I now invite up here Dennis Lockard to the podium to begin our program.
Well, thank you, President Kathy, and thanks everyone for being here this afternoon. I introduce Raphael Bostic with a touch of sadness. He has announced his retirement at the end of the month, so this is my last time to torment him with gag gifts and so forth. But it's been, Raphael, it's been an honor to interview you these seven or eight years that we've been doing this together. It was a great idea I thought that I never came up with when I had these early in the year speeches. And Raphael proves that each generation is an improvement on the former. Now, I would have said after that comment that I had talked myself into a corner because I'd like to introduce Jack Guynn, who was my predecessor, but Jack was already introduced, so I get away with that. I'm sure you're familiar with Raphael's bio, but let me just quickly run through it. He's a native of New Jersey, educated at Harvard University, got his PhD in economics at Stanford, was an economist with the Board of Governors of the Federal Reserve System early in his career. He was later the Assistant Secretary for the Department of Housing and Urban Development. He had an academic career at University of Southern California as the chair of the Department of Governance, Management and Policy Process of the Price School of Public Policy, and then 15th President and CEO of the Federal Reserve Bank of Atlanta where he served of course on the Federal Open Market Committee. Very active in Atlanta civic affairs. Too numerous a number of connections to mention but one of the highlights was chairing the Metro Chamber but many other things. So please welcome Raphael for his valedictory appearance here.
Well, many of you will remember that over past years I have been each year bequeathing to Raphael some of the tools of monetary policy that I accumulated when I was in the job. So this year is no different, but this of course will be the last year. And it occurs to me that maybe what you want to do after you receive what I brought today is leave these things on your desk for your successor who might find them useful. So, first, just in case your successor wants to cut something like interest rates in 2026 or thereafter. So, this is interest rate cutting scissors. But you have to understand you don't cut rates without a reason. You may very well need a reason. So here's the reason. I think I better put this away. All right, time to get serious. We've had fun over the years proving that central bankers have a sense of humor. So, let's just get started. What's your take on where the US economy is today and outlook for the near term?
Well, first of all, good afternoon everyone. It's really good to see you. Good to have you all here. Dennis, thank you for doing this. You know, the first year I did this, I just gave a speech and it was I thought it was boring and it was long and I don't give speeches well. So, I'm really glad you were willing to do this. I didn't know it came with the gag thing. We should have done a deeper interview of what this was going to be, but it's been great and you can see the room is full. People really enjoy this. I also wanted to just acknowledge your work and Jack's work as my predecessors. You know, when you, many of you have been CEOs, you know, you're set up by the people ahead of you and then their work and their visions are the things that really are the foundation that allow you to move on to other things. And so I want to thank you both for your wisdom, your vision, your guidance, and your counsel since I've been in this role. It's been really fantastic. And then there was an announcement. Thanks for putting those scissors away. There was an announcement about Jimmy Edge, Cynthia Day. Jonathan Rafford is a former director for us in Atlanta. So many leaders, many of you here in the room have supported us directly and I just want to say thank you. In these times, there have been so many unexpected things that have happened that made it almost impossible for the pure economic models to be able to give us guidance and insight as to what's likely to happen moving forward. And it's from the input that we get from all of you and business leaders across the sixth district that have really helped Atlanta be on the forefront. And I do think that we've been on the forefront because when we've gotten wisdom, when we've gotten insights about how you're seeing the world, we actually listen to it, we take it on board, and then we share it as much as we can. So, just want to thank all of you as well. Really grateful for all of that. All right. So, now with all that out the way, you asked about the economy. You know, the economy has been quite interesting. Over the course of my time in this role, I think the first question is when are you cutting rates? But the second question has always been when's the recession coming? We've had so much turbulence. We've had so many things that could have shaken the economy in ways that have taken it off the rails and it just hasn't happened. And through 2025, that continued to be the case. We saw a large tariff shift that was unexpected for most business leaders, could potentially introduce increased costs in a significant way that would make it hard to be profitable in the way that they were in the past. And that could have led to a real contraction in the economy. But that's not what we saw. In the aggregate, the US economy is growing above 2%, maybe 2.5% for 2025. That is really strong growth. And as we talked to business leaders over the last six to eight weeks, we've asked them, so compared to 2025, what do you think going to happen in 2026? And almost all of them said, you know, about the same and there are some scenarios where it could even be better. And that's actually quite interesting. It suggests that the economy will continue to be resilient. And that's before we think about some of the other stimulative things that can happen. So, you know, the tax bill introduced a number of stimulative things for businesses and for families. There's been a lot of deregulation that has not yet come into the marketplace, but will come. And then we've cut interest rates in the last 18 months by 175 basis points. That's a point and three quarters. That's all stuff to help the economy move more robustly, not less. And so, my outlook for 2026 is a continuation of the resilient economy. And we'll start to see strength.
The news of last week, of course, was quite dramatic. The nomination of Kevin Warsh to be the new Fed chair. He would arrive, I presume, in about June if he's confirmed. What do you think he will face on arrival? What will the economy look like at mid-year? And more importantly, what's the job all about? And what would it take to be successful?
So, that's, the last question is actually a really important one. But let me tell you sort of my outlook for the first half of 2026 is strong economic performance and that will limit the extent to which inflation can fall. So I'm expecting inflation, inflation's been sideways for the better part of two years and well above our target. I don't think we're going to see dramatically different things for the first half of 2026. And that is going to be a source of concern. Another thing I would say, you know, we have the dual mandate, stable prices and maximum employment. On the employment side, the last six months of last year, we heard consistently from businesses the labor market is wearing us more than it was before. And that was really an impetus for a bunch of the cuts that we did as insurance to make sure that the economy didn't collapse. We're not hearing that anymore and businesses are feeling much more sure about where they are. There's a lot that's happening in labor markets. We may get into that at some point. But no one is projecting that there'll be a calamity such as we'll drop off a cliff and see the conditions worsen dramatically. And so you're going to have I think in the middle of this year a situation where we've kind of reached an equilibrium where the economy's grown in a solid way. Labor markets are where they're going to be but not in a horrific state. Unemployment at 4.2, 4.3, 4.4, historically that's been considered full employment. That's a very strong number. But inflation will be too high. And so how you navigate that as a policy maker I think will be a challenge that folks will have to wrestle with.
And success factors for a new chair.
Oh so the, you know, the chair of the Federal Reserve is a very large job. And it's large because you are a leader in multiple different spaces. Some of which you see on the news but many of them you don't, many of them in an international perspective. So the chair is overseas talking with the BIS, the ECB, Bank of International Settlements, global, there's a confederation of central banks, the G7 has a role for the Federal Reserve, the G20 has a role for the Federal Reserve and the chair heads all of those things in addition to all the things that you know that person does here in addition to the speaking and they have to manage from a CEO perspective a pretty significant organization that has a bunch of economists, they have bank supervisors and a whole host of things. That's a lot of stuff and then they also have to make sure that the constituents, the political constituents of the Federal Reserve understand that we know that we're accountable to them and to the American people. And that's, there are 435 people on the Hill, actually 535 people, 435 in the House, 100 senators. And that's a whole another group of people that you have to be present with. You have to engage. And that's before you even get to the committee because, you know, the committee is actually a committee. Every person has a vote. And so if you want to have policy enacted or go in a direction that you want, you got to convince them to go along. And in order to do that, you've got to build a relationship with them. You have to build their trust. You have to show your wisdom and guidance. And those things don't happen overnight. And so it's just a huge undertaking. And for Mr. Warsh, I wish him the best. You know, I don't know him personally. You've served with him. But he's got a tall task and fortunately he's from the Fed before so he kind of understands the context. But it's going to be a lot of work. It should be a lot for him to get up to speed on.
You've already touched on inflation, but I want to dig a little bit deeper because as I recall, particularly based on your contacts in the sixth district, you are a little skeptical that we've seen the last of tariff effect on prices. Could you just elaborate on what you're hearing out there?
Sure. So everybody remembers April 2nd, the so-called Liberation Day when all these tariffs were announced much larger than people expected. The reaction from economists was, you know, this is going to be a calamity because these things are going to change the cost structure in ways that businesses won't be able to handle and it'll be very challenging. That's not what happened as I think you all know. And then the question is why? Well, some of it is because those businesses didn't eat all the costs, right? They were able to pass through a bunch of them in prices. But many didn't pass through most of the tariff increase in the prices. They shared that with suppliers and with others so that the realized price that you saw in the marketplace didn't equal the initial price plus the full tariff. Another thing that businesses did was they tried to find efficiencies internal to their process because there are two ways to hit margin, right? If your costs go up, then you can do that by passing the price on so your revenue goes up that way or you can try to reduce your expenditure on the inputs to continue to do that. A lot of businesses decided to find those efficiencies that way. And that has played out. All right. So that gets us through to, oh and then one other thing is because the way the tariffs were announced businesses had 90 days to buy up as much pre-tariff inventory as possible and then produced with the non-tariff product so that the things they were producing were actually not a tariff cost basis. Right? So all of that was happening through 2025 and now we get to 2026 and a bunch of those strategies you can't do anymore. Right? And so what we've heard is that businesses still are at a place where to the extent that they still are dealing with some of the tariff pricing those prices are going to start to reveal themselves in the first half of this year. And even here though there is a split in some sectors consumers are not as strong as in others. So we know you've heard about the K-shaped economy or the two-prong economy, however, the barbell where you have the upper end is quite strong and robust and resilient. If you're making products that serve that segment, you're going to pass through 100%. Right? Those folks are not sensitive to this. They're buying all that stuff. If you're on the other side and your consumers are living paycheck to paycheck, maybe even paycheck to the next two paychecks, there's only so much price they can take on. So you're going to see businesses have to make different kinds of decisions and we are talking to folks who are telling us a range of things and we'll have to just see sort of how that all plays out. But I do think that we're not through with inflation. And then the one other thing I would say, actually I got to say two other things. One is the standard textbook on tariff impacts on inflation is that it's basically zero in the long run. You see the one move when the tariff hits and then businesses go back to doing what they were doing before. So whatever the inflation was before becomes the inflation after. This has been a little different because the realization of the tariff impact into prices hasn't just come in one full swoop. It's kind of dripped and drabs through the year. So it will be the case it'll take longer for that experience to play itself out. And that's an important thing. But there's another thing that I also want to say is that we all are living this. There are a bunch of prices and products that we're buying where prices are going up a lot that are not associated with tariffs. Right? So I sit on the people committee at the Federal Reserve. We are dealing with health costs that are going like they're double digits and not small double digits. It's significant. And when we talked to our health professionals, they said that this is not going to be a one-year blip. This is a thing and you're going to have to deal with that. Florida's in our district. You think about insurance for our real estate and other things. Those costs are all going up because insurance companies are paying more when these big storms come through and lead to a lot of damage. Those sort of things are not tariff related. And so, there are still significant price pressures out there that we're going to have to watch and see how it evolves moving forward. So, it's complicated, but I think where it is premature for us to say the job is done. We don't have to worry about it. Some are saying using the T-word, which I don't use. You might use it though.
That was it. So the reason I don't use it is because we have a little jar. We have a swear jar on transitory and so I'm cheap so I don't want to put the dollar in there but yeah so I think this is going to be more lingering than others that you might think.
Let's turn to employment and go a little deeper. I found a quote you were quote of the week in some publication. I never made quote of the week but you made quote of the week. The four drivers of declining job creation. Do you remember that one in one of your... hopefully you have the rest of the quote. So I thought it was really good. So there it is.
This is very good actually. So the first is, I'm just going to read my quote. So the first is normalizing staffing from high headcounts. So if you remember in the pandemic there was a lot of demand for certain products. Everybody wanted the lumber, they wanted the decking and all that kind of stuff. So businesses ramped up. Amazon hired tons of people because there were so many orders coming to homes. And they haven't really actively rightsized. And so, one of the things that's happening now is businesses are responding. They're saying, okay, that level of demand was almost like a push force demand. And once you're past that, you got to back that out. So, that's what's happening. A second is that we've heard consistently that businesses are much less eager to hire because they have a hope that technology is going to be able to do jobs that they had their entry-level folks doing. Now in many instances they haven't actually figured that out yet. But they're hopeful and so they're willing to be patient in the hiring especially because many of them remember how painful it was to have to lay people off in the great financial crisis. You know when I first started I was in Jacksonville I was talking to, it was a business roundtable and several of them were almost back to sobbing telling the stories about how hard it was to let people go in that time and they just don't want to do that again. So if there's a chance to be patient, they want to do that. The third is there's just so much uncertainty in the world that hiring someone being too bold about a future projection just makes people uncomfortable. And I was talking here before like news happens every day, sometimes by the hour. And they're not small things in many instances. They're things that would have to cause you to rethink what a plan or a strategy should be for a 6 or 12-month period. And if you're not confident that your strategy is going to hold, then you're not going to go out and hire a bunch of people focusing on that strategy. So, you got to be patient on that. And then the fourth thing is that they are just trying to figure out to the extent that they've done their strategies hiring other people is going to just put pressure on margins because when you pay your wage, wages go up, they never come down. You're stuck in a dynamic where if you're not confident that you can get those larger margins, then you're not going to want to put those stresses on them. So all four of those things are out there and it's one of the reasons what makes the labor market really difficult to forecast because in some of these instances they may not be cyclical. And for example the technology if the technology plays out the way that many hope, those jobs are not coming back, right? Those jobs will just go to technology and so the baseline amount of hiring that would be necessary to do the production that they want to do or do the same amount of production will be lower. Right? Those kind of structural changes are not changes that monetary policy can really address. Right? That's just a different kind of change that becomes the reality against which we need to assess policy. But we can't, lowering interest rates is not going to bring those jobs back, right? Those jobs are going away for a different reason. And that's something to think about. Another structural change which is not here but which is actually or potentially structural change has to do with immigration, right? And so, you know, we've had many years of significant immigration where immigration has been the source of the growth of our labor force. Right? Our natural increase of population has been slowing down for the last 35, 40 years in such a way that we don't have enough young people coming up to replace all the jobs and so you can't grow if you don't have those workers. Immigrants have been playing that role. So to the extent that we are now changing the dynamic of people's willingness to come here, people's ability to come here, that has implications for what labor supply looks like. If this is a short-run thing, then maybe we can treat this as cyclical. If it's a longer run dynamic, that is something closer to a permanent change. That's another structural change that will change the notion of what a good labor market looks like, what good job creation looks like, and how we should think about our policy in the context of the data that comes out. And one of the challenges with all of these things is that this is happening in real time, right? This is not like we're 3 years into this. So the businesses that have gotten the technology know what they're going to do and all that. Like we talk to them month after month after month. We have a bunch of surveys. Hopefully you all are subscribed to our surveys. I say this all the time, but we started to ask a lot of questions about deployment of AI, investment in AI and those sort of technologies. Two years ago, everybody had it in a sandbox. A year ago, businesses were starting to deploy it into their processes but didn't have any idea about what's going on. Today, everyone is trying it in a serious way somewhere. But even now there when we talk to folks they say well we think we might be able to either redeploy workers or replace them but we're not really sure. But even that articulation is a stronger statement than what we heard a year ago. So evolution is happening in this and there will be changes in labor markets. It's just hard to really project out is it going to be a total substitution of jobs or is it going to be a thing that enables the existing workforce to do more things or perhaps other things so that you get actually more output that is still an open question.
Raphael, you've been a leader, a really fine leader in looking under the hood of the economy, which in the aggregate is quite strong right now and trying to understand the experience of people at different income levels and in different neighborhoods and so forth and the economy has been described as K-shaped in terms of consumption. Could you talk about how the bottom half is doing in this economy? How the economy feels to those people.
So, the bottom half is having a hard time. And I'll describe it like this. So, we've always had a segment of the population that has not had a lot of resilience essentially don't have a lot of wealth, don't have their monthly income kind of matches what their monthly expenditures are. So, there aren't large margins. And you know, the Fed for many years has been doing a survey to ask what fraction of families if they had a $500 shock would be put in a bad place. And it's always an alarmingly large fraction, 40%, 50%, something like that, right? So, we know that that exists. The pandemic was actually quite interesting because the dynamic there was that businesses needed workers who fit who were in that segment. And so wage growth for the essential workers was actually higher than it was for higher income folks, higher wage folks. And that plus the expenditures from the federal government, the pandemic support allowed those families for the first time maybe ever to have a buffer, right? And unfortunately what's happened though is that over time that buffer has now been spent down and they're back to where they were before. And so we've seen for the last year and a half a lot of signs that families are starting to make decisions on how they can make their dollars go further. You know, an example that I use is that instead of perhaps in a dishwasher or a washing machine using a pod, you might use liquid or a powder so that you can put in just half as much so that box can go twice as far, right? Those are the ways that you can make your money go further. And we were starting to see those sort of things. We're also seeing trading or transitioning from name brands to generics like all those sort of things started to happen more robustly and the question that we've had to ask is is this something that will persist. I actually think there's not stuff that's going to make this change dramatically today. We are trying to just make sure that we understand and we notice if it looks like it's going to turn worse. And right now I think there's a stabilization that we've seen. But we'll have to see what happens. I'll say one other thing on this. I know my questions have been long. My answer has been long on this. For those folks inflation is a problem. High prices are a problem. And this is one of the reasons why I think it's really important that we get inflation back down to our 2% target so that price changes and that the effect of price changes on that lower income struggling family start to get back into a range where they can handle it. I do think that a lot of the sourness that you see in consumer confidence numbers is about this. It's about the stress that people see on a day-to-day basis. And to the extent that we can succeed in getting our policy to get our targets where they are I think we can see improvement.
You've given us a great summary of the performance of the economy, how it's performing, what is likely to how it's likely to perform. What's your policy outlook? And maybe you can go back to December when you had to project for the year which makes it somewhat independent of the arrival of a new chair. What do you think the policy picture? How many rate cuts for example in 2026?
So for me I didn't have any, like to me I think we have so much momentum in the economy that we need to keep our policy rate in a mildly restrictive stance and today if you look at the returns the profits in so many businesses I think it's hard to make a case that our policy stance is heavily restrictive or strongly restrictive and so if you want to think about where neutral is I think maybe one or two cuts would put us at neutral for my outlook and that would make it very unlikely if we did that for us to get our inflation back down to our target or even get it on trajectory to that. So I think this is a time to be patient also because you know with the government shutdown the statistics we're going to get at least till April are going to be more volatile. We're not going to get as clear signals on that. And so moving definitively in any direction at this point I just think would not be prudent. We have time to wait. The labor markets seem to have stabilized and that gives us space to let things play out and make sure that inflation gets back on the path to 2%.
Okay, Kathy, two more questions. Let's shift to allow you to reflect on your tenure a little bit and I'm going to ask two questions. One is your advice to your successor to be named later of course about being a policy maker. That's the first question.
