Atlanta Fed President Raphael Bostic Talks Fed Policy, Tariffs

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We'd like to thank Graphael Bostik for joining us here on Bloomberg Television and Radio worldwide. They were just talking about how the President came out a short time ago and said the Fed should lower interest rates when he talks, do you listen.

Well, we hear lots of voices.

I would say, my job is really to talk within the sixth district and see where policies should go based on what I'm hearing. In terms of the momentum of the economy and today, what I would say is there's a lot of uncertainty. Forecasting is maybe a bit more challenging than it's been in the past. But look, I state on my job to just talk to the business folks that we see and hear from them to understand sort of what's happening on the ground, and that really.

Is the thing that it informs me very much.

Well, this is the part where I'm normally going to try to pry out of you some sort of guidance on future interest rate moves. But when you look at the summary of economic projections, the dot plot from last week, one gets the impression that you don't really have a clue at this point.

Well, you know, what we've heard, and what I've heard is that we don't really know where the economy is going to go. Business leaders don't know, families don't know, and local policymakers don't know either. So one of the things that really has impressed upon me is the idea that people are taking on board information as it occurs. What they're hearing or things that are leading to expectations that there'll be upward pressure on prices so that inflation will happen longer.

And I've taken that on board.

So my projection of where inflation is going to go this year is pretty much sideways, and we won't get back to a more neutral level of inflation or two percent target. I don't project until sometime early in twenty twenty seven, but it is very much hearing people taking the latest news figure out what that means for them, and then I will respond to that in terms of how I think about the economy's trajectory and policy.

Last month, you.

Said you thought we would have two rate cuts this year. The dot plot didn't change, still calling for two rate cuts, but a number of people move their dots up to say, maybe we get fewer than that.

Were you one of those?

I was one of those, So I was at two. I moved to one mainly because I think we're going to see inflation be very bumpy and not moved dramatically and in a clear way to the two percent target, because that's being pushed back. I think the appropriate path for policy is also going to have to be pushed back and getting us to that neutral level.

Well, some of your colleagues also move their dots down, suggesting that we might see more rate cuts, probably because they think the economy will weaken. What do you think the odds of a economy weakening because of fiscal policies are?

Well, what I would say is I am hearing more concerns about the trajector of the economy.

That's undoubted.

But what I also will say is the data that's come in today has not actually shown that, and we've still seen a resilient economy. I do know that consumer sentiment has started to take a dip. And the question that we face right now is is consumer sentiment going to be a leading indicator like it was pre pandemic, or is it going to be something that doesn't really translate into actual observed behavior in the economy. That is

Well, it's hard to know for sure what consumers are going to do, but you talk to business leaders all the time. What's a general attitude of CEOs right now about business outlook and about their plans for say, hiring or even raising prices.

So we actually have started to ask our business leaders exactly this question, where do you think pricing pressures are going to go higher or lower? What we've heard consistently is they think they're going to go higher. Then we ask what do they think is going to happen in terms of their sales, And they're also quite bullish.

On the sales rising as well, well, which.

Says to me they think that consumers are going to be able to manage these higher levels of prices and whatever changes in prices that happen moving forward.

We'll have to see if that actually plays out.

I think that'd be one of the big questions and stories that emerges through the course of twenty twenty five, namely how the consumer manages in the face of these elevated price levels.

Well, if companies are saying prices are going to go up, are they going to pass that along if tariffs come on and add to the cost of their materials.

Well, we've done survey question as well, and what we've gotten in survey responses is yes, they're expecting to try to pass these through. The expectations about unit price costs going up is clear. But if you look at in our surveys about what they're expecting for price changes, the amount of price change they're expecting almost matches the cost change one for one, which says a complete pass through

What are they tell you about the labor market and their plans for employment going forward.

Well, labor markets they're still tight, not as tight as they were two years ago. But what we hear from most businesses is that's not a source of worry for them. I feel like if they can get if they need workers, they'll be able to get them, and that wage pressures are not really outsized relative to where they're pre pandemic. So folks are feeling pretty good about the prospects in terms of workers.

Border crossings are way down, and deportations are supposedly ramping up.

What do you hear from the service.

Industries about their abilities or even construction to find workers.

Well, we haven't been hearing this as across the board thing, but we are hearing from particular sectors that there is a shortage that's starting to emerge in terms of work crews on housing, construction sites and a like.

We're just have to watch to see if.

That remains isolated or whether it becomes something that is more widespread, which then will have implications for the ability of the economy to meet the demand that's out there.

You were talking about the consumers set. What do you make of the rise in inflation expectations, which, at least in the Michigan survey has been fairly dramatic.

Well, as you know, for many, many years, short run inflation expectations that really matched where people are. And I think seeing the elevated prices, hearing the talk about the tariffs, and hear the idea that tariffs push up prices, I think has shaped people's expectations in the short run. It's the medium in the longer term that I'm trying to focus on much more. They're the reaction has been far

Well, there was a lot of pearl clutching on Wall Street when Chairman Powell suggested that the impact of tariffs on inflation would be transitory.

Would you use that characterization? Well, I try not to use that word anymore.

I will just say that, but I do think, Look, we have to acknowledge that historically, when tariffs have played out, there's been a one time jump in prices and then the economy's return to its usual trajectory, so just that policy doesn't have to respond to it. For me, I think there is a question about whether that's going to happen this time.

We've just gone through a.

Period of elevated inflation, so it is very much on the consumer's mind, and I fear that they might be more sensitive to higher prices today than they have been in the past, but they might not, and we'll just have to see how that plays out.

Well, this whole question of seeing how it plays out. Given how we're getting government by tweeting, things change all the time. Are you sort of foreclosed from acting preemptively? Are you going to be necessarily behind the curve?

I don't think we're going to be behind the curve, mainly because we know we're waiting, and so from my perspective, the longer you have to wait, that means your actions, when you decide that it's clear where the economy is going, are going to have to be larger than they would be otherwise. So I would say, we don't want to make it's not in our interest to move in one direction, find out that the economy is going in a different way, and then have.

To undo that.

I'd much rather take the time make sure that when we act, it's acting appropriately to where the economy is, and we can make sure that we stay close to our dual mandate objectives.

Now you produce the GDP now number from the Atlanta Fed. It's gotten a lot of publicity lately, Yes, it has not for its cheery news, but even adjusted for gold, it's sort of unchanged, which is a big drop from the growth rates we've seen. Do you think we're in the midst of a real slowdown or was this just sort of a temporary dip at the beginning of the first quarter.

Well, we'll have to see.

You know, GDP now is a now cast, so it takes data as it comes in through the course of the quarter. What I would say is the drop from the two point two percent down to anywhere from zero to a half of percent is a sign that that suite of data that set a data that came in is suggesting slowdown. We'll have to see what that looks

Well, if the economy slows a lot, which would suggest maybe that lower rates are needed, but inflation hasn't come down to two percent, and you want to have higher rates to quell inflation. If you have that sort of stagflation, which do you choose to act on.

Well, I'm not jumping to stagflation yet, so I'm just going to say that. But I've been saying for a long time it is paramount that we get inflation back to our two percent target. That's the thing that I'm laser focused on to the extent that the labor market and the economy does weaken and we're not seeing that now. I'll have to manage that when that happens, but right now it is let's get inflation back to two percent.

If I could say this politely, one of the constants with the Fed's forecast about inflation is that you keep pushing out the time frame for getting to two percent. What's keeping inflation sticky at this point and what should we look for to see a sign that it is actually going to come down because PCE is expected to come in up.

So I'll just say I haven't always been pushing it out, like though the SEP and disambrac forward a bit because the economy was progressing in a nice way. But what I would say is this, we know housing numbers have not come in is not normalized as fast as others have, as well, we know the goods prices in the most recent period have risen a bit, and we're going to have to keep.

An eye on that.

You know, I hear a lot about eggs and the like, And then we also know that service prices have seemed to have leveled off. So one of the questions that I have in my head is are we seeing a fundamental change from the trends that we had been seeing over the last two years. That's not my baseline outlook, but it's a possibility and it's one of the things that me and my team will be watching closely in the next six to eight weeks.

Well, suppose inflation stays about where it is and remain sticky but doesn't go up, is the Fed funds rate properly calibrated for that level of inflation.

Everyone I've talked to has given me information to suggest that it is. We will just have to see, with all the other pressures that are going on, whether we have to adjust and adapt based on new realities. So I think it will be an interesting question the extent to which we do see upward pressure on prices as these teriffs come in, And it depends really on the suite of terrifs that we see. It'll be interesting to

To be at.

Well, do you think at this point you have a problem with monetary policy transmission in the sense that you've been cutting rates since September, but market rates have basically stayed range bound and followed you down.

I don't think it's a transmission issue. I actually think it's a collective, dynamic issue. As you know, the longer rates are our function of things other than just what we set our policy rate as, and there's been a lot of change in there. To the extent that there's uncertainty has gone up, you might expect rates to be stubborn on the high side, and so I look at it as a much more meta picture and really try to keep in mind that we don't control the whole economy.

Let me go back to the beginning of our conversation and ask if you or the system have heard from the administration besides these tweets or random comments the President makes.

I've not heard anything, and I will just keep reaching out doing my job the way I have and hopefully we will get to a place where the economy is stabilized and both of our mandates are at target.

Well, you and your colleagues talk a lot about the FED having no role in fiscal policy. Do you think the administration should have any role in monetary policy?

Well, there is an opinion, and then this role.

To me, I would say, we are going to make our decision based on the task that we have at hand. We have an FMC, we have nineteen mention members, we have the Federal Reserve Deck which guides us in terms of doing that, and as long as that's the law of the land, that's what I'm going to focus on doing.

Do you find any issue with the Fed's credibility from all this outside chirping at you?

So, I'll just say, from the time I've been in this job, folks have had comments on what the FEDS should do, so that in and of itself has not really been a factor.

I do think that we have a lot.

Of credibility, and I talk to lots of folks that almost at the end of almost every meeting, I get thanked for what we're doing as a collective, and to me, that's the true measure whether when folks that are out there in the economy doing real things talk to me and provide feedback, the feedback has appreciation about how we've approached a job and the desire for us to keep doing it.

One last question for our friends on the money market desks around Wall Street. You're cutting down on QT to five billion a month for treasuries. Do you anticipate ramping that up again or is this basically it until you decide to stop.

So my preference would be to stay at this rate for a while until we stop. As you know, and as your friends on the desk, no, it's not clear exactly what the threshold level of reserves is, at which point money markets might start to function less smoothly.

I don't want to get to that level.

We're closer to it now than we were a year ago, so for me slowing down to make sure we don't go too far, it's fully appropriate.

Would you ever sell mortgages?

I would think about it.

You know, the Committee definitely has as a goal moving out of the mortgage backed security space into tread. But now we just have to make sure that if we're going to go that route, and I'd say we've not had any conversations on that, we do it in a way that doesn't disrupt either the mortgage market or money marguts more broadly.

All right, well, thank you very much, Rafael for joining us today. Rafael Bastik, the President of the Federal Reserve Bank of Atlanta,