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

Episode Summary

Executive Summary: The episode features an in-depth interview with Atlanta Fed President Raphael Bostic on the economy, tariffs, inflation, and monetary policy. Bostic argues the U.S. economy remains resilient but is losing momentum due to widespread uncertainty, especially around trade policy. He expects slower growth, more cautious firms, and only limited Fed easing unless conditions clarify.

Main Topics: Economic resilience is fading (Priority: 5/5): Bostic says the economy is still growing, but at a slower pace than earlier expected because households and firms are more hesitant to make big decisions amid uncertainty. Tariffs and policy volatility (Priority: 5/5): The conversation centers on tariffs as a major supply shock that complicates pricing, hiring, supply chains, and Fed forecasting because policy is changing rapidly. Soft data vs. hard data (Priority: 4/5): The hosts raise the mismatch between weak sentiment surveys and relatively strong activity indicators, and Bostic discusses why psychology matters but may not map neatly to behavior. Labor market and pricing behavior (Priority: 4/5): Bostic says labor hiring is easier than during the pandemic, firms are more willing to pass through costs, but the effects may differ by sector and household. Monetary policy outlook and rate cuts (Priority: 5/5): Bostic’s baseline for the year shifted from multiple cuts to just one, reflecting his view that uncertainty and tariff effects will keep policy constrained. Structural changes in supply chains and productivity (Priority: 4/5): The discussion examines whether firms will reconfigure supply chains for resilience rather than lowest cost, and how that could alter productivity, inflation, and the neutral rate.

Key Arguments: Bostic believes the economy remains out of recession territory, but growth is likely to slow meaningfully from the 2%-plus pace seen earlier. Uncertainty is suppressing household and business spending because people are postponing major commitments until policy becomes clearer. The recent episode of weak consumer sentiment did not produce the expected slowdown, but current conditions may differ because household balance sheets are less boosted than during the pandemic. Firms learned during the pandemic that they can raise prices without immediate loss of market share, and many are still trying to apply that lesson. Unlike the pandemic, labor is currently easier to hire and applicant quality is better, reducing one of the earlier constraints on business expansion. Tariffs are likely to push inflation upward, and the Fed may need to lean against those pressures even if growth slows. Because tariff levels and trade arrangements are changing frequently, it is difficult to infer a stable neutral rate or long-run policy setting right now. Small businesses face much greater downside risk than large firms because tariff shocks can quickly become existential for them. Supply chains may increasingly be optimized for resilience and variance reduction rather than pure cost minimization, which could have long-term effects on productivity and inflation.

Data Points: FOMC rate decision: Rates unchanged - Referenced by the hosts as the meeting immediately preceding the interview. Time horizon for U.S.-China tariff truce: 90 days - Bostic and the hosts discuss the temporary nature of recent tariff pauses. Expected 2025 rate cuts at start of year: 3 to 4 cuts - Bostic says his initial baseline anticipated several cuts before tariff developments. Current expected 2025 rate cuts: 1 cut - Bostic says his current dot-plot-style outlook implies only one cut due to uncertainty. Last year GDP growth: Over 2% - Used by Bostic as evidence of continued economic resilience. Potential slowed growth range: Around 1% or 0.5% - Bostic says growth may slow to this range if resilience weakens further. Unemployment rate cited as previously unimaginable: 3.5% - Bostic recalls that this level was once thought impossible without inflation. Historic natural unemployment rate estimate: About 6% - Bostic cites his early-career view of the natural rate of unemployment. Tariff examples discussed: 10%, 40%, 125% - Bostic notes very different economic effects depending on tariff level. Balance sheet improvement during pandemic: 30% to 40% higher - Bostic says banks reported customer balances were much higher during the pandemic than pre-pandemic.

Pivotal Quotes: "there's just a tremendous amount of uncertainty out there" — Raphael Bostic: Explaining why firms and households are delaying decisions and why growth should slow. "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 they're going to hold tight today and see how things evolve." — Raphael Bostic: Describing business behavior in response to tariff and policy volatility. "what we're seeing today are decidedly not small changes relative to the status quo" — Raphael Bostic: Arguing that tariff changes are large enough to challenge standard marginal economic models.

Implications: Listeners should expect slower growth, higher policy uncertainty, and a more cautious Fed. Firms may delay investment, rework supply chains, and pass through costs unevenly, while small businesses remain especially vulnerable to tariff shocks.