Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Alloway and I'm Joe Weisenthal. Joe, we're here in Atlanta. I've never, I'm embarrassed, I've never really spent any time in Atlanta so far, but it seems lovely. We're in Midtown. I had southern food last night. Fried chicken.
How much fried stuff have you eaten? I have to be really careful because I will devour the food while I'm here. So I went out with our producer Carmen last night and we had fried chicken, fried okra, fried green tomatoes. I think there were a few other fried things. It was so good.
All right, but we're not actually here just to talk about southern food. We are actually here to interview someone very important, 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.
Well, that's right. So obviously it's an extraordinarily difficult time for literally everyone to understand what's going on with the economy. The Fed in particular, people have talked about, oh, it's in a tight spot, right? Because there perhaps are signs of economic deceleration. There's the potential inflationary impulse of the tariffs and the tariffs themselves keep moving. That being said, I was sort of, knock on wood, between the recent detente, so to speak, with China, maybe things are quieting down. Maybe we'll at least have some trade policy stability for some period of time, which maybe makes things today slightly easier to understand or anticipate than they might have even been a week ago. That is the big question. So why don't we get right to it? We're speaking with Raphael Bostic, who is of course the president of the Atlanta Fed. So Raphael, thank you so much for coming on Odd Thoughts.
Well, thank you for having me and welcome to Atlanta.
Thank you. Thanks for having us. So I'm going to start with the 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 US, does that change your outlook a little?
I would say the overarching message that I've gotten from the people I talked to and from our survey responses and other things, and it's the reason why I was comfortable with our policy action last week, is that there's just a tremendous amount of uncertainty out there. And because of that, businesses and households as well aren't really comfortable making big decisions. And as a consequence, the amount of energy I would have expected to see in the economy is going to be less than that expectation was at the beginning of this year. It looks like it's going to be less than that for the remainder of this year. And then we'll have to see how things play out to determine how much less. But that uncertainty definitely is weighing on consumers and business leaders alike.
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. It's literally never going to happen. That word comes up in every episode. But actually going back to Tracy's question, what does that mean? The economy less resilient. What did you mean by that term?
So what we've seen through the last several years is an economy where all the analysts had expected things to start slowing down. You know, 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 the fastest pace of rate hikes in decades. And that just didn't happen. Like last year GDP was over 2%. Which is faster than potential. 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, okay, 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 and 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. Folks are not sure about the cost of goods again. People are not sure whether that will trigger a recession. I will say in the last six months, actually the last three months, analysts have used the word recession in their narrative about possibilities far more than they have for quite some time. And all of that, people notice. And if folks think that there's going to be a possibility that they're going to lose their job or those sorts of things, they're going to engage differently. Their perceptions of what a safety net needs to be for them, that rainy day fund is going to change, 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. Got it. And the less resilience does not necessarily mean recession. I would say even today, recession is not in my outlook, but it's less, right? So rather than the 2% or 2.5%, it may be 1%, maybe a half percent. That's the thing that I'm looking to really understand as I try to keep my finger on the pulse of the US economy.
I think one of the reasons a lot of people expected recession going back to 2023, 2022, was the soft data measures. The surveys looked absolutely terrible. And if you looked at something like consumer sentiment, people seemed to think it was basically the end of the world. Fast forward to 2025 and we do have a similar dynamic happening now where the soft data is deteriorating but the hard data remains relatively strong. Is there a risk that this time is different and maybe we're a little overconfident in the economy given what happened with the soft data a couple years ago?
So, you know, it's funny that you say this time is different. I always hesitate to say on a podcast, but I still do it. Sometimes it can be different. 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. Oh, I didn't know that. And so for me, I know psychology is important and I know psychology can shift people's decision-making even when the information set doesn't change. And so understanding that psychology and how it translates into decision-making is a critical thing. 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. You know, it's very interesting when I think about the pandemic, a lot of it is people kept getting paid. The employment rate rebounded incredibly fast, but they didn't have things to spend on. They couldn't go to restaurants. They couldn't go on vacation. So the household balance sheet was actually quite stronger than you would expect to see in sentiment turning south. Today, that balance sheet is in a quite a different place. I talked to a lot of folks and asked 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.
Eventually I want to get to the contemporary situation and then thinking about the tariffs, etc. But before we do, thinking back, one of the residual lessons of the pandemic period, and there were two big ones, 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? Do they still have these searing memories of not having been able to staff their facilities once demand starts picking up? And do you think that still affects the sort of marginal impulse to lay off workers?
So I wouldn't put it exactly like that. I think that there is a reluctance among firms, and this is what I've heard from most firms, that they're going to hold tight today and see how things evolve. And because there's two-sided risk, because the economy might be stronger than people are projecting today or it might be weaker, you don't want to take actions that might cause you to have to do extra things to get back to where you are. 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 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 suggests that maybe they won't, but maybe they will. And in fact, it might actually be more complicated in that for some households, it may be the size of the change. So if it's a smaller incremental, it may not register. For others, it could be one penny and that's too much. And then the third piece to this is sector by sector, do you wind up seeing different responses? And 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, all the math gets more complicated. So I think our job will get a bit more challenging.
