Odd Lots - Atlanta Fed's Raphael Bostic on Monetary Policy During Extreme Uncertainty

Episode Date: May 16, 2025

This is obviously an extraordinarily difficult time to make economic forecasts. Nobody really knows how tariffs will affect the US economy. And beyond that, nobody knows what the ultimate state of tariffs will be, or if they'll ever settle into a predictable rate. So how do you conduct monetary policy in this environment? On this episode, recorded at the Federal Reserve Bank in Atlanta, we spoke with Atlanta Fed President Raphael Bostic. He walked us through how he's thinking about the dual mandate right now, and why he has significantly dialed back his expectations for aggressive rate cuts since the start of 2025. Read More:For Exhausted Stock Market Pros the Choice Is Buy or Stay HomePowell Signals 2020 Fed Framework Language on Chopping Block Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Oddlots podcast. I'm Tracy Allaway. And I'm Joe Wisenthall. 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 a southern food. I was going to ask, how much fried stuff have you eaten? I have to be really cute. 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 love fried tomatoes. I love

fried tomatoes. I think there were a few other fried things. It was so good. It was so good. All right, but we're not actually here. We're not here just to talk about Southern food. We are actually here to interview someone very important. That's right. 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 extraordinary 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 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 Rafael Bostick. He is, of course, the president of the Atlanta Fed. So, Raphael, thank you so much for coming on all 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, I guess 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 U.S. Does that change your outlook? A little. I would say the overarching message that I've gotten from the people I talk to and from our survey responses and other things. And 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 podcast 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 it 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. Yeah. 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. Correct. Yeah. And that just didn't happen. Like last year, Jesus. GDP was over 2%, which is faster than potential. In the face, look, 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, like, 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 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, and I'm sorry, I'm saying this word that I know you're trying to be. No, no, no, no. It's just a joke. You're allowed to use the word uncertainty. Well, thank you. 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 of what a safety net needs to be for them, that rainy day fund is going to change and they're willing to spend out of savings is going to change it, or even spend out of regular income.

All of that would suggest less energy. That's less resilience. And less resilience does not necessarily mean recession. I would say even today, recession is not in my outlook, but it's less. 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 is as I try to keep my finger on the pulse of the U.S. economy. I think one of the reasons a lot of people

expected recession going back to 2023, 2002, was the soft data measures, the surveys, looked absolutely terrible. And, you know, 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 it on a podcast, but I still do it. But sometimes it can be different.

Yeah. Well, a lot of times it can be different, but just as often is 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, psych and econ, yeah. 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 the sentiment today is that we have had two realities with sentiment, right? 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, you know, 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. 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 quite a different place. I talked to a lot of folks and asked bankers, for example, compared to pre-pandemic where your customer's balance is, 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 family's response function may be back to a pre-pandemic setting. And we'll just have to see how that plays out. I'm Francine Lacquah, an award-winning journalist, and I've got a new podcast, leaders with Francine Laquois from Bloomberg podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders?

I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacois wherever you get your podcast. Eventually, I want to get to the contemporary situation and then thinking about the tariffs, et cetera. But before we do, you know, thinking back, one of the residual lessons of the pandemic period, and there are two big ones, and they've come up a lot, many lessons, but from the corporate

perspective, one is companies maybe for the first time and 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 and 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 today, do they still have sort of 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 layoff 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, you know, 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 to do? day or is it worse than it was a year ago and two years ago? And uniformly, the answer is easier. 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 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, you know, one lesson that I think people did learn through the pandemic was if you tell people cost them up and it's obvious that 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've 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 then if you wind up with something like that, and I think that's probably where we're going to wind up, then forecasting it at the aggregate level becomes incredibly challenging. I mean, you have to wind up doing a lot more. Your spreadsheets get larger. The math gets more complicated. And so, you know, I think our job will get a bit more challenging. So just on this point, at the press conference last week, Powell seemed to suggest this idea of tariff impacts may be operating at different speeds. So the impact on inflation could potentially come quicker, especially if you had a bunch of companies immediately raising

prices to offset the cost. But the impact on something like the labor market could take a lot longer to actually feed through, maybe even because some businesses still have residual scars from the pandemic or whatever. How do you deal with those two different factors operating at different speeds? It seems very difficult. Well, we have a very dynamic economy. And, you know, that's just an overarching feature of the environment that we work in. I think part of what we try to do in Atlanta is try to get hints about. the longer run things in real time as much as possible. Because for many of these things, if you wait for them to show up in the national data,

you're two months behind, a quarter behind, sometimes a couple weeks behind, and then there's more of a scramble. We learned, and the great financial crisis, that we needed to be asking much more front-forward and prospective questions about what businesses are seeing, what they're feeling, and how they're going to respond, so that even if the revelation happens at different speeds, the impulses and the drivers will be more contemporaneous. And if you can discern those, then you might be able to get a head start on where things are going.

What I would say today is, and it gets back to what we were just talking about, I think many firms will probably try to pass through costs to the extent they see them. They will learn pretty quickly whether those cost increases are very, being taken on by customers or being rejected by them. And then they'll have to make a decision about what is their production function going to look like. And once they make that decision, then they'll decide what kind of workforce they need. I'm expecting that those lessons will be learned quickly. And as I go around, I talk to chambers of commerce. I do open kind of discussions and cities all across the 6th District. I say, if you see someone doing something that's really

different than what they were doing two weeks ago, you need to call us and let us know, because we need to be collecting that information to try to understand whether a single impulse is actually a trend and whether there are some lessons that can be learned from the collection of the masses. We need a Fed tip line. Exactly. Wait. How many calls have you been getting? Have you been getting calls?

So, no, nobody calls me as it turns out. But we have a team that's out in the field and they are getting calls on a regular basis. You know, when I got here, I was really, I didn't really know any of this, but we have a network of staffers whose job it is, is just to have relationships with business leaders and with community folks all over the Southeast and come and see them and talk to them in really conversational and unstructured ways for 90 minutes, two hours, just to get a sense of where are they, how are they feeling, what are they worrying about, what are they excited about, what's changed, and because the relationships are personal on some level, people do feel more comfortable

picking up the phone and telling us things. And it's been something that's really helped us. So we knew fairly early on that people's horizon in the pandemic was expanding. So we did a survey, we do a number of surveys. We have a survey shop here. We did a survey of businesses and asked them, okay, in April of 2020, when do you think this will be done? they said September of 2020 in January of 2021 we asked them they said probably another 18 months right and it was this learned experience and we got to see their understanding of the environment evolved in real time in ways that really I think helped us understand what questions we needed to ask and what kind of decisions and policy changes that we should be looking for it's been quite interesting and I think there's

going to be some of that. There's going to be a lot of that that happens in the next several months. Look, we've just gone through a period where people were expecting tariffs. I think many people didn't expect the tariffs to roll out at the scale that we saw. And it's causing everyone to think about, okay, now, if this is our new reality, how do I think about this? What am I going to do? And just as it was at the early stages of the pandemic, people are kind of doing it on the fly. Yeah. And the only way to really understand how things are going when people are doing on the fly is to be there with them and to be continually asking them and seeing how their decision making and their changes are evolving as they get more insights. So as the tariff environment shifts, as the numbers move around, there's learning when you see, oh, their strategy was A and now the strategy is M.

Like that's saying something about their thought process and what they're likely to do and moving forward. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations. But they usually rerun their radio newscast.

throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So let's talk a little bit more about the intersection of tariffs and monetary policy. And something that's been on my mind in particular is tariffs are a supply shock in some way. And what I've been wondering about is, does that therefore increase the terminal rate in terms of

how low the Fed can ultimately go in a cutting cycle? Okay. Your supply constrained on some level, perhaps also in theory there's going to be some force development in the United States of some industrial capacity. And so that's a positive activity impulse. Does that mean when you think about like weakness and when you think about possible rate cuts, which is what everyone is expecting at some point, does that increase the floor of how low you can go? I don't think of it like that. Okay. But first of all, I think being able to say a blanket statement on anything like, This is going to be quite challenging. It would be challenging if you just picked one tariff rate for the whole world.

Yeah. In an environment now where there's so much variation and price discrimination, country to country and sector to sector, it's really difficult to know how to add it all up. And then you overlay that the numbers can change. We're expecting one of the things I do when I talk to folks in public settings show a hands how many people think that the tariff numbers that we see today are going to be the tariff numbers that we see a month from now. Does anyone raise their hand?

Nobody's hands goes up. And in part, that's by design, right? So we know there are negotiations going on. We know it's a 90-day moratorium in some of these instances. So that change that's out there means that it's going to be very challenging. I try to go back to just our basic mandate. We got price stability and we have maximum employment, maximum sustainable employment, how I like to think about it.

And so what I try to do is figure out, okay, given all the things that are going on, what's that likely to do for us getting closer to our 2% target and inflation? And what's that likely to do in terms of the movement of labor markets relative to some broad notion of full employment? Today, what I would say is what I hear from analysts, when I talk to my economists in the building, like, relative to the pre-tariff environment, tariffs have an upward, put an upward force on inflation. And so that means that our policy is going to have to, you know, anticipate and to some

extent potentially push against those inflationary forces to the extent that we see them. So that will put a limit on where our current policy stance is. Now, you ask something about a broader economy-wide, new fundamental. as to like an R-star type of thing. I think there's a lot of debate. There's a lot of debate on sort of R-star in non-turbulent times. For sure.

And so today, I think you would see the same thing. Look, I think, you know, pre-pandemic, coming out of the great financial crisis, and actually, even before that, we knew there was a long secular decline in R-star. Demographics and a whole host of other things were believed to be behind it. And the notion that you could see inflation move the way it has kind of caused people

just have to step back and say, well, wait a minute. Or maybe our notion of the immutable is not so immutable. And I think that debate is being taken on board right now. And so the other thing to think about is, look, to the extent that we are in a period where firms are redoing their supply chains and perhaps not looking for lowest cost, location, that has implications for just, could potentially have implications for what a baseline new level of inflation is likely to be writ large. And if that is what happens, then sure, all the fundamental dynamics and measures are going

to change as well. But we haven't seen that. And, you know, it's, it's been interesting. I've talked to a number of producers. And they have production in multiple countries. and they say you can put the same plant in three different countries, and they will have different levels of productivity. And that is interesting.

But it also means that the specifics of where they put things down, how much production happens in those places, and then where assembly and it all comes together, is incredibly material. And folks don't have the answers to those things now. So I actually try to shy away from thinking about those. those bigger issues right now and just say, look, we're in a period of tremendous transition where we had received wisdom, cost minimization and production, free and open trade,

and that equilibrium is being broken. And when you're in disequilibrium, in econ, you know, there's the, I forgive me what they say it, but there are an infinite number of possible new equilibriums that you could achieve. And so what, we're trying to do now is kind of figure are there ways to narrow and get a sense of what are the ranges of possibilities given where things are going so then we can start to think about those parameters, make judgments about what best long run policy might look like. On the neutral rate, R-star, I was going to ask if it's even a useful concept given the current levels of uncertainty, if it's actually even possible to try to attempt to navigate by the star.

Well, you know, the chair famously had a speech on the stars and expressed some skepticism that the scars were always going to be reliable guides. I think there are really two things. And, you know, I was like major undergrad in addition to econ. One of the things I take took or have taken from being in both those professions is that economic models are models. They are stylized characterizations of how the world actually works. We should all understand and appreciate that there is a confidence interval around any number that comes out from these models, even though some economists may declare them as truth and you should never deviate from those sorts of things. It's one of the reasons why a lot of the rules are useful, but the actual numbers that come out

and never hit right where the rule is. And so there are other things that are going to influence what makes sense from a policy perspective. And those are the things that we have to actually acknowledge. People are not, ruthless utility maximizers, firms aren't either. And in fact, what's been interesting for me in this pandemic period is the old model, I'm calling this more, like it says, a high level, was cost minimization. And that means find the place where you can produce everything at the lowest cost. Do all your stuff there because that makes you the most efficient. What that doesn't do, though, is acknowledge that if you're locally reliant or dependent, if anything happens in that locality, your ability to produce basically goes to zero. So there's a higher variance

potential in your output. And we were not putting any cost value on that. And we learned that there is a cost value on that. And so the change of philosophy that might be going on right now, and we'll get to see how many people really start to set up these supply chains with the eye toward diversifying locations just for reducing variance. That's a new thing. And that could be quite interesting to look out moving forward. Joe, I want a T-shirt that says ruthless utility maximizer. I think I could rock that. Most people aren't, but Tracy is actually the one person who lives left by the economic. We'll see what we can do. I'll look around and see if there's some economic education club that does that.

Prior to the tariffs, actually, thinking back to like January, et cetera, we didn't know anything about what the tariff roll out. Was the U.S. economy decelerating? Like, was it an economy that was sort of due for several more rate cuts? So my outlook at the beginning of the year was that the economy would continue to grow in a solid way, and inflation would return to 2%. over time. And my expectation was somewhere toward the end of this year, we would be at that point where it would be appropriate for us to have a neutral stance for policy. So I had maybe three or

four rate cuts for the year with the idea that there was a lot of momentum. We're still over 2% GDP. Hiring is happening at a robust clip, and we could avoid having sort of a recessionary a negative outcome. I feel like the bones of the economy were pretty solid and strong. And, you know, that's why I talk about the resilience and all those sorts of things. So even with a slowdown, you know, I thought that we would still see pretty robust growth. People would still have jobs. One of the things that was quite useful for us to see was that wage growth was returning to pre-pandemic level. So we were evolving to an environment that was fairly sustainable. And it was going to be able to call it a soft landing.

Yeah, I never used those words, right? So I try to stay away from that stuff because it means different things to different people. But if that's what you want to call it, I'm happy for that. Some might say. To me, I think one of the questions that I ask is to what extent, once we get through and get to some degree of steady state, we will still have those aspects of the U.S. economy still in place at the same levels of strength. and something we're going to continue to look at and look for as we go through the rest of 2025 and into 26. So you mentioned wage growth just then. And one of the things I've been thinking about when it comes to inflation under the tariff regime is wage growth. Do you think it's fair to say that the

chances of having a lot of wage growth alongside higher goods prices is lower than it was post-pandemic? And if that's the case, does it perhaps give the Fed more room to look through higher goods prices if you're not worried about, you know, a big self-reinforcing inflationary spiral? Yeah, so that's a very interesting question. I would say it's possible. One of the things has been quite interesting is I think in this environment, wage growth has been a trailing indicator as opposed to a leading indicator. And so what we will see if that continues is that a lot will depend on the extent to which consumers are willing to take on price. If they're unwilling to take on price, then the dynamic that we have is pretty set. And then I think we'll see different strategies taken by firms as to how to manage their increased cost basis.

And to the extent that it's necessary, you might see some reductions in the staffing level. I don't think you'd see reductions in wages. But again, a lot of this depends. There's a big difference between a 10% tariff rate, a 40% tariff rate, and an 125% tariff rate as to what the cost implications are going to be and the ability of firms to absorb them in their margins as opposed to having to pass those on. And so, again, this is another one where I think the details will matter in a pretty significant way, and we'll have to see where it goes.

You know, in the wake of the original big inflation in the late 70s and early 80s, and it took a while for that to come down. But I got the strong impression over the years that for the Fed, this was like a crowning achievement of sorts, having defeated that inflation and had several years of price stability. And I also think that, you know, fast forward in the wake of the great financial crisis, particularly in the latter half of the 2010s, that something resettable. what people would call full employment has been another achievement. And I think that, you know, if you go back to Powell's speech in August to Jackson Hall last year, as part of what he said, like, this has been an achievement to get low unemployment. And we don't want to lose that. We don't want to let it slip again. In your view, like, how important is that for, you know, when you think about the potential tension of the dual mandate, how do you think about sort of like preserving that

achievement of maintaining a low level of unemployment even in the face of all this uncertainty and potentially, you know, inflationary shocks from the form of tariffs. So let me say two things on this. First, I'm very pleased that during my tenure here, the two mandates have not been in conflict. They've not been in tension. So I've not really had to face that challenge. We've either had low inflation so we could worry more about the employment or we've had really rock solid employment. So we've had really rock solid employment. we could worry about inflation. Look, I think one of the things that was quite interesting was the end of the 2010s was the effort by the Fed and it started before I got here to be less

preemptive around anticipating that inflation must happen because we've never seen an environment where inflation didn't arise. And so there was a philosophy that was embraced to say, okay, we should actually see signs of inflation before we get too crazy on this. And what we wound up seeing was unemployment levels fall to numbers that were inconceivable. Right. So at one point, unemployment was a 3.5% somewhere like that. When I first started my career as an economist,

the unemployment rate that was viewed to be the natural rate of unemployment was, I think it was like 6%. And so the idea that you could get to three and a half without seeing inflation was just, it was like crazy talk, right? And so for us to then just, well, let's let's let it go. And then it kept going and kept going and kept going. I think that was a tremendous, you could call it an achievement, but it was a discovery that a lot of our perceptions

or understanding of what the possible could be might be constrained by our own, preconceived notions of where the world is. And in this instance, I think about all the advances that have been made in technology in job searches. So a lot of natural unemployment is about, it takes time for the match to happen between an employer and an employee.

Now you can sit over lunch on your phone and submit like 100 applications to things. businesses are using AI-type tools to review resumes to really be able to pick out the people. And that match happens faster. If that's the case, then the natural rate should be lower. And now the question is, how much lower? And this is something we argue about. I actually think it's much lower than others in my building do.

But I think the experience would show that change did happen. And it happened in ways that we could get more people employed and in a sustainable, way without being a problem, without that being a problem for inflation. I wanted to go back to something Joe brought up, which is the sort of, I guess, cross current of monetary versus fiscal policy. And I get that, you know, monetary is always existing alongside fiscal policy, which may change in various directions. But it does feel like the tariffs are sort of an extreme example of that in the sense that they have a big impact on the market. So they have a big impact on financial conditions, and they seem to be changing constantly, as we've been discussing.

How is the Fed just generally thinking about, I guess, the tension between your own monetary policy versus the changes in financial conditions being wrought by the Trump administration and its impact on financial conditions? So I don't think it's different in character, but it is different in magnitude. And so, look, we take all non-monetary policy as given. And then, you know, I just respond in thinking about where we need to go based on where that part of policy is and where businesses are and all those sorts of things. These changes here that are being made are very much like that.

Like trade policy is not something that the Fed manages, and there are lots of different ways you can influence it. And so that's what we're seeing here. I think for me, one of the things has been quite interesting to reflect on is that in your standard econ, like if you do your models, it's all marginal this and marginal that. And the margin is calculus. So these are small, small changes on the status quo. And what we see today are decidedly not small changes relative to the status quo. And so the question is, does that require a different kind of conceptual model about what we see? response functions will be for businesses and for families and households. That's the bigger question that we're having to wrestle, which is quite different than what we usually do. But it is not so much about the idea that, you know, there's a policy and it changed how financial markets are thinking about risk. There are lots of other things that do that as well. And, you know, that's just part of the

landscape. With any luck, we might have some policy stability for a while, lots of 90-day pauses, et cetera. And I have, you know, my personal guess is that 90-day pauses could turn into more 90-day pauses at some point in the future. You mentioned at the beginning of the year, you know, maybe this was an economy that would, you know, require or be three to four cuts. Today, May 14th, assuming some policy stability, I'm mindful of the fact that our Bloomberg colleagues would love a nice clean headline, Boston C-Ex. But what, uh, and so I'm trying to do. I'm trying to do them a favor here. What is the rest of the year look like for you from a policy perspective? How many cuts are we getting? All right. So, okay, I will say, so I'm required to do this, right? So, so you know,

and the dot plot, some of our perspectives, I have one cut for the year. And in part, it's because I think the uncertainty is unlikely to resolve itself quickly. Right? So 90-day- So we have 90 days in two settings, right? So you have the reciprocal tariff 90 day window. You have the China tariff 90 day window, which is at a different periodicity than that. And we have all these negotiations and we don't know how any of them, we know the UK. But other than that, you know, it's all. I don't even think that's formally signed. Anyway, yeah. Well, you would, yeah, I just, I just read the Bloomberg headline on it and it seems like it was done. And so, so. So. Until there's uncertainty, you know, what we've asked our businesses, like, what kind of plans are you making for this year? And many of them are like, well, I don't really know. We're going to keep change to a minimum until we get that resolution. And so if that uncertainty continues, then I expect we're not going to see the same level of big investments or those sorts of things. And that will then push out the time before we'll be able to get to that equilibrium.

I think we both have two more short questions. I just real quickly on those business conversations, and this is something that's been coming up on episodes. Do you see a divergence between small and large businesses? Large businesses who have the balance sheet can lose money for a couple quarters. For a small business, they make a mistake, they make an order. There's a huge tariff bill at the port. It might be existential. Have you noticed sort of a distributional effect in terms of planning and the effects?

Absolutely. And I think forecasts for sales, forecast for cost. are much higher for small businesses. We talk to small business leaders, so you can see this in our survey responses. They're the ones who are feeling most at risk. Yeah. And we'll just have to, I mean,

I think they're hoping that this is a short episode and we can get to a new steady state so they can understand how to run their businesses. I have just one more question, and it's a very important one. We heard that you like birding. Do you prefer seeing hawks or doves? This is a very serious question.

You know, that's very good. You know, when I first started, I got asked my hawk or a dove and I said I was an owl. And I have doves in my backyard pretty regularly, morning doves. They're the stupidest birds. But it's always super exciting when a red shoulder, a red tail hawk comes swooping in or a coopers. So just like when they ask parents, their favorite child and they say, we love them all, I love all my birds. I don't love morning doves. They're idiotic. They're like they have a death wish and always are getting killed and building. their nests in stupid places. And then it becomes my problem. Okay, enough about morning doves.

Rafael Bostick, thank you so much. Really appreciate the invite to Atlanta and this conversation. Thank you. Thanks for coming down to Atlanta. I look forward to talking you again sometime in the future. Anytime. That was a blast. Joe, that was fantastic getting to talk to, I guess, I guess Bostick is non-voting at the moment, but getting to talk to a Fed person at this really interesting juncture in economic and I guess central bank history. It's such an interesting time for all kinds of reasons. I mean, you know, the fact that the COVID shock still looms with us in various ways. Yeah, clearly. And particularly just the fact that, you know, up until very recently, arguably, depending on how you

measure it, inflation's still running above target. But this is sort of uncharted territory to some extent because of the speed of policy changes in both directions in D.C. You know, I wrote in a newsletter, I think it was last week after the Powell's press conference. You know, I've never heard more, more different ways to express the concept of we don't know anything that's about to happen. That's right. An extreme level of humility is required in this moment. Well, he certainly mentioned the word uncertainty a number of times. Yeah, it really is. Well, the other thing I was thinking is, I guess, the complexity of trying to do economic analysis in the current period is really, really coming through. And I thought the point that Bostick was making about productivity, depending on where

people actually move manufacturing or move operations to, like that level of detail seems almost impossible to predict. And yet productivity is obviously something that matters enormously for the economy. Well, is it who were we talking to? And they were quoting Paul Krugman. and someone recently, and they're like, productivity isn't everything, but it's almost everything. I guess pretty much all there is. You know, you think from the perspective of any sort of international, any company that has international ties. And now we've had like two supply shocks in a way, in a very short period of time.

You could almost be forgiven for post-COVID, say, oh, you know, this is a once-in-a-century type of thing. So I don't know how much we're going to change our businesses. But A, now we've had this other one. And so at some point, this idea of moving supply chains, which has already been happening to various degrees, has to be top of mind and how these things get organized and what do you reshore and what do you fredshore

and what do you put in Vietnam that has links to both U.S. and China. They're policymaking in a state of flux for sure. Yeah, and it also gets harder for companies, right? Like the longer this kind of goes on because you had the first wave of reshoring after the 2016 Trump administration. And now what's left to move places, especially if you have tariffs on both Vietnam and China. You know what I've been thinking about? I would never give financial advice on a podcast because it would be terrible. But something I've been thinking about a little bit lately is that you actually might have this situation. This doesn't even really have to do with our conversation, but a straight thought in my head. You actually have the situation now, which I think is kind of. of interesting in which if you're an American importer, you're obviously thinking at least to some extent about diversifying the base of where you source from. So do you like go more to

Latin America? Do you go to other non-China parts of Asia and so forth? If you're a Chinese exporter, you might be thinking about the same thing. There's already been this pressure from Chinese exporters, just a business pressure to move some of their lower end manufacturing outside of China. Now there is the fact that there's this big tariff disparity, assuming that current levels stay roughly stable. So it'll be interesting to see if there is some sort of, you know, positive impulse to non-China EM generally, because it strikes me that a lot of different entities really do have an economic reason to truly diversify in a way that maybe hadn't been the case several years ago. Oh, for sure. And we saw that in the episode we did with Sarah Lafleur

when one of her Chinese manufacturers was talking about, well, if we can't export a bunch of stuff to America, maybe we start selling M.M. Lefleur clothes into China as well, right? It's like on both sides of the equation. So many moving parts. You know what I'm thinking about? Eating more fried things before I leave Atlanta. Okay, so we got to wrap it up right now. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wisenthal. You can follow me at the stalwart. Follow Raphael Bostic. He's on LinkedIn. You could check out some of his post there. Follow our producers, Carmen Rodriguez at Kermannerman, Dashob Bennett, at Dashbod, and Kail Brooks at Kail Brooks.

For more odd lots, content, go to Bloomberg.com slash oddlots, where we have all of our episodes in a daily newsletter. And you can chat about all of these topics 24-7, including monetary policy, with fellow listeners in our Discord, discord.g.g slash oddlots. And if you enjoy Oddlots, if you like it when we travel around the U.S. interviewing regional Fed presidents, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes. Absolutely add free. All you need to do is find the Bloomberg channel on Apple Podcast and follow the instructions there.

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