MNI Webcast with Raphael Bostic

I'm doing well now that I got here. It's warm and I understand walking is better than trying to do the cars. So, I'm doing London. It's all good.

Thank you for hosting me. It's good to see you all. Thank you for being here and thanks all of you online for being here as well. There are a couple of pieces to the answer to this question. I think the first is the tariffs have been signaled for quite some time before any were announced or put into effect. When we talked to business leaders, I've talked to a number of them, they all said we knew they were coming, so we wanted to try to take steps as much as possible to push off when we would have to make decisions about changing prices. So they front-loaded a lot of buying of inputs and goods. They had inventories that could last for some time over the course of the initial establishment of the tariffs moving forward. That played out over a long period of time, and I think businesses turned out to be more effective at forestalling the need to respond to tariffs. So a lot of the products that have received tariffs are not the ones that consumers have been facing to date. That's been one piece. I think a second piece is that there's still a lot of uncertainty about where this is all going to go. A lot of businesses were expecting there to be tariffs this year, but they didn't know exactly what they were going to look like, how big they were going to be, what they were going to cover, all those sorts of things. Today, I think there's still a good deal of uncertainty on the part of businesses about the answer to any of those questions. You mentioned we're coming to the end of a pause period, but there are already signals that there's going to be an extension of a bunch of those. The Treasury Secretary and others have made suggestions that we're not going to have clarity in a week or two weeks. This is still going to take some time before we'll know the answer to those sorts of things. When we've talked to businesses, there are really three strategies I think of. I've been trying to bucket them into three categories. One category is companies that are just saying, okay, we can wait this out as long as we can, and we don't want to be moving prices over repeated sequences. They tend to be larger companies that have some scale, resilience, and resources to manage that. It'll take a while for all these businesses to figure out exactly where their end point is. By some estimates, this could stretch into 2026 before businesses do all the things they're going to do and respond to these, and that assumes the tariff situation is not extended even further moving forward. The second is that what we will see with prices is a more continuous evolution over time, as opposed to the textbook story of tariffs which is a one-time step up. If you know your basics of economics, tariffs are supposed to be a shift of the curve, you're done, and then we move on. This doesn't look like it's going to be a step like that. It will be much more incremental over time, and we'll have to see what that means for overarching inflation dynamics.

It could be. The one thing I hearken to is that you've done your job on whatever you're doing if no one's talking about it. If no one's talking about inflation, then inflation clearly isn't an issue. If no one's talking about power, then the electric company's doing what it's supposed to do. It's only when you have issues and concerns that people will be talking about it. To the extent that inflation stays on the front pages because this upward pressure dynamic is still present, there is a risk that it seeps into the psyche of the consumer and the business leader and could eventually lead to changes in their strategies much more structurally. That remains an open question though. We are just in the middle of this right now, and it will be interesting. We'll be watching closely to see how both consumers and businesses respond as this extends further into the future.

That's hard to say. On one hand, everyone expected some slowdown because a lot of consumers were trying to beat the tariffs, and we knew there was a fair amount of upfront spending that was going to be present. That's one of the reasons why we saw so much importing in the first quarter. There was always going to be that dip coming after that. On one level, that's something to keep in mind. The question is how big of a dip should you expect? Lots of different views on that. We'll have to see. I'm actually interested to see whether that's a one-time blip in May or whether this is the beginning of something that looks more like a trend. We will see. I also think a lot of this was not about the tariffs because much of the tariff pricing has not actually made it into the marketplace yet, so that response is still yet to come.

I think it's about two things. One, there was some pulling forward of consumption. The second is uncertainty causes everyone to go a little slower, take your time, step back, and wait and see. To the extent that you can, I've been using the analogy of driving in fog. When the fog gets thicker, everyone slows down or they pull over. In that context, you would expect to see some degradation of energy in the marketplace. I think that's another part of what we've seen.

I won't speak for the whole committee. I'll let my colleagues do that on their own, but I would say I like to move in a direction when I know which direction to move in. That would require more information than we have today. I definitely want to have some sense of how the increase pressure in pricing will play out in the marketplace. I'll want to know how consumers respond to the extent that prices change in any regard. I'll also want to know what's happening in a whole host of other areas. There's a lot of discussion on trade policy, but there's change happening in a lot of different places and ways that could impact economic activity as well. In the US, you have fiscal policy, the budget, taxes, regulation. All those things matter. There are others: the geopolitical situation, the Middle East. I would hearken back to the Russian invasion of Ukraine and the impact that had particularly here in Europe. All those things are in play as well. We'll have to watch all of that to make sure I understand how it all fits together. It's an interesting time in that there are so many dimensions changing at once that trying to tease this out so you know how all the moving parts fit together like a puzzle is a challenge. I'll want to make sure I have some confidence that I know for sure which direction the economy is going in and our mandates before feeling comfortable that we should move. Two other things on this. One part is born out of the experience our institution had in the 1970s where we moved up a little bit, then down, then up, then down. What we learned from that episode was that people don't like the Fed bouncing around a lot. It creates uncertainty about where the economy is going, gives folks a bit of pause, and then they're talking about inflation all the time. We really don't want that if we can help it. The second thing is I think we actually have some luxury to be patient because labor markets are actually quite solid in the US. Unemployment is not at a historically high level; it's actually at a historically low level. The only lower period was in the years leading up to it where our unemployment rate was at levels people didn't at one point think was attainable. Because we don't have a crisis in our other mandate, it gives us some time to wait and see what's happening with inflation to be absolutely sure that it's moving toward our 2% target.

I'm still there.

Next year I think I have three cuts. But here's what I would say with the dot plot. You have to pick something. What we don't, I mean, we do actually say how confident we are in parts of the SEP submission. If you look at that part, no one is confident. The bands around whatever we're saying are really quite wide. You have to pick an outlook or scenario that you're going to tell. In my view in our building, if I ask people how many dinners would you pay for us to on your outlook, nobody wants to do that. We've been asking businesses as well how confident they are with their outlook. First we asked them, you had an outlook on January 1, is it the same today? Nobody says yes. Then we ask what did you change it to, and they tell us, and we ask how confident are you, and nobody has any confidence. What we know is that the environment in which all of us have been living has been shifting day to day, week to week, which means every outlook people are articulating comes with very wide confidence. You all have outlooks of your own, I'm imagining. If we did that poll, if I could ask you how confident you were, you know what your answers would be. I'm guessing you're not outliers on this in any way.

I like the way you started the question. You anticipated where I'm going to land partially. We don't really comment on fiscal policy; that's somebody else's in the government's opportunity and responsibility to do. We really take that as a given. In this instance, there's still some question as to what the policies are going to look like that are pretty substantial. Even there, I'm not sure I could do a fair handicapping of that. They're in negotiation as we speak for one side of one chamber of the Congress. From what I've read, they're not really close in terms of the two pictures, in which case there's going to be a negotiation. We'll have to see how that comes out. The other part that is important to be mindful of is that the package proposals I've seen have some investments moving forward and some investments pulled back. Another thing everyone will have to do is figure out what's the net of all of this in the aggregate and for particular regions and economies. Given the scale of the bill, that could in its own right be quite a complicated process. Once this is all done, then we'll start to try to figure out the implications for various sectors in our district and in the country to have a sense of what the implication is then for our mandates, which are maximum employment and price stability. It's a super complicated question, and we're still in process of getting the details. I think the details will actually matter a lot.

On the first question, you characterized my view correctly in the sense that I think there is actually more pricing to come and it is more a question of time of when and not if. I take this from a couple of sources. I hope you all are subscribed to the Atlanta Fed. We do a bunch of surveys. If you look at those surveys, we get an unambiguous signal from CFOs or the businesses that their forward anticipation of what they're going to do with prices is to increase them. Our folks in the survey center have done a little mapping to say, when we ask you a year forward what actually happens, it tends to be spot on. We take that as a good indication that today businesses really do intend to pass on the increased cost they face to the consumers. The other part that's been interesting is we ask, when is this going to happen? That's when you get the three buckets. Some will say we want to wait because we know it'll be more, but we don't know how much more. Some have a view that when they increase the price, they want to do it one time. They don't want to start to do it in little drips and drabs because they might upset their customers. That becomes a harder thing to articulate. That brings in the timing element. To the extent that today we don't have a resolved tariff regime for our country, we have many bilateral negotiations going on, it's hard to know what you would raise it to until you know what the tariff is. There's math to this that they can't do. That's just one reality of where we are on that. On the second question about the labor market, when I think about the labor market, I think about when I started at the Fed a long time ago. In those days, the natural rate of unemployment was thought to be about two and a half percentage points higher than what it is today. If you're standing at 4% on a historical level, that's a really solid labor market. The thing that makes it more difficult is that we have recent memory. We know that labor markets have been even tighter than they are today through the early part of the pandemic and even at the end just before the pandemic. When we talked to businesses then, they were painfully tight. It was beyond a reasonable functioning labor market. It was an incredibly difficult labor market in which to do business. During the pandemic, firms were actually doing things to retain their workers because they felt if they had a vacancy, they would struggle to find anyone who would apply with comparable skills. That is the context we were weakening from. We're weakening from a hyper tight and strong labor market to one that is strong and solid. Having longer historical context would suggest that the levels we're talking about now are not screaming red flashing anything like that, but rather suggest it's solid but not as tight as it used to be. Every meeting I have with a business person or a chamber of commerce, I do hand polls. One question I ask is, how many people are looking to hire? If you had one extra worker, would you hire them today? Almost no hands go up. If I ask, if you were oppressed, how many would have plans to lay off a lot of people? No hands go up or very few. Everybody today is at a very stable level. They feel like this is a growth generalization, but there's nothing extraordinary in terms of strategies or plans around the workforce that we're hearing from any of our contacts, which gives some comfort that there's not a cliff that's here next week where we're going to see labor markets become incredibly loose. The context plus the forward-looking signals from the folks we talk to suggest that things may ease a little bit, but today there's not an expectation that there's going to be a dramatic weakening such that you'll see unemployment rates spike and have people feel there's real risk.

If I got a lot of hands saying we're going to lay off a bunch of people, that would be one. I would also start to get concerned if I was hearing that businesses were starting to have concerns about the robustness of their consumers or their customers. That's another thing we're not hearing today. There is not today a sign of a significant retrenchment that would suggest a dramatic slowdown or contraction of the economy.

It depends. I don't like to get 'it depends' answered, but this one actually does depend. A lot is going to happen. We will learn about how some of these tariff negotiations are resolved. We'll get some of the details of what that looks like and what the settled upon tariff rates wind up being. Then we can actually have a different kind of conversation with businesses because then you can do math. You can start to get a sense of, oh, this is going to be a big impact, moderate size impact, or a small impact. Then we can fold that into a projection of where inflation is likely to go and get a better sense of whether it's going to spiral away from our target, stay basically the same, or continue on its path. That's really the question I'm trying to understand. Our team is working to get insights on that. Today, we had lots of arguments in the building. I encourage my staff to tell me exactly what they think, and they have obliged me on a regular basis. There are some who think we are headed for a crisis already, like the writing's on the wall. There are others who are saying businesses are really trying to figure things out, they're going to make it through, and it's going to be relatively benign. We run the gamut in our building. If you talked to 10 people, you're going to hear a little bit of all of that at some point. There is one thing I didn't mention earlier that I should: we've noticed a shift in the sentiment around performance. Our sense is that the business community has downgraded the possibility of the doomsday trade impact. The probability attached to that has gone way down, which has been an interesting and notable thing we've noticed in the last four or five weeks.