 2: outlook a little?
Speaker 4: I would say the overarching message that I've gotten from
Speaker 4: the people I talked to and from our survey responses
Speaker 4: and other things, and it's the reason why I was
Speaker 4: comfortable with our policy action last week, is that there's
Speaker 4: just a tremendous amount of uncertainty out there, and because
Speaker 4: of that, businesses and households as well aren't really comfortable
Speaker 4: making big decisions, and as a consequence, the amount of
Speaker 4: energy I would have expected to see in the economy
Speaker 4: is going to be less than that expectation is at
Speaker 4: the beginning of this year. It looks like it's going
Speaker 4: to be less than that for the remainder of this year,
Speaker 4: and then we'll have to see how things play out
Speaker 4: to determine how much less. But that uncertainty definitely is
Speaker 4: weighing on consumers and business leaders alike.
Speaker 2: Joe and I have been joking about trying to get
Speaker 2: through podcast nowadays without saying the word uncertainty. I don't
Speaker 2: think we've succeeded.
Speaker 3: It's literally never going to happen. That word comes up
Speaker 3: in every episode. But actually, going back to Tracy's question,
Speaker 3: what does it mean they become to me less resilient?
Speaker 3: What did you mean by that term?
Speaker 4: So, what we've seen through the last several years is
Speaker 4: an economy where all the analysts had expected things to
Speaker 4: start slowing down. Yeah, you know, inflation went very high.
Speaker 4: We had challenges in terms of supply chains, which led
Speaker 4: people to worry maybe labor Marcus would loosen people who
Speaker 4: lose their jobs. Sentiment expressed a lot of concern. Consumers
Speaker 4: and households were all expressing their frustration with things. All
Speaker 4: those things would have suggested that you would see less
Speaker 4: economic activity.
Speaker 3: In the fastest phase of rate hikes in decades.
Speaker 4: Correct, And that just didn't happen. Like last year, GDP
Speaker 4: was over two percent, which is faster than potential in
Speaker 4: the face. Look, I go around and talk to a
Speaker 4: lot of folks for much of the pandemic. The second
Speaker 4: question I would get, after what are you going to
Speaker 4: do with raids is when is their a session happening? Right?
Speaker 4: That was the overarching sentiment. I used to would always say,
Speaker 4: that's not my outlook. So people should expect that the
Speaker 4: momentum will continue. That momentum did in fact continue, and
Speaker 4: I call that resilience right, that strength and that continued
Speaker 4: energy in the economy that allows firms to produce, people
Speaker 4: to consume at robust levels. Then we come to today
Speaker 4: where there's a lot of uncertainty, and the uncertainty hits
Speaker 4: on many levels. And I'm sorry I'm saying this word.
Speaker 5: That it's just a joke.
Speaker 2: You're allowed to use the word uncertainly, right.
Speaker 4: Well, thank you. Folks are not sure about the cost
Speaker 4: of goods again, people are not sure whether that will
Speaker 4: trigger recession. I will say, in the last six months,
Speaker 4: acting the last three months, analysts have used the word
Speaker 4: recession in their narrative about possibilities far more than they
Speaker 4: have for quite some time. And all of that people notice,
Speaker 4: and if folks think that there's going to be a
Speaker 4: possibility that they're going to lose their job or those
Speaker 4: sorts of things, they're going to engage differently. There are
Speaker 4: perceptions of what a safety netlet needs to be for them.
Speaker 4: That rainy day fund is going to change and they're
Speaker 4: willing to spend out of savings, is going to change,
Speaker 4: or even spend out of regular income. All of that
Speaker 4: would suggests less energy. That's less resilience. And you know,
Speaker 4: the less resilience does not necessarily mean recession. I would say,
Speaker 4: even today, recession is not in my outlook, but it's
Speaker 4: less right, So rather than the two percent or two
Speaker 4: and a half percent, it may be one percent, maybe
Speaker 4: a half percent. That's the thing that I'm looking to
Speaker 4: really understand is as I try to keep my finger
Speaker 4: on the pulse of the US economy.
Speaker 2: I think one of the reasons a lot of people
Speaker 2: expected recession going back to twenty twenty three twenty twenty
Speaker 2: two was the soft data measures. The surveys looked absolutely terrible,
Speaker 2: and you know, if you looked at something like consumer sentiment,
Speaker 2: people seem to think it was basically the end of
Speaker 2: the world. Fast forward to twenty twenty five, and we
Speaker 2: do have a similar dynamic happening now where the soft
Speaker 2: data is deteriorating but the hard data remains relatively wrong.
Speaker 2: Is there a risk that this time is different and
Speaker 2: maybe we're a little overconfident in the economy given what
Speaker 2: happened with the soft data a couple of years ago.
Speaker 4: So you know, it's funny that you say this time
Speaker 4: is different.
Speaker 2: I always hesitate to say on a podcast, but I
Speaker 2: still do it.
Speaker 3: Sometimes it can be done.
Speaker 4: Yeah, well a lot of times it can be different,
Speaker 4: but just often as not right. And so part of
Speaker 4: what I try to do in my approach is never assume,
Speaker 4: never have a preconceived notion or an expectation about what's
Speaker 4: going to happen, but rather just pay attention and what
Speaker 4: I would say on the sentiment, which is quite interesting.
Speaker 4: You know I was a psych major undergrad. Oh I
Speaker 4: didn't know that, and so psychoicon. Yeah, And so for me,
Speaker 4: I know psychology is important, and I know psychology can
Speaker 4: shift people's decision making even when the information set doesn't change,
Speaker 4: and so understanding that psychology and how it translates into
Speaker 4: decision making is a critical thing. The very interesting thing
Speaker 4: with the sentiment today is that we have had two
Speaker 4: realities with sentiment. Right. The conventional wisdom is that when
Speaker 4: people are feeling bad, they do less. When sentiment turns negative,
Speaker 4: things slow down. I think there's been a history to
Speaker 4: show that that has been an experience. More often than not,
Speaker 4: the anomaly or the odd one was this most recent
Speaker 4: one where a sentiment was really down in the dumps,
Speaker 4: you know, the vibe session and all those sorts of things.
Speaker 4: But when push came to shove, consumers continued to go out,
Speaker 4: people kept going to restaurants, going on trips, renovating their homes,
Speaker 4: all those things, and the economy remained robust. So the
Speaker 4: question we have today is which of those realities is
Speaker 4: going to play out. And the one thing I would
Speaker 4: say that's different today than in the pandemic environment is
Speaker 4: that going into the pandemic, we hadn't had a high
Speaker 4: recessionary period, and we also didn't have a situation where
Speaker 4: the government was going to provide support for the economy
Speaker 4: to robust away. So you might imagine that even in
Speaker 4: the face of more negative sentiment. Look, the pandemic was
Speaker 4: super stressful on many dimensions, and so it didn't surprise me.
Speaker 4: People were a little kind of upset and rattled, if
Speaker 4: you will, but they got a lot of support. People
Speaker 4: kept their jobs. It's very interesting when I think about
Speaker 4: the pandemic. A lot of it is people kept getting paid.
Speaker 4: The employment rate rebounded incredibly fast, but they didn't have
Speaker 4: things to spend on. They couldn't go to restaurants, they
Speaker 4: couldn't go on vacation. So the household balance sheet was
Speaker 4: actually quite stronger than you would expect to see in
Speaker 4: sentiment turning south. Today, that balance sheet is quite a
Speaker 4: different place. I talked to a lot of folks and
Speaker 4: asked bankers, for example, compared to pre pandemic, where your
Speaker 4: customer's balance is during the pandemic, everyone's like a lot higher,
Speaker 4: thirty forty percent higher today, That's not what I'm hearing.
Speaker 4: And many of them are back to pandemic levels, which
Speaker 4: might mean that families response function maybe back to a
Speaker 4: pre pandemic setting, and we'll just have to see how
Speaker 4: that plays out.
Speaker 3: Eventually, I want to get to the contemporary situation and
Speaker 3: thinking about the tariffs, etc. But before we do, you know,
Speaker 3: thinking back one of the residual lessons of the pandemic period,
Speaker 3: and there are two big ones, and they've come up
Speaker 3: a lot many lessons. But from the corporate perspective, one
Speaker 3: is companies, maybe for the first time in a long time,
Speaker 3: realize that they can raise prices without losing market share,
Speaker 3: and so suddenly price increases become maybe back on the
Speaker 3: strategy book. And then the other thing is the sort
Speaker 3: of residual fear of being caught short labor, right, And
Speaker 3: so for years there was this expectation you put a
Speaker 3: help want it sign in the window, and you get
Speaker 3: a line out the door, and labor is easy to
Speaker 3: come by. And maybe one of the reasons that's been
Speaker 3: theorized for the lack of layoffs and say twenty twenty two,
Speaker 3: twenty twenty three, is just this fear that if you
Speaker 3: cut jobs, you're not gonna be able to get them
Speaker 3: back in the door when you need them. Do you
Speaker 3: think those lessons still linger with us today when you
Speaker 3: talk to business leaders today, do they still have sort
Speaker 3: of these searing memories of not having been able to
Speaker 3: staff their staff their facilities once demand starts picking up.
Speaker 3: But do you think that still affects the sort of
Speaker 3: marginal impulse to layoff workers.
Speaker 4: So I wouldn't put it exactly like that. I think
Speaker 4: that there is a reluctance among firms, and this is
Speaker 4: what I've heard from most firms. Yeah, that you know
Speaker 4: they're going to hold tight today and see how things evolve.
Speaker 4: And because there's two sided risk, because the economy might
Speaker 4: be stronger than people are projecting today, or it might
Speaker 4: be weaker. You don't want to take actions that might
Speaker 4: cause you to have to do extra things to get
Speaker 4: back to where you are, So I think there's a
Speaker 4: precautionary posture that's happening today which is actually quite different
Speaker 4: than what happened during the pandemic. We ask our firms
Speaker 4: through our surveys, is a labor market easier for you today?
Speaker 4: Or is it worse than it was a year ago
Speaker 4: and two years ago, And uniform of the answer is easier.
Speaker 4: We're hear easier to hire. The number of people who
Speaker 4: apply for a vacant position is up in some instances considerably,
Speaker 4: and the quality of the applicants is also a relative
Speaker 4: to where they were in the pandemic. Back then, they
Speaker 4: put a shingle out and if they got someone, it
Speaker 4: was someone that they probably didn't want to hire, and
Speaker 4: they were hiring them anyway because they didn't have options.
Speaker 4: That's not the environment that we have today, and that's
Speaker 4: important in terms of the the impulse of firms to
Speaker 4: increase prices. I do think that's still real today. And
Speaker 4: you know, one lesson that I think people did learn
Speaker 4: through the pandemic was if you tell people conser up,
Speaker 4: and it's obvious that if that wasn't in the debates,
Speaker 4: then people understand that the price might have to go up.
Speaker 4: And what businesses learned is that most consumers, most of
Speaker 4: their customers, were okay with that. The question is are
Speaker 4: they still okay with that? And to me, I would say,
Speaker 4: there are two really interesting dynamics that I think are
Speaker 4: potentially emerging. One is I think firms are going to
Speaker 4: try to apply the lesson learned from the pandemic. They
Speaker 4: have an assumption or an expectation that the consumer response
Speaker 4: is going to be exactly the way it was before.
Speaker 4: We will see if it actually is. And I think
Speaker 4: the concern about the level of prices that we heard
Speaker 4: a lot about in the last six months suggests that
Speaker 4: maybe they won't, but maybe they will, And in fact,
Speaker 4: it might actually be more complicated in that for some
Speaker 4: households it may be the size of the change, So
Speaker 4: if it's it's a smaller incremental it may not register.
Speaker 4: For others it could be one penny and that's too much.
Speaker 4: And then the third piece to this is sector bisector.
Speaker 4: Do you wind up seeing different responses And then if
Speaker 4: you wind up with something like that, and I think
Speaker 4: that's probably where we're going to wind up, then forecasting
Speaker 4: it at the aggregate level becomes incredibly challenging. I mean,
Speaker 4: you have to wind up doing a lot more. Your
Speaker 4: spreadsheets get larger, the math gets more complicated, and so
Speaker 4: you know, I think our job will get a bit
Speaker 4: more challenging.
Speaker 2: So, just on this point, at the press conference last week,
Speaker 2: Howe seemed to suggest this idea of tariff impacts maybe
Speaker 2: operating at different speeds. The impact on inflation could potentially
Speaker 2: come quicker, especially if you had a bunch of companies
Speaker 2: immediately raising prices to offset the cost, But the impact
Speaker 2: on something like the labor market could take a lot
Speaker 2: longer to actually feed through, maybe even because some businesses
Speaker 2: still have residual scars from the pandemic or whatever. How
Speaker 2: do you deal with those two different factors operating at
Speaker 2: different speeds. It seems very difficult.
Speaker 4: Well, we have a very dynamic economy, and that's just
Speaker 4: an overarching feature of the environment that we work in.
Speaker 4: I think part of what we try to do in
Speaker 4: Atlanta is try to get hints about the longer run
Speaker 4: things in real time as much as possible, because for
Speaker 4: many of these things, if you wait for them to
Speaker 4: show up in the national data, you're two months behind,
Speaker 4: a quarter behind, sometimes a couple weeks behind, and then
Speaker 4: there's more of a scramble. We learned and the Great
Speaker 4: Financial Crisis that we needed to be asking much more front,
Speaker 4: forward and prospective questions about what businesses are seeing, what
Speaker 4: they're feeling, and how they're going to respond, so that
Speaker 4: even if the revelation happens at different speeds, the impulses
Speaker 4: and the drivers will be more contemporaneous, and if you
Speaker 4: can discern those, then you might be able to get
Speaker 4: ahead start on where things are going. What I would
Speaker 4: say today is and it gets back to what we
Speaker 4: were just talking about. I think many firms will probably
Speaker 4: try to pass through costs to the extent they see them.
Speaker 4: They will learn pretty quickly whether those cost increases are
Speaker 4: being taken on by customers or being rejected by them,
Speaker 4: and then they'll have to make a decision about what
Speaker 4: is their protection production function going to look like. And
Speaker 4: once they make that decision, then they'll decide what kind
Speaker 4: of workforce they need. I'm expecting that those lessons will
Speaker 4: be learned quickly and what I've As I go around,
Speaker 4: I talk to Chamber of Commerce, I do open discussions
Speaker 4: and cities all across the sixth district. I say, if
Speaker 4: you see someone doing something that's really different than what
Speaker 4: they were doing two weeks ago, you need to call
Speaker 4: us and let us know, because we need to be
Speaker 4: collecting that information to try to understand whether a single
Speaker 4: impulse is actually a trend and whether there are some
Speaker 4: lessons that can be learned from the collection of the masses.
Speaker 3: We need a fed tip line.
Speaker 2: Wait, how many calls have you been getting? Have you
Speaker 2: been getting calls?
Speaker 4: So no, nobody calls me, but we have a team
Speaker 4: that's out in the field and they are getting calls
Speaker 4: on a regular basis. You know, when I got here,
Speaker 4: I was really I didn't really know any of this.
Speaker 4: But we have a network of staffers whose job it
Speaker 4: is is just to have relationships with business leaders and
Speaker 4: with community folks all over the Southeast and come and
Speaker 4: see them and talk to them in really conversational, unstructured
Speaker 4: ways for ninety minutes two hours, just to get a
Speaker 4: sense of where are they, how are they feeling, and
Speaker 4: what are they worrying about, what are they excited about?
Speaker 4: What's changed, and because the relationships are personal on some level,
Speaker 4: people do feel more comfortable picking up the phone and
Speaker 4: telling us things. And it's been something that's really helped us.
Speaker 4: So we knew fairly early on that people's horizon in
Speaker 4: the pandemic was expanding. So the right we did a survey.
Speaker 4: We do a number of surveys. We have a survey
Speaker 4: shop here, and we did survey of businesses and asked them, Okay,
Speaker 4: in April of twenty twenty, when do you think this
Speaker 4: will be done? They said September of twenty twenty. In
Speaker 4: January of twenty twenty, when don't we asked them. They
Speaker 4: said probably another eighteen months, right, And it was this
Speaker 4: learned experience, and we got to see their understanding of
Speaker 4: the environment evolve in real time in ways that really
Speaker 4: I think helped us understand what questions we needed to
Speaker 4: ask and what kind of decisions and policy changes that
Speaker 4: we should be looking for. It's been quite interesting, and
Speaker 4: I think there's going to be some of that. There's
Speaker 4: going to be a lot of that that happens in
Speaker 4: the next several months. Look, we've just gone through a
Speaker 4: period where people were expecting tariffs. I think many people
Speaker 4: didn't expect the tariffs to roll out at the scale
Speaker 4: that we saw, and it's causing everyone to think about, Okay, now,
Speaker 4: if this is our new reality, how do I think
Speaker 4: about this? What am I going to do? And just
Speaker 4: as it was at the early stages of the pandemic,
Speaker 4: people are kind of doing it on the fly. And
Speaker 4: the only way to really understand how things are going
Speaker 4: when people are doing on the fly is to be
Speaker 4: there with them and to be continually asking them and
Speaker 4: seeing how their decision making and their changes are evolving
Speaker 4: as they get more insights. So as the tariff environment shifts,
Speaker 4: as the numbers move around, there's learning when you see, oh,
Speaker 4: their strategy was a and now their strategy is M
Speaker 4: like that's saying something about their thought process and what
Speaker 4: they're likely to do and moving forward.
Speaker 3: To So, let's talk a little bit more about the
Speaker 3: intersection of tariffs and monetary policy. And something that's been
Speaker 3: on my mind in particular is tariffs are a supply
Speaker 3: shock in some way, and what I've been wondering about
Speaker 3: is does that therefore increase the terminal rate in terms
Speaker 3: of how low the FED can ultimately go in a
Speaker 3: cutting cycle Okay, your supply constrained on some level. Perhaps
Speaker 3: also in theory, there's going to be some force development
Speaker 3: in the United States of some industrial capacity, and so
Speaker 3: that's a positive activity impulse. Does that mean when you
Speaker 3: think about like weakness and when you think about possible
Speaker 3: rate cuts, which is what everyone is expecting at some point,
Speaker 3: does that increase the floor of how.
Speaker 4: Low you can go? I don't think of it like that, okay,
Speaker 4: But first of all, I think being able to say
Speaker 4: a blanket statement on anything like this is going to
Speaker 4: be quite challenging. It would be challenging if you just
Speaker 4: picked one tariff rate for the whole world. Yeah, in
Speaker 4: an environment now where there's so much variation and descript
Speaker 4: price discrimination country to country and sector to sector, it's
Speaker 4: really difficult to know how to add it all up.
Speaker 4: And then you overlay that the numbers can change, we're expecting.
Speaker 4: One of the things I do when I talk to
Speaker 4: folks in public settings, show a hands how many people
Speaker 4: think that the tariff numbers that we see today are
Speaker 4: going to be the tariff numbers that we see a
Speaker 4: month from now, and anon raises, nobody's hands goes up.
Speaker 4: And in part that's by design right, So we know
Speaker 4: their negotiations going on. We know it's a ninety day
Speaker 4: moratorium in some of these instances, So that change that's
Speaker 4: out there means that it's going to be very challenging.
Speaker 4: I try to go back to just our basic mandate.
Speaker 4: We got price stability and we have maximum employment. Maximum
Speaker 4: sustainable employment is how I like to think about it.
Speaker 4: And so what I try to do is figure out, Okay,
Speaker 4: given all the things that are going on, what's that
Speaker 4: likely to do for us getting closer to our two
Speaker 4: percent target and inflation? And what's that likely to do
Speaker 4: in terms of the movement of labor markets relative to
Speaker 4: some broad notion of full employment today. What I would
Speaker 4: say is what I hear from analysts when I talk
Speaker 4: to my economists in the building, like, relative to the
Speaker 4: pre tariff environment, tariffs have a put upward force on inflation,
Speaker 4: and so that means that our policy is going to
Speaker 4: have to anticipate and to some extent potentially push against
Speaker 4: those inflationary forces to the extent that we see them.
Speaker 4: So that will put a limit on where our current
Speaker 4: policy stands is Now, you ask something about a broader
Speaker 4: economy wide new fundamental as to like an R star
Speaker 4: type of thing. I think there's a lot of debate.
Speaker 4: There's a lot of debate on sort of our star
Speaker 4: in nonturbulent times, for sure, and so today I think
Speaker 4: you would see the same thing. Look, I think pre
Speaker 4: pandemic coming out of the Great Financial Crisis, and actually
Speaker 4: even before that, we knew there was a long secular
Speaker 4: decline in our star demographics and a whole host of
Speaker 4: other things were believed to be behind it. And the
Speaker 4: notion that you could see inflation move the way it
Speaker 4: has kind of caused people just have to step back
Speaker 4: and say, well, wait a minute, maybe our notion of
Speaker 4: the immutable is not so immutable. And I think that
Speaker 4: debate is being taken on board right now. And so
Speaker 4: the other thing to think about is look to the
Speaker 4: extent that this that we are in a period where
Speaker 4: firms are redoing their supply chains and perhaps not looking
Speaker 4: for lowest cost location. That has implications for just it
Speaker 4: could potentially have implications for what a baseline new level
Speaker 4: of inflation is likely to be writ large. And if
Speaker 4: that is what happens, then sure all the fundamental dynamics
Speaker 4: and measures are going to change as well. But we
Speaker 4: haven't seen that, and you know it's been as I've
Speaker 4: talked to a number of producers and they have production
Speaker 4: in multiple countries, and they say, you can put the
Speaker 4: same plant in three different countries and they will have
Speaker 4: different levels of productivity, and that is interesting, but it
Speaker 4: also means that the specifics of where they put things down,
Speaker 4: how much production happens in those places, and then where
Speaker 4: assembly and it all comes together is incredibly material and
Speaker 4: folks don't have the answers to those things now. So
Speaker 4: I actually try to shy away from thinking about those
Speaker 4: bigger issues right now and just say, look, we're in
Speaker 4: a period of tremendous transition where we had a received
Speaker 4: wisdom cost minimization and production free and open trade, and
Speaker 4: that equilibrium is being broken. And when you're in dis
Speaker 4: equilibrium in ECON, you know, there's the I forget but
Speaker 4: they say it, but there are an infinite number of
Speaker 4: possible new equilibriums that you could achieve. And so what
Speaker 4: we're trying to do now is kind of figure out
Speaker 4: are there ways to narrow and get a sense of
Speaker 4: what are the ranges of possibilities given where things are going,
Speaker 4: So then we can start to think about those parameters
Speaker 4: make judgments about what best long run policy might look
Speaker 4: like on.
Speaker 2: The neutral rate our star. I was going to ask
Speaker 2: if it's even a useful concept given the current levels
Speaker 2: of uncertainty, if it's actually even possible to try to
Speaker 2: attempt to navigate by the stars.
Speaker 4: Well, you know, the chair famously had a speech on
Speaker 4: the stars and express some skepticism that the scars are
Speaker 4: always going to be reliable guides. I think there are
Speaker 4: really two things, and you know, I was psych major
Speaker 4: undergrad in addition to econ One of the things I
Speaker 4: take took or have taken from being in both those
Speaker 4: professions is that economic models are models. There are stylized
Speaker 4: characterizations of how the world actually works. We should all
Speaker 4: understand and appreciate that there is a confidence interval around
Speaker 4: any number that comes out from these models, even though
Speaker 4: some econas may declare them as truth, and you should
Speaker 4: never deviate from those sorts of things. It's one of
Speaker 4: the reasons why, you know, a lot of the rules
Speaker 4: are useful, but the actual numbers that come out never
Speaker 4: hit right where the rule is, and so there are
Speaker 4: other things that are going to influence what makes sense
Speaker 4: from a policy perspective, and those are the things that
Speaker 4: we have to actually acknowledge. People are not ruthless utility maximizers.
Speaker 4: Firms aren't either. And in fact, what's been interesting for
Speaker 4: me in this pandemic period is the old model I'm
Speaker 4: calling this more like a high level was cost minimization,
Speaker 4: and that means find the place where you can produce
Speaker 4: everything at the lowest cost, do all your stuff there,
Speaker 4: because that makes you the most efficient. What that doesn't do, though,
Speaker 4: is acknowledge that if you're locally reliant or dependent, if
Speaker 4: anything happens in that locality, your ability to produce basically
Speaker 4: goes to zero. So there's a higher variance potential in
Speaker 4: your output. And we were not putting any cost value
Speaker 4: on that, and we learned that there is a cost
Speaker 4: value on that. And so the change of philosophy that
Speaker 4: might be going on right now, and we'll get to
Speaker 4: see how many people really start to set up these
Speaker 4: supply chains with the eye toward diversifying locations just for
Speaker 4: reducing variants. That's a new thing and that could be
Speaker 4: quite interesting to look out moving forward.
Speaker 2: So I want a T shirt that says ruthless utility maximizer.
Speaker 5: I think could rock.
Speaker 3: The most people aren't, but Tracy is actually the one person.
Speaker 5: But I do want the T shirt.
Speaker 4: Economic We'll see, we'll see what we can do. I'll
Speaker 4: look around and see if there's some economic education club
Speaker 4: that does that.
Speaker 3: Prior to the Turriff's actually thinking back to like January,
Speaker 3: et cetera, we didn't know anything about what the terff
Speaker 3: for a lot. Was the US economy decelerating, like was
Speaker 3: it an economy that was sort of due for several
Speaker 3: more rate cuts?
Speaker 4: So my outlook at the beginning of the year was
Speaker 4: that the economy would continue to grow in a solid
Speaker 4: way and the place would return to two percent over time.
Speaker 4: And my expectation was somewhere toward the end of this
Speaker 4: year we would be at that point where it would
Speaker 4: be appropriate for US to have a neutral stance for policy.
Speaker 4: So I had maybe three or four rate cuts for
Speaker 4: the year with the idea that there was a lot
Speaker 4: of momentum. We're still over two percent GDP, hiring us
Speaker 4: happening at a robust clip, and we could avoid having
Speaker 4: sort of a recessionary negative outcome. I felt like the
Speaker 4: bones of the economy were pretty solid and strong, and
Speaker 4: you know that's why I talk about the resilience and
Speaker 4: all those sorts of things. So even with a slow down,
Speaker 4: I thought that we would still see pretty robust growth.
Speaker 4: People would still have jobs. One of the things that
Speaker 4: was quite useful for us to see was that wage
Speaker 4: growth was returning to a pre pandemic levels, So we
Speaker 4: were evolving to an environment that was fairly sustainable and
Speaker 4: which going to be Yeah. I never used those words, right,
Speaker 4: So I try to stay away from that stuff because
Speaker 4: it means different things to different people. But if that's
Speaker 4: what you want to call it, I'm happy for that,
Speaker 4: you know. To me, I think one of the questions
Speaker 4: that I ask is to what extent once we get
Speaker 4: through and get to some degree of steady state, we
Speaker 4: will still have those aspects of the US economy still
Speaker 4: in place at the same level as the strength, and
Speaker 4: you know, something we're going to continue to look at
Speaker 4: and look for as we go through the rest of
Speaker 4: twenty twenty five and into twenty twenty six.
Speaker 2: So you mentioned wage growth just then, and one of
Speaker 2: the things I've been thinking about when it comes to
Speaker 2: inflation under the tariff regime is wage growth. Do you
Speaker 2: think it's fair to say that the chances of having
Speaker 2: a lot of wage growth alongside higher goods prices is
Speaker 2: lower than it was post pandemic. And if that's the case,
Speaker 2: does it perhaps give the FED more room to look
Speaker 2: through higher goods prices if you're not worried about you know,
Speaker 2: a big self reinforcing inflationary spiral.
Speaker 4: Yeah, so that's a very interesting question. I would say
Speaker 4: it's possible. One of the things that's been quite interesting
Speaker 4: is I think in this environment, wage growth has been
Speaker 4: a trailing indicator as opposed to a leading indicator. And
Speaker 4: so what we will see if that continues is that
Speaker 4: a lot will depend on the extent to which consumers
Speaker 4: are willing to take on price. If they're unwilling to
Speaker 4: take on price, then the dynamic that we have is
Speaker 4: pretty set. And then we'll I think we'll see different
Speaker 4: strategies taken by firms as to how to manage their
Speaker 4: increased cost basis, and to the extent that is necessary,
Speaker 4: you might see some reductions in the staffing level. I
Speaker 4: don't think you'd see reductions in wages. But again, a
Speaker 4: lot of this depends. You know, there's a big difference
Speaker 4: between a ten percent tariff rate a forty percent tariff
Speaker 4: rate and at one hundred and twenty five percent tariffyrate.
Speaker 4: As to what the cost implications are going to be
Speaker 4: and the ability of firms to absorb them in their margins,
Speaker 4: it's supposed to having to pass those on, and so
Speaker 4: again this is another one where I think the details
Speaker 4: will matter in a pretty significant way, and you know,
Speaker 4: we'll have to see where it goes.
Speaker 3: You know, in the wake of the original big inflation
Speaker 3: in the late seventies and early eighties, and it took
Speaker 3: a while for that to come down, but I get
Speaker 3: the strong oppression over the years that for the FED
Speaker 3: this was like a crowning achievement of sorts, having defeated
Speaker 3: that inflation and had several years of price stability. And
Speaker 3: I also think that you know, fast forward in the
Speaker 3: wake of the Great financial Crisis, particularly in the latter
Speaker 3: half of the twenty tens, that something resembling what people
Speaker 3: would call full employment has been another achievement. And I
Speaker 3: think that you know, if you go back to Powell's
Speaker 3: speech in August to Jackson Hall last year, as part
Speaker 3: of what he said, like this has been an achievement
Speaker 3: to get low unemployment and we don't want to lose
Speaker 3: that we don't want to let it slip again in
Speaker 3: your view, like, how important is that for you know,
Speaker 3: when you think about the potential tension of the dual mandate,
Speaker 3: how do you think about sort of like preserving that
Speaker 3: achievement of maintaining a low level of unemployment even in
Speaker 3: the phase of all this uncertainty and potentially you know,
Speaker 3: inflationary shocks from the form of tariffs.
Speaker 4: So let me say two things on this. First, I'm
Speaker 4: very pleased that during my tenure here the two mandates
Speaker 4: have not been in conflict. They've not been intentions, so
Speaker 4: I've not really had to face that challenge. We've either
Speaker 4: had low inflation so we could worry more about the employment,
Speaker 4: or we've had really rock solid employment so we could
Speaker 4: worry about inflation. I think one of the things that
Speaker 4: was quite interesting to where the end of the twenty
Speaker 4: tens was the effort by the FED, and it started
Speaker 4: before I got here to be less preemptive around anticipate
Speaker 4: anticipated in inflation must happen, because we've never seen an
Speaker 4: environment where inflation didn't arise, and so and so there
Speaker 4: was a philosophy that was embraced to say, Okay, we
Speaker 4: should actually see signs of inflation before we get too
Speaker 4: crazy ones. And what we wound up seeing was unemployment
Speaker 4: levels fall to numbers that were inconceivable. Right, So at
Speaker 4: one point unemployment was a three and a half percent
Speaker 4: somewhere like that. When I first started my career as
Speaker 4: an economist, the unemployment rate that was viewed to be
Speaker 4: the natural rate of unemployment was I think it was
Speaker 4: like six percent. And so the idea that you could
Speaker 4: get to three and a half without seeing inflation was
Speaker 4: just just it was like crazy to talk, right, And
Speaker 4: so for us to then just well, let's let it go,
Speaker 4: and then it kept going and kept going and kept going.
Speaker 4: I think that was a tremendous you could call it
Speaker 4: an achievement, but it was a discovery that a lot
Speaker 4: of our perceip or perceptions are understanding of what the
Speaker 4: possible could be might be constrained by our own preconceived
Speaker 4: notions of where the world is. And in this instance,
Speaker 4: you know, I think about all the advances that have
Speaker 4: been made in technology in job searches, so a lot
Speaker 4: of natural unemployment is about you know, it takes time
Speaker 4: for the match to happen between an employer and an employee.
Speaker 4: Now you can sit over lunch on your phone and
Speaker 4: submit like one hundred applications to things. Businesses are using
Speaker 4: AI type tools to review resumes to really be able
Speaker 4: to pick out the people and that match happens faster.
Speaker 4: If that's the case, then the natural rate should be lower.
Speaker 4: And now the question is how much lower? And you
Speaker 4: know this is something we argue about. I actually think
Speaker 4: it's as much lower than others in my building do.
Speaker 4: But I think the experience would show that change did happen,
Speaker 4: and it happened in ways that we could get more
Speaker 4: people employed and in a sustainable way without being a problem,
Speaker 4: without that being a problem for inflation.
Speaker 2: I wanted to go back to something Joe brought up,
Speaker 2: which is the sort of I guess cross current of
Speaker 2: monetary versus fiscal policy. And I get that, you know,
Speaker 2: monetary is always existing alongside fiscal policy, which may change
Speaker 2: in various directions, but it does feel like the tariffs
Speaker 2: are sort of an extreme example of that in the
Speaker 2: sense that they have a big impact on the market,
Speaker 2: so they have a big impact on financial conditions, and
Speaker 2: they seem to be changing constantly. As we've been discussing,
Speaker 2: how is the fed just generally thinking about I guess,
Speaker 2: the tension between your own monetary policy versus the changes
Speaker 2: in financial conditions being wrought by the Trump administration and
Speaker 2: its impact on financial conditions.
Speaker 4: So I don't think it's different in character, but it
Speaker 4: is different in magnitude. And so look, we take all
Speaker 4: non monetary policy as given right, and then you know,
Speaker 4: I just respond and thinking about where we need to
Speaker 4: go based on where that part of policy is and
Speaker 4: where businesses are and all those sorts of things. These
Speaker 4: changes here that are being made are very much like that.
Speaker 4: Like trade policy is not something that the FIT manages,
Speaker 4: and there are lots of different ways so you can
Speaker 4: influence it, and so that's what we're seeing here. I
Speaker 4: think for me, one of the things that's been quite
Speaker 4: interesting to reflect on is that if your standard econ,
Speaker 4: if you do your models, it's all marginal this and
Speaker 4: marginal that, and the margins is calculus. So these are small,
Speaker 4: small changes on the status quo, and what we see
Speaker 4: today are decidedly not small changes relatives to the status quo.
Speaker 4: And so the question is does that require a different
Speaker 4: kind of conceptual model about what response functions will be
Speaker 4: for businesses and for families and households. That's the bigger
Speaker 4: question that we're having to wrestled with, which is different
Speaker 4: than what we usually do, but it is it is
Speaker 4: not so much about the idea that you know, there's
Speaker 4: a policy and it changed how financial markets are thinking
Speaker 4: about risk, right. There are lots of other things that
Speaker 4: do that as well, and you know that's just part
Speaker 4: of the landscape.
Speaker 3: With any luck, we might have some policy stability for
Speaker 3: a while, lots of ninety day pauses, et cetera, and
Speaker 3: I have you know, my personal guess is that ninety
Speaker 3: day pauses could turn into more ninety day pauses at
Speaker 3: some point in the future. You mentioned at the beginning
Speaker 3: of the year, you know, maybe this was an economy
Speaker 3: that would you know, require or be three to four
Speaker 3: cuts today May fourteen, assuming some policy stability. I'm mindful
Speaker 3: of the fact that our Bloomberg colleagues would love a
Speaker 3: nice clean headline. But what U So I've tried to
Speaker 3: do them a favor here. What does the rest of
Speaker 3: the year look like for you from a policy perspective?
Speaker 3: How many cuts are we getting?
Speaker 4: All Right? So, okay, I will say, so I'm required
Speaker 4: to do this, right, so so you know, and then
Speaker 4: the plot some avic and our perspectives. I have one
Speaker 4: cut for the year, and in part it's because I
Speaker 4: think the uncertainty is unlikely to resolve itself quickly right days.
Speaker 4: So we have ninety days in two settings, right So
Speaker 4: you have the reciprocal tariff ninety day window, you have
Speaker 4: the China tariff ninety day window, which is at a
Speaker 4: different periodicity than that. And we have all these negotiations
Speaker 4: and we don't know how any of them. We know
Speaker 4: the UK, but other than that, you know, it's all I.
Speaker 3: Think that's formally signed anyway.
Speaker 4: Well you would, yeah, I just I just read the
Speaker 4: Bloomberg headline on it and it seemed like it was done.
Speaker 4: And so so until there's uncertainty, you know what, We've
Speaker 4: asked our businesses like what kind of plans are you
Speaker 4: making for this year? And many of them are like, well,
Speaker 4: I don't, I really know. We're going to keep changed
Speaker 4: to a minimum until we get that resolution. And so
Speaker 4: if that uncertainty continues, then I expect we're not going
Speaker 4: to see the same level of big investments or those
Speaker 4: sorts of things, and that will then push out the
Speaker 4: time before we'll be able to get to that a delibrium.
Speaker 3: I think we both have two more short questions and
Speaker 3: just real quickly on those business conversations. And this is
Speaker 3: something that's been coming up in episodes. Do you see
Speaker 3: a divergence between small and large businesses? Large businesses who
Speaker 3: have the balance sheet can lose money for a couple
Speaker 3: of quarters. For a small business, they make a mistake,
Speaker 3: they make an order. There's a huge tariff bill at
Speaker 3: the poor it might be existential. Have you noticed a
Speaker 3: sort of a distributional effect in terms of planning and.
Speaker 4: How and the effect absolutely, And I think forecasts for sales,
Speaker 4: forecasts for costs are much higher for small buinesses. We
Speaker 4: talk to small bus leaders. You could see this in
Speaker 4: our survey responses. They're the ones who are feeling most
Speaker 4: at risk, and we'll just have to I mean, I
Speaker 4: think they're hoping that this is a short episode and
Speaker 4: we can get to a new steady state so they
Speaker 4: can understand how to run their businesses.
Speaker 2: I have just one more question, and it's a very
Speaker 2: important one. We heard that you like birding. Do you
Speaker 2: prefer seeing hawks or doves?
Speaker 5: This is a very serious question.
Speaker 4: You know, that's very good. You know when I first started,
Speaker 4: I got asked in my hawker dev and I said
Speaker 4: I was an owl, and I have doves in my
Speaker 4: backyard pretty regularly. Mourning doves.
Speaker 2: They're the stupidest birds.
Speaker 4: But it's always super exciting when a red shoulder a
Speaker 4: redtail hawk comes swooping in or Cooper's So just like
Speaker 4: when they ask parents their their favorite child and they say,
Speaker 4: we love them all. I love all my birds.
Speaker 2: I don't love mourning doves. They're idiotic. They're like they
Speaker 2: have a death wish and always are getting killed and
Speaker 2: building their nests in stupid places, and then it becomes
Speaker 2: my problem. Okay, enough about mourning doves. Raphael Bostic, thank
Speaker 2: you so much. Really appreciate the invite to Atlanta and
Speaker 2: this converse.
Speaker 4: Thank you, thanks for coming down to Atlanta. I look
Speaker 4: forward to talking again sometime in the future anytime.
Speaker 5: That was a flash the time, Joe.
Speaker 2: That was fantastic getting to talk to I guess Bostic
Speaker 2: is non voting at the moment, but getting to talk
Speaker 2: to a FED person at this really interesting juncture in
Speaker 2: economic and I guess central bank history.
Speaker 3: It's such an interesting time for all kinds of reasons.
Speaker 3: I mean, you know the fact that the COVID shock
Speaker 3: still looms with us in various ways, clearly in particularly
Speaker 3: just the fact that you know, up until very recently,
Speaker 3: arguably depending on how you measure it, inflation still running
Speaker 3: above target. But this is sort of uncharted territory to
Speaker 3: some extent because of the speed of Paul changes in
Speaker 3: both directions in DC. You know, I wrote in a
Speaker 3: newsletter I think it was last week after the Polle's
Speaker 3: press conference. You know, I've never heard more different ways
Speaker 3: to express the concept of we don't know anything that's
Speaker 3: about to happen. That's right, an extreme level of humility
Speaker 3: is required in this moment.
Speaker 2: Well, he certainly mentioned the word uncertainty a number of times. Yeah,
Speaker 2: it really is. Well, the other thing I was thinking is,
Speaker 2: I guess the complexity of trying to do economic analysis
Speaker 2: in the current period is really really coming through. And
Speaker 2: I thought the point that Bostik was making about productivity
Speaker 2: depending on where people actually move manufacturing or move operations too,
Speaker 2: like that level of detail seems almost impossible to predict.
Speaker 2: And yet productivity is obviously something that matters enormously for
Speaker 2: the economy.
Speaker 5: What is it?
Speaker 3: Who are we talking to and they're quoting Paul Krugman
Speaker 3: someone recently, and they're like, productivity isn't everything, but it's
Speaker 3: almost everything. I guess pretty much all there is. You know,
Speaker 3: you think from the perspective of any sort of international
Speaker 3: any company that has international ties, and now we've had
Speaker 3: like two supply shocks in a way in a very
Speaker 3: short period of time, you could almost be forgiven for
Speaker 3: post COVID say, oh, you know, this is a once
Speaker 3: in a century type of thing. So I don't know
Speaker 3: how much we're going to change our businesses, but a
Speaker 3: now we've had this other one, and so at some
Speaker 3: point this idea of moving supply chains, which has already
Speaker 3: like been happening to various degrees, has to be top
Speaker 3: of mind. And how these things get organized, and what
Speaker 3: do you reshore, and what do you friendshore and what
Speaker 3: do you put in Vietnam that has links to both
Speaker 3: US and China. They're policymaking in a state of flux,
Speaker 3: for sure.
Speaker 2: Yeah, and it also gets harder for companies, right like
Speaker 2: the longer this kind of goes on, because you had
Speaker 2: the first wave of reshoring after the twenty sixteen Trump administration,
Speaker 2: and now what's left to move places, especially if you
Speaker 2: have tariffs on both Vietnam and China.
Speaker 3: You know, what I've been thinking about. I would never
Speaker 3: give financial advice on a podcast because it would be terrible,
Speaker 3: But something I've been thinking about a little bit lately
Speaker 3: is that you actually might have this situation. This doesn't
Speaker 3: even really have to do with our conversation, but straight
Speaker 3: thought in my head. You actually have the situation now,
Speaker 3: which I think is kind of interesting, in which if
Speaker 3: you're an American importer, you're obviously thinking at least to
Speaker 3: some extent, about diversifying the base of where you source from.
Speaker 3: So do you like go more to Latin America, do
Speaker 3: you go to other non China parts of Asia and
Speaker 3: so forth. If you're a Chinese exporter, you might be
Speaker 3: thinking about the same thing. There's already been this pressure
Speaker 3: from Chinese exports, just a business pressure to move some
Speaker 3: of their lower end manufacturing outside of China. Now there's
Speaker 3: the fact that there's this big terarifa disparity, assuming that
Speaker 3: current levels stay roughly stable, so it'll be interesting to
Speaker 3: see if there is some sort of, you know, positive
Speaker 3: impulse to non China em generally, because it strikes me
Speaker 3: that a lot of different entities really do have an
Speaker 3: economic reason to truly diversify in a way that maybe
Speaker 3: hadn't been the case several years ago.
Speaker 5: Oh for sure.
Speaker 2: And we saw that in the episode we did with
Speaker 2: Sarah Lafleur when one of her Chinese manufacturers was talking about, well,
Speaker 2: if we can't export a bunch of stuff to America,
Speaker 2: maybe we start selling m. M. Lafleur clothes into China
Speaker 2: that as well. Right, it's like on both sides of
Speaker 2: the equation, so many moving parts. You know what, I'm
Speaker 2: thinking about eating more fried things before I leave Atlanta.
Speaker 3: Okay, so I got to wrap it up.
Speaker 2: Yeah, shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the ad Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm joe Isnenthal. You can follow me at the Stalwart.
Speaker 3: Follow Rafae Albostic. He's on LinkedIn. You could check out
Speaker 3: some of his posts there. Follow our producers Kerman Rodriguez
Speaker 3: at Kerman Armadesh O, Bennette Dashbug, and Kilbrooks at Kalebrooks.
Speaker 3: More oddlotscontent go to bloomberg dot com slash odlots, where
Speaker 3: we have all of our episodes in a daily newsletter,
Speaker 3: and you can chat about all of these topics twenty
Speaker 3: four to seven, including monetary policy with fellow listeners in
Speaker 3: our discord discord dot gg, slash od loots.
Speaker 2: And if you enjoy Oddlots. If you like it when
Speaker 2: we travel around the US interviewing regional FED presidents, then
Speaker 2: please leave us a positive review on your favorite podcast platform.
Speaker 2: And remember, if you are a Bloomberg subscriber, you can
Speaker 2: listen to all of our episodes absolutely ad free. All
Speaker 2: you need to do is find the Bloomberg channel on
Speaker 2: Apple Podcasts and follow the instructions there. Thanks for listening