8.7.25 Economic Crossroads with Dr. Raphael Bostic

Well, Ira, first let me just start by saying it's really good to be here and I'm excited to talk with you today and you made this happen and you're on the other side of the pond. This is quite impressive and to Dustin and his team, I just want to thank you all for all that you've done to make this happen. These things don't happen on their own. When I was at USC as a professor I did a lot of events and even though I was standing on stage all the work was done by other people and so just want to thank everyone who's been a part of this to help make this possible. Now, Ira, you mentioned uncertainty that has been perhaps the most frequently used word that I've done in 2025. There has just been so many things that have gone on that have made it difficult to know exactly what's going to be next. And so one of the things that we've done in our team is really try to step back a bit and be open to the possibility or the reality that there are a ton of scenarios out there that could play out. And as rapidly as things are evolving and changing, it's very difficult to assign probabilities to any of them. So you just have to be open to scenarios. You have to be ready to adapt and adjust quickly. And I think there's a fair amount of effort that we've been doing on two fronts. One is just to try to figure out is there a way to know what's more permanent versus things that are going to be fluid and continue to be fluid. And then the second is to really stay focused on who we are, which is we are monitors of the economy. We want to make sure we're understanding how all the key players are responding to the uncertainty. And that's been a key focus for us. So, we've actually redoubled our efforts. We go out and talk to lots more people. We ask more focused questions about how are you doing? Where do you feel confident about your strategy? Are you making a three-month strategy? So, you know, several months ago, a bunch of the big companies said, 'We're not even going to give you a year ahead projection because there's just too much churn going on.' We need to understand all those things because that really sets us up to have a sense about what the trajectory of the economy is going to be. Now you asked about outlooks. My outlook right now is for the economy to continue its pace of slowing down. It's been slowing down for some time. But I also expect there to be some real uncertainty about what that means for labor markets as well as what we're going to look at for inflation. So on the labor side, we've been asking folks for a long time what they're expecting to do. And what they've told us is, you know, we're in a wait and see pattern. We're not going to hire more people. We're not looking to hire a ton of more people. We're not looking to lay people off either until we have a better sense of the landscape that's under our feet. On the inflation side, I do think that there is likely to be upward pressure on prices in the next 6 to 12 months. A lot of this has to do with the trade policy changes that are going on. But that puts real pressure on us. So one of the things we're trying to do, one of the things I always try to do is be true to the Fed's dual mandate and really ask ourselves and I ask myself and our team, how are we doing relative to the inflation side of the mandate? How are we doing relative to the employment side of the mandate and then tease out from the answers to those two questions what should we be doing with policy.

Send me that list when you get off the call. I'd love to have that.

Well, you know, this question about whether tariffs are a one-time thing or whether they're going to be more persistent in their effects and might even cause structural changes, I think is perhaps the most important question that we have today. If you think about econ textbooks, if you were in your econ 101 class, the idea of a tariff is that it's a one-time shift and then everybody goes back to doing all the things they were doing before. So, there are no real effects. And importantly that shift happens pretty instantaneously. So you kind of know exactly what the change is. You know what the magnitude is and there haven't been real changes in anything else that's going on in the economy. In that context, you would expect that to be really a temporary thing. Short run, one-time hit. Nobody takes it on board very seriously. And then in that case, you shouldn't expect policy makers to want to have to respond much to it because you're going to be back where you were right before the tariffs anyway. The question that I've been asking our team and I've been asking myself really is does that textbook model fit today's environment? And I think there are reasons that are pretty compelling that suggest that we should be somewhat skeptical about that. You know, the first is just in terms of the speed at which the tariffs are being implemented. This has not been a one-time thing where you wake up on one day and everybody knows what all the tariffs are. In fact, they changed and the regime has changed pretty continuously. I think we just heard about some new ones proposed just yesterday in a whole host of areas that we didn't really have on the radar screen. And so in that context it's unclear really how you would shift that curve because the things are changing all the time. And so that's one thing. The second piece is really about how long this is going on. And you're seeing, say for you take India for example that number has bounced around three or four times over the last four or five months. And so if you have business in India, it is hard to know upfront what the tariff cost is going to be to you and as a consequence it's going to be difficult to build a strategy that you're going to have confidence that will endure over any length of time. And so those sorts of things suggest that the episode will last a lot longer than I think you would definitely see in a textbook, but much longer I think than many people might have anticipated at the beginning of these changes. We're talking to a lot of businesses right now and we've been asking them sort of how are you thinking about this? How are you making decisions? Couple things have come out pretty clearly. One is that everyone is reticent to change prices on a rolling basis. They want their changes to happen once, maybe twice, and then be done with it because consumers will not respond to a continuously evolving environment. And so that has caused a lot of businesses just to pause and say, I'm not going to do anything until I know exactly what's going on and where we stand in terms of our cost basis. So that's one thing. A second thing is that we're starting to see divergence across some businesses in terms of how they're thinking about this in the sense of there's still uncertainty about where consumers are and how much consumers can take on board in terms of elevated cost. And so we're seeing a mix of strategies. Some are saying I can't wait anymore. I got to go. Some are saying I can wait a long time so I'm just going to wait. Others are somewhere in between and they're trying to tease some things out. All of this has really created some challenges. I do think the other thing I worry about is that the more that you have tariffs always on people's minds, the more it just becomes part of people's reality. And that higher cost can be something that then leads to expectations about where costs will be three months from now, six months from now, 12 months from now to be much higher. You know, I think I'm always reminded about previous Fed chair Alan Greenspan when he said, you know, you're winning the battle against inflation when no one is thinking about it. Well, this is kind of the flip side of that. You know, it's on the front page every day. And so people are thinking about this in ways and I worry about what that means for how consumers and businesses will approach their strategies for engaging in the marketplace moving forward. We still have a lot to learn. So I want to say nothing is settled but these are the types of things that we're definitely paying close attention to and as we learn we will inject that into my views on policy.

So, you know, it's been very interesting the range of views about how quickly tariffs should diffuse into the marketplace. You know, I've seen reports by some who suggest that we've seen all we're going to see. There's nothing more that's going to happen. All the decisions have been made so we don't have to worry about it. That's not what I'm hearing from my business contacts and I think more and more that we will still be seeing strategic adjustments into 2026 and probably well into 2026 as the landscape becomes clearer. I do think that for some businesses there are questions about how long you can wait and I've actually increasingly been talking to businesses who are like okay I kind of have some sense of the range of the possible and one thing that's been quite interesting over the last two months maybe six weeks or so, I've heard and our team has heard just more and more that most business leaders have taken the doomsday scenario off the table that the worst of the worst I don't think is in people's minds about what can likely happen and that I think has contributed to some improvement in people's willingness to take a few steps try some things and create some expectations about what strategies will look like but we still don't know what these final tariffs are going to be for most businesses and that means that everyone is remaining a bit cautious so I think it's going to be a while yet and I do think that we've yet to see all the things that will happen.

Well, you know, it's funny you asked that. I mean, a lot of folks are saying exactly that, that they think this is just a new reality and that, you know, on a Thursday morning, they could get an announcement that things are changing and that you're just going to have to get used to that. It's a very different mindset and I think it presents real challenges for leaders in basically every sector in the country.

So, the forward-looking approach, I think, is very similar to what you just said, which is until folks know where the world is, what the rules of the game are, it's hard to... we've heard people are not very confident making big bets doing big capital investments and making big changes in how they produce goods or where they source their products from. You know, one of the things that we have really heard a lot is that in many regards the underlying fundamentals, the foundations of the economy are still quite solid. So at the beginning of the year, most folks we talked to were very optimistic about the prospects for 2025 and 2026. And then the tariffs came in at levels higher than people expected. And I think it caused everyone to step back and say, okay, I had one mindset, one thing in mind, and now I have something totally different. And so let's think about what a strategy looks like in that context. For most businesses, what we've heard is that if you've had a product that was already going, you just kept doing it. And it's the new ones, the big ones that folks are being more hesitant and cautious about. With the doomsday scenario coming off for some, they're like, 'Okay, we're going to run.' But that is not a consensus view right now. And, you know, we'll just have to see how that moves forward. This is one of the reasons why my outlook for the economy is for it to continue to slow because we're not seeing the robust engagement that one might have expected at the beginning of the year. And we'll just have to see if we get to a point where businesses feel sufficiently confident that they're willing to just move forward in a very robust way. I'm hopeful we'll get clear signs on that in the next couple months.

Well, that's a question I'm going to steal that question from you. I mean, we ask it in a lot of different ways, but I mean, I think that is one of the real things like what's going to cause folks to be willing to get off the sidelines and make some pretty significant bets to try to drive higher levels of growth.

Yeah, we're starting to see a lot of different strategies and approaches taken. And a lot of it depends on the sector that you're in, the scale that you have, and what your competitors are facing. And so, I'll talk about each of those. So in terms of the size, we're getting very clear signals that small businesses are feeling the stress and strain in pretty acute ways. You know small businesses already don't have a lot of extra resources. They don't have diverse supply chains. You know, some research that we've done would suggest that most small businesses, the vast majority have one supplier, and for many of their inputs, and that supplier is often from China or Vietnam. That creates direct exposures in ways that a smaller company just doesn't have the ability, the capability to adjust to very quickly. And so we're starting to hear those stresses. Those are the types of businesses that I think are going to be least able to forebear and at some point they're going to have to move prices just to address and reflect the reality of their increased cost structure. And that's one thing. In terms of sector, as I think everyone on this call knows, different companies have very different exposures to international trade. And so if you're in a sector that has a lot of exposure to that trade, you're feeling the pressures more and you're going to be more likely to have to change your pricing strategies at a higher level. So in the surveys that we do, we split it out by trade related, trade oriented and not and what we see is respondents saying if you're in those sectors you're increasing more your expectations of your price increases are more significant. Your expectations about growth are more muted and so we've got that as well. And then the other thing that's been quite interesting is we have seen businesses be much more strategic about how they're operating based on what they understand their competitors to be. So, we've done some research that shows through our survey on some of our survey responses that shows that if you have a business model that is exposed to trade and the tariffs, but you're in a sector where most businesses do not, you're much less likely to respond with price in the marketplace. By contrast, if you flip this around and if you're in a sector that's exposed to tariffs and trade, but your business model is not, you respond as if you're in that tariff regime. And so we're starting to see these kind of other kinds of effects which makes broad-level macroeconomic forecasting even more complicated because now you've got all these crosses and things that are going on that are quite challenging. You know, I feel fortunate. We have a great team doing great work to try to make sure that I'm aware of all of the different dynamics that are going on. But this spillover thing, the impact of tariffs on businesses that are not covered by tariffs is something quite interesting. And I think if you look at say US steel prices, they're up relative to where they were. And even though US companies are not affected by the tariffs because the competitors are. This is a classic type of scenario and it's another reason why I think we have still yet to see all the price changes that we're going to see and all the upward pressure on pricing.

For sure. Yeah. I'm a consumer too. So, you know, I go to the grocery store, I get my eggs, and everybody, just like everybody else, the prices are there, and you just see it. Here's what I would say. You know, we've been doing framework reviews for our long run monetary policy statement for many years now. One of the things that we've done is we have a seminar series called Fed Lessons. And in that series, we routinely ask if it's a choice between inflation, high inflation or a weaker labor market, everyone says get rid of the high inflation. And so inflation is something that is on everyone's mind. It is incredibly painful. It is real time jarring. So when you are in the store one week and the prices are different, you notice that that stays in your head and it has a real impact on folks. That is certainly true for lower income consumers. And what we've seen for them is the stresses for low-income consumers have been building from the height of the pandemic when we had all those supports, you know, the $1,400 check and all those sort of things. For those families, that extra money has been spent, right? So they are very much in stress and we're starting to see all manner of strategies that they're using to try to stretch their money going from, you know, label goods to the generics in stores. Using dishwashing liquid instead of dishwasher pods or in the washing machine using liquid or powder instead of the pods because you can ration those things. And we're starting to see all of those choices being made. I don't know that it's gotten harder for them in the sense that once you start in that space, you're in that space. But we are definitely seeing stresses. I think the larger question though is how does the consumer more broadly and more generally respond if they start to see higher prices? Because, you know, when we had the first episode of elevated inflation, consumers had not really seen that for quite some time and they had very strong balance sheets. Now we're having potentially a second period where prices are going to go up at a high level. But we've already just been through one where a lot of balance sheets have been weakened a bit and so we don't know sort of where folks are going to how they're going to respond or where they will turn to buy their products and goods. And that will be one of the things that we'll really have to try to resolve as we look forward to how the economy moves and how businesses respond and react.

We should have been talking two weeks ago when I had my family visiting.

Well, you know, I was on TV last week just I think an hour after those things came out and it was a surprise to everyone. It's definitely something that everyone's speaking to. I think for me the biggest eye-opening aspect of that data report were the revisions for the previous two months. Like I kind of expected things to slow down. Those revisions were quite large and I think it really reflects some of the churn and the turbulence in the economy. It's just very hard to get a clear signal on this. I'll say the other thing I'll say is my district, I think the southeast has actually been perhaps stronger than other parts of the country. And so as we've been going around, we've not been getting signs of the slowdown being that dramatic. And so one of the things that we will be looking to in the next several weeks is to try to unpack this and really understand what this means. How should we be thinking about the next set of revisions on the numbers? And also really test with you leaders in business about what you're seeing and whether the numbers that came out over the last 3 months match what your experiences or whether it's something actually quite different. That'll be an important thing for me. I think it really did cause me to think differently, a little differently about how well we're doing relative to our maximum employment mandate. Now, I said at the very beginning, we have two mandates. Inflation has been high. It's actually been... we haven't been at our 2% target for more than four years. That's a long time and that's a problem. And for most of that time, the employment mandate has basically been at full employment, as good as you would hope it to be. The BLS numbers last week really raised a question as to whether we're still at full employment or whether we're moving away from it in a way that should mean that those risks to our two mandates are much more imbalanced as opposed to it being inflation is a big risk and employment is not right now. And that's the thing that me and my team will really be having, I'll call them discussions. It'll be more like arguments about in the next few weeks leading up to the meeting in September.

So, I say a couple things. So one, when I was a professor one of the last projects I started before I came on this job was to look at revisions and to understand how revisions evolve and whether revisions to data affect people's perceptions of the marketplace. So revisions in and of themselves are not a new thing. They're something that happens all the time and it's part of actually doing good statistical work to always be trying to refine. So the fact that there were revisions wasn't that troubling to me. The fact that they were large was surprising. But as we've been saying, ton of uncertainty today, lots of things that have happened that we've never seen in our lifetimes. So the idea that the standard approaches to collecting data might not capture all the things that are going on is not a huge surprise. And so I think one of the things that we should always be trying to do though is learn lessons from this and see if we can evolve our processes to be more on point. But that's very difficult to do in real time. And so I take my hat off to all the economists and the folks at the BLS who are doing the work on this. This is a really hard period. And I'm hopeful that the events that have happened and a lot of the commentary doesn't undermine people's confidence in what they're doing. They work super hard. I talk to a lot of them. I have the greatest respect for the work that they do and it's really in all of our interests that they continue to do their work in a way that allows them to produce the highest quality, the most accurate data possible and we will definitely support them in anything that they need.

So, you know, I get lots of questions on this and the first thing I try to remind people is that the financial markets are not our mandate. Our mandate is employment and stable prices. So I spend much more time focused on that. I will say it's been surprising to me how markets have been evolving. In spite of a pretty significant shift in the cost basis for doing business, the markets seem to have sort of shrugged that off. I've honestly asked others sort of why they think that is and what they're thinking, and how it should be interpreted. What I've been told is that the markets feel like they know the range of where these tariffs are going to land and it's in a level or in a style that they can handle and that businesses can handle. But you know, that's just speculation on all of our part. I think this is a good cocktail party conversation to be honest, to try to discern sort of what the decisions or how the decisions of millions of people all come together to make a statement. It's quite difficult. But I do think that in this environment for me, I'm expecting that the volatility that we will see in pretty much everything is heightened and so it would not surprise me to see swings in equity markets. I don't have any predictions on what'll trigger it or what that will look like, but because there's just so much that's unknown, so many data points that are coming in, it's really difficult to describe the psychology of a financial market. I'm a psych major. I was a psych major with econ. So I know people are super complicated. And then you bring them all together in the marketplace, the complicated gets even more complicated.

Well, you know, I think big businesses just have more buffer resources, right? So if things happen, they have the ability to shift workforces in bigger ways. They have a bigger capital stack that they can tap into. They actually have more relationships out there that they can then use to get information and then respond quickly. So I do think they have some structural advantages which allow them to weather things more readily. The question though is being able to parry and manage is different than really being able to just avoid and totally absorb. And so we'll just have to see how that plays out. Actually, I want to say one other thing on tariffs while I'm thinking about it, which is the other thing about these tariffs which I think is actually quite interesting and I think we all need to reflect on is the fact that these tariffs are actually designed to change people's and businesses' supply chains. They're designed to actually lead to structural, enduring changes in how businesses operate. And if that is the case, then I don't think that these tariffs are likely to be something that you should look through because they're inducing structural changes. And if there are structural changes that happen, then you would expect there to be structural changes or fundamental changes in the dynamics of inflation and employment and all those other things. So I think one other question that we all need to have in mind is to what extent do we think that these tariffs are likely to succeed in driving that structural change, because if that does, then it means the impacts are going to be far more permanent.

Well, you know, balance sheet management is really about trying to make sure there's a lot of liquidity so that markets function. And, you know, the debt will divert resources out of liquidity, some liquidity segments to others and really to try to fund and finance that debt. And so, we'll have to watch what's happening in that space. You know, we've been over the last several years reducing the size of our balance sheet, trying to move it out of an emergency posture into one that's sort of more ordinary and sustained. And we've made tremendous progress on that. And I think, you know, I've been in many settings where people had doubts that we would do it. And I've been really pleased about the amount of progress that we've made on that. So, we'll have to think about that. So we're going to watch and you know, we've not ever seen a period where the US central bank has tried to reduce its balance sheet so dramatically. And so we're getting to a territory where you may be at a point where we reduce it beyond the point that markets can function from a liquidity perspective. And so we're watching that very carefully. We've developed some new metrics to try to assess how much liquidity is in the marketplace and we'll just be watching over the next several months as the Treasury issuances play out to see how reserves evolve and to try to get a sense of how much liquidity there is. But again, I think people should not think that any adjustments that we make reflect a lack of certainty or commitment to getting us back to a more normal posture with our balance sheet. That's essential. We need the US economy to stand on its own and us move into the background just to make sure that things function.

Oh no no no. So no, I'm fully expecting that. So here's what I would say. I've been for most of this year on one cut for the year. Today I'm still on that. I fortunately have five weeks, I think five or six weeks before the next meeting. We're actually going to get a lot of data around inflation, around what's happening in terms of employment. That will allow me to think about how do the relative balance of risks between inflation and employment. The employment number did say that the risk on the employment side is much higher than it had been in my mind going into the meeting last week. And so I will definitely be looking carefully on that and actually listening to a lot of folks, a lot of business leaders, a lot of my colleagues around what they're seeing so that we collectively have the right view about where the economy is, how it's functioning, so that we can get to a policy that makes the most sense for where we are today.

So, I'm hopeful that we get through the elevated pricing pressures in an orderly and quick way so that we can actually start to return our policy rate to neutral. I think my outlook today is that we're going to get there next year, probably to the middle to the later part of it. But there's so many moving parts that it's hard to have a lot of confidence on that. You know, I've actually started asking folks when I give in person talks like, 'How many of you had a plan at the beginning of the year? Is it the same plan that you have today? Do you think it'll be the same plan that you have three months from now?' And no hands go up on the last one. It's become very, very difficult to forecast. So you know, I'm just going to keep my eyes open, keep my head down and try to make sure that I notice the turns and trends sufficiently fast that I can adapt my policy strategy for that.