We'd like to thank Raphael Bostic for joining us here on Bloomberg Television and Radio worldwide. They were just talking about how the president came out a short time ago and said the Fed should lower interest rates. When he talks, do you listen?
Well, we hear lots of voices. I would say my job is really to talk within the six districts and see where policy should go based on what I'm hearing in terms of the momentum of the economy. And today, what I would say is there's a lot of uncertainty. Forecasting is maybe a bit more challenging than it's been in the past. But look, I stay on my job to just talk to the business folks that we see and hear from them to understand sort of what's happening on the ground. That really is the thing that informs me very much.
This is the part where I'm normally going to try to pry out of you some sort of guidance on future interest rate moves. But when you look at the Summary of Economic Projections, the dot plot from last week, one gets the impression that you don't really have a clue at this point.
You know what we've heard, and what I've heard, is that we don't really know where the economy is going to go. Business leaders don't know, families don't know, and local policymakers don't know either. So one of the things that has really impressed upon me is the idea that people are taking on board information as it occurs. What they're hearing are things that are leading to expectations that there'll be upward pressure on prices, so that inflation will happen longer. And I've taken that on board. So my projection of where inflation is going to go this year is pretty much sideways, and we won't get back to a more neutral level of inflation, our 2% target, I don't project until sometime early in 2027. But it is very much hearing people take in the latest news, figure out what that means for them, and then I will respond to that in terms of how I think about the economy's trajectory and policy.
Last month you said you thought that we would have two rate cuts this year. The dot plot didn't change, still calling for two rate cuts, but a number of people moved their dots up to say maybe we get fewer than that. Were you one of those?
I was one of those. So I was at two, I moved to one. Mainly because I think we're going to see inflation be very bumpy and not move dramatically in a clear way to a 2% target because that's being pushed back. I think the appropriate path for policy is also going to have to be pushed back, getting us to that neutral level.
Some of your colleagues also moved their dots down, suggesting that we might see more rate cuts, probably because they think the economy will weaken. What do you think the odds of an economy weakening because of fiscal policies are?
What I would say is I am hearing more concerns about the trajectory of the economy, that's undoubted. But what I also will say is the data that's come in to date has not actually shown that, and we've still seen a resilient economy. I do know that consumer sentiment has started to take a dip, and the question that we face right now is: is consumer sentiment going to be a leading indicator like it was pre-pandemic, or is it going to be something that doesn't really translate into actual observed behavior in the economy, as that's how it played out for most of the pandemic? Right now, it's an open question, and it's one of the things I'm going to be watching very closely in the months to come.
It's hard to know for sure what consumers are going to do, but you talk to business leaders all the time. What's the general attitude of CEOs right now about business outlook and about their plans for say hiring or even raising prices?
We actually have started to ask our business leaders exactly this question: where do you think pricing pressures are going to go, higher or lower? What we've heard consistently is they think they're going to go higher. Then we ask what do they think is going to happen in terms of their sales, and they're also quite bullish on sales rising as well, which says to me they think that consumers are going to be able to manage these higher levels of prices and whatever changes in prices that happen moving forward. We'll have to see if that actually plays out. I think that would be one of the big questions and stories that emerges through the course of 2025, namely how the consumer manages in the face of these elevated price levels.
If companies are saying prices are going to go up, are they going to pass that along if tariffs come on and add to the cost of their materials?
We've done surveys on that question as well, and what we've gotten in survey responses is yes, they're expecting to try to pass these through. The expectations about unit price costs going up is clear. But if you look at our surveys about what they're expecting for price changes, the amount of price change you're expecting almost matches the cost change one-for-one, which has a complete pass-through as the expectation. And then again, we'll have to see what happens in terms of whether consumers take that on board.
What are they telling you about the labor market and their plans for employment going forward?
Labor markets are still tight, not as tight as they were two years ago. But what we hear from most businesses is that's not a source of worry for them. They feel like if they need workers, they'll be able to get them, and that wage pressures are not really outsized relative to where they were pre-pandemic. So folks are feeling pretty good about the prospects in terms of workers.
Border crossings are way down, and deportations are supposedly ramping up. What do you hear from the service industry about their abilities, or even construction, to find workers?
We haven't been hearing this as an across-the-board thing, but we are hearing from particular sectors that there is a shortage starting to emerge in terms of work crews on housing construction sites and the like. We're just going to have to watch to see if that remains isolated or whether it becomes something that is more widespread, which then will have implications for the ability of the economy to meet the demand that's out there.
You were talking about consumer sentiment. What do you make of the rise in inflation expectations, which at least in the Michigan survey has been fairly dramatic?
As you know, for many years short-run inflation expectations have really matched where people are. And I think seeing the elevated prices, hearing the talk about the tariffs, and hearing the idea that tariffs push up prices has shaped people's expectations in the short run. It's the medium and the longer term that I'm trying to focus on much more. There, the reaction has been far less dramatic, but to the extent that that starts creeping up, that'll be something that I'll have to worry about.
There was a lot of pearl clutching on Wall Street when Chairman Powell suggested that the impact of tariffs on inflation would be transitory. Would you use that characterization?
I try not to use that word anymore. I will just say that I do think, look, we have to acknowledge that historically when tariffs have played out, there's been a one-time jump in prices and then the economy returns to its usual trajectory, such that policy doesn't have to respond to it. For me, I think there is a question about whether that's going to happen this time. We've just gone through a period of elevated inflation, so it is very much on the consumer's mind, and I fear that they might be more sensitive to higher prices today than they have been in the past. But they might not, and we'll just have to see how that plays out.
This whole question of seeing how it plays out, given how we're getting government by tweet and things change all the time, are you sort of foreclosed from acting preemptively? Are you going to be necessarily behind the curve?
