Charles Davidson: Welcome to another Economy Matters podcast, from the Federal Reserve Bank of Atlanta. I'm your host, Charles Davidson. Just a quick reminder today, before we get rolling: the Atlanta Fed offers a variety of news publications, blogs, data tools, and more that you can subscribe to—and they're, of course, all free. To do that, go to atlantafed.org/subscribe. Now, we're in for a treat today. This is a special edition of our podcast series, featuring Atlanta Fed President and CEO, Raphael Bostic. Raphael, thanks for joining us today.

Raphael Bostic: It's always good to talk with you, Charles.

Davidson: Yes. Today we're going to talk with President Bostic—or Raphael, as he always insists everyone call him—about this year in the economy and monetary policy, and a little more generally about what it's like to be a monetary policymaker in the world's largest economy. So, Raphael, again—thank you, and let's jump into it here. So, you're a member of the Federal Open Market Committee [FOMC], which is the Federal Reserve's body that is responsible for setting monetary policy with the goal of achieving the dual mandate we have from Congress, and that is price stability and maximum employment. In formulating your policy stances, can you talk the audience just generally through how you weave together a big variety of information sources: input from in-house economists and other experts, anecdotal feedback from business contacts, all the aggregate data we get from numerous sources, and then your own views of the state of the economy and where things might be going?

Bostic: That's a very big question. I'll try to get to it in order. First of all, it's a privilege to have this job, and the work that the Federal Reserve does is really important, and so it's really essential that we do all that we can to be best positioned to understand how the economy is working, which then will give us a sense of where policy should be. To do that, I really try to take information from the varied sources you noted, and then try to use that information to build a narrative. So, for example, the aggregate data that the federal government provides—things like the unemployment rate and GDP and some of the inflation measures—those give a very high-level picture of what the US is doing, generally. And as you noted, our mandates are stable prices and maximum employment. A lot of these statistics will give us direct sight lines into them. The unemployment rate, for example, will give us a picture of how well labor markets are working, and the price indices—the Consumer Price Index and the like—give us a picture of price stability. I definitely want to understand those and look deeper into those, and with my team try to really get a sense of what some of the underlying dynamics are, and that would give me a top-line picture of where things have been. Because an important aspect of these data points is that they're describing things that happened a month ago, two months ago, a quarter ago—and sometimes it's possible that things have evolved. So, at the Atlanta Fed we've developed a whole complementary infrastructure to try to get insights on these potentially new developments so that we're not missing things, and we're noticing things as they happen. One way we do that is through surveys. We have a survey center that runs a series of surveys that ask business leaders and others about what they're seeing, what stresses they're facing, how they're thinking about pricing moving forward, and the like. That gives us a sense of where they are today, but also a glimpse into what they're expecting to do in the future.

Then we have our Regional Economic Information Network, our REIN team, and their job is really to just talk to folks. Over the course of an FOMC cycle of six to eight weeks between meetings, they may talk to anywhere between 60 to 120 people in unstructured conversations, that then they will all come back and see if those conversations have yielded clear pictures about what's happening, in real time. And so, we can start to notice some trends before they are actually trends in the aggregate data, and so we can be really on time. Of course, I go out and I talk to people as well. I do visits to cities, and I go to chambers of commerce and the like, and I ask a lot of questions. Even when I'm giving a talk, people are supposed to come listen to me, but I feel like it should be a two-way street, so, I'll often ask questions like, "How many of you are expecting to hire people in the next quarter, versus layoff?" And that's another data point to give a sense of the sentiment. And then we take all that information, and then we basically argue among ourselves in the building about what it means.

I should also say, another set of people that we talk to in this are our boards of directors. All of Atlanta has a board, and then all of my branch locations have boards, so we talk to those leaders as well—and then we try to build a narrative about what we expect the economy to do in the next year, next six months. What dynamics are prevailing, in terms of employment and inflation, and what forces or developments are out there that are shaping how those are likely to evolve in the coming months? Once I have all that, then I can decide and really think hard about how should policy evolve—or maybe not evolve—given my appreciation of where the economy is, and that's really the view that I then bring to Washington, when I go up for the FOMC meeting.

Davidson: I wanted to ask you—you mentioned the narrative, and so the idea is to have basically sort of a coherent "story," for lack of a better word.

Bostic: I hope it's coherent [laughter]. I'm always asking people about that.

Davidson: Well, we're doing a little bit of a "year in review" here, so let's talk a little bit about 2024. We're recording this in early December—we have another FOMC meeting next week—so in, I guess, eight or nine days. But a lot has happened this year. We started to loosen policy after a pretty aggressive tightening policy designed to bring down what had been elevated inflation. That appears to be working. But the two cuts so far—you voted for both, so can you talk a little bit about how you got to that vote? What convinced you that the time had come to shift the direction of policy?

Bostic: You talked about how this is a year in review, so I think it's important to go back a year and talk a little bit about where we were. A year ago, we were at a place where it seemed that things were evolving in a nice way—inflation had started to come down, we were starting to see good progress in that dimension, and the employment situation was not deteriorating in a material way. But then in the first quarter, we got a series of inflation measures that seemed like things had stalled out—that inflation had gotten to this plateau level, and it wasn't continuing its decline to 2 percent. The reality is it took another three or four months of inflation data to really learn that it was a temporary pause in the progress, and that we were actually positioned to see inflation continue to fall. In fact, compared to what I expected in January, aggregate inflation did fall a bit faster than I expected, which told me that I should be open to pulling forward the beginning of alleviating the restrictiveness of our policy stance. And that's one thing to think about.

A second piece, though, is the employment mandate actually became more salient. When inflation is way far away from your target and employment is dead on your target, then the whole game is about inflation and getting it back to target. But as inflation got closer to our 2 percent, the unemployment rate started to increase, and we started to hear many more stories about the ability of employers to find workers actually improving and that the labor market was loosening in significant ways. And I think if you look at the numbers, we went from about a 3.4 percent unemployment rate to—at one point it was 4.2 percent. That's a pretty big move. Now, 4.2 percent by historical standards is still a very tight labor market, so I don't want to overstate the degree of weakening, but it did tell me that there was a possibility that labor markets could actually get materially weaker, which would take us out of the reins of our employment mandate target. So given that the risks to inflation had come down and we were getting closer to our target and the risks to employment were starting to go up, I felt like it was really time to start to get our policy to a more neutral stance—to start that effort to move it that way. September was a good time to do that and get that started, and things have continued. I will say there's still a lot of uncertainty, so we'll have to see where we are moving forward. But I do think that, in a material way, the balance of risks has changed, and so the risks to inflation and the risks to employment are now closer to balance than they've been for quite some time.

Davidson: So in a sense, then, things have become a little more nuanced. Not that monetary policymaking is ever truly straightforward and simple, but, as you said—and I think you did a nice job of pretty succinctly explaining that if inflation's way off from the target, it's pretty clear where the focus should be. But now there's a lot more parsing and nuance to deciding where policy needs to go. In your recent quarterly essay, Raphael, you wrote that you and your FOMC colleagues are going to have plenty to wrestle with in the year to come, 2025. So, can you talk just a little bit about what you expect for '25, and maybe, for example, when do you see inflation—we're close, but when do you see it actually getting to the 2 percent goal of the Committee?

Bostic: These are the questions everyone wants answers to. In fact, I'd like to get them myself, and if I knew it with certainty I'd be in a good place. For 2025, my outlook is for inflation to continue to fall and approach our 2 percent target but do it in a very gradual way. I mentioned earlier how in the first quarter of 2024, the numbers didn't always go in a straight line. I think we're going to see a bit of that through 2025, so there are going to be some times when it may look like things are stalling, and there'll be some times when maybe it looks like inflation is moving maybe more aggressively. And given that kind of bumpiness in the measures, I think that will call for our policy approach to be more cautious—because we don't want to overreact to any one data point in an environment where things may bounce around considerably. I want to make sure we get the right signal, and make sure that our policy is calibrated to that right signal. And if we've got to err, I would err on the upside. I would want to make sure—for sure—that inflation gets to 2 percent, which means we may have to keep our policy rate higher longer than people might expect, or we may have to be more deliberate in the pacing of reducing our policy. So on net it'll be higher, even as we're higher than an original baseline on what that movement of 2 percent might look like.

Davidson: Right. Raphael, you mentioned a word in there that I think is kind of intriguing: signal. I think you mean "signal" versus "noise"—"signal" meaning a real indication of where things are going, versus the month-to-month kind of fluctuation. So, can you talk a little bit about why it's important, and how we go about trying to tease out where the real signal is?

Bostic: When I give talks, one of the things that I try to remind people of is, way back in either middle school or high school, when you were in your math class and they were trying to teach you how to figure out what a trend line looks like. I remind people when you look at a trend line, very few points are actually on the line, right? Some are above the line, some are below the line, and you have to pay attention to, in aggregate, what all of that adds up to. In today's environment, I think what we're going to see are a lot of data points. None of them are going to be on the line, and some of them could potentially be very far from the line. And if we're not deliberate, then you may let that one that's far away cause you to react very large. Now, if you know the line, the line is the signal. The distance of all these data points from the line, you might think of that as the noise. And so, if you have any one data point, it's hard to know exactly where the line is—where the true line is—relative to where that data point is coming up, without getting more information. And so, for me, I always try to say, "Okay, we have one data point—that's nice. I won't know if it's pulling the line to a different place unless I see two or three, or maybe even four, data points after that." Those are the sorts of things that I definitely want to lean in on to make sure that I'm noticing the true signal relative to a cloudier signal that has a lot of noise in it. And the more data points you have, the clearer the signal will be. Lots of techniques, both in math and just even eyeballing it, you'll be able to tell much more clearly where that line is.

Davidson: Yes, when we talk about noise versus signal, I think about an example maybe is the jobs report from—I guess it was October, when it went down to something like 13,000. But we knew there were hurricanes, there were labor strikes and so on, and sure enough, the most recent jobs report popped way back up again, so maybe that's an example. Now, again—nuance, complexity…we know that it's not even always completely obvious exactly how monetary policy is influencing the macroeconomy, I think, and it can be very varied and nuanced. So, without getting really arcane and super in the weeds, I wanted to see if you could share a little bit about how what we call the transmission of monetary policy—from the financial system through to actually affecting the real economy where we all live day to day—does that change over time, and how do you and the research staff here try and stay on top of that process, and why is that important to do?

Bostic: You're asking an economist about not getting the weeds, which is always a risky proposition [laughter]. Look, when I think about monetary policy transmission, really there are two aspects of this. One is, what are the mechanisms that would drive that transmission—so, what determines how the economy evolves when we move our policy rate? And then the second dimension is really about the efficacy of those channels. At a very high level, our policy rate affects the cost of capital, the cost of debt. And so, when we raise the rates, in the rest of the economy that cost of debt—in general—is going to go up, and when we reduce the rates, in general the cost of debt will go down. So, as I think everybody knows, if interest rates on your loan are higher, you're going to do less borrowing. You're going to be less active in the economy, and ultimately that will reduce the amount of energy and activity in the economy. So the higher the interest rate is—the higher our policy rate is—the more restrictive it is going to be on economic growth, and the flip is the same, so as rates go down, people are going to see loans as more affordable. They may do the investments that they might not have done otherwise. People might go to take out a student loan at a more favorable price or do the very things that they might want to do to achieve their best selves and their best lives.

So that's the mechanism. That mechanism has been there, it stays there, and it largely continues. What does vary, though, is the efficacy of those policies. We've just come through a period—the pandemic—where we saw a lot of government support to help businesses get through a very trying time—households as well. And one of the byproducts of that is that both households and businesses, in the aggregate, have a lot more in their bank accounts. They have more savings, they're sitting on a bunch of cash, which then means that if they want to do something, they don't need a loan nearly as much as they might have otherwise. And so, if they don't need lending, if they don't need that service, then the space where our policy is going to have its greatest impact is less important to them. So, you might expect that, while a high rate will be restrictive—it will keep some people from getting loans—it won't slow as many people as it might have in a different era. I don't view that as a different policy transmission mechanism. It's the same mechanism, but it's the efficacy of that mechanism that may have changed. And to the extent that the context of the economy and how the world works has caused certain people to be more or less dependent on credit, then the efficacy of policy can ebb and flow. One of the things that I need to do—and all central bank policymakers need to do—is be thoughtful about the extent to which those changes are influencing how strongly the economy is going to respond to a policy action, and then decide, if there is a difference, what to do about it.

So there are two possibilities. One, you might raise higher, if you think efficacy has gone down in this context. The second is you might just hold it for longer. Both of those will accomplish, in theory, the same outcome, and that's a conversation that we have in the building, that I have with my colleagues, all the time, just to make sure we understand what our expectation is when our policy moves to a certain level.

Davidson: Yes, so I think you just answered the next question I had in mind to a certain degree, but I wanted to ask: What is it that you and the staff have been digging into lately to determine maybe the efficacy of monetary policy, or how it might be affecting different sectors a little bit differently? Because it sounds like it's not as simple as saying, "Okay, well, last time we loosened, we know this happened, and so it's going to happen the same way again." We can't really approach it like that, right?

Bostic: You definitely can't approach it like that. You can't say, "Okay, if we cut half a percentage point, then we know for sure that the economy is going to contract by three-quarters of a percent of GDP," or something like that. Those relationships are not clear, and the context actually matters. One of the things that I try to do is really understand where families and where businesses are in terms of the degree to which they're going to need a loan. And through the pandemic, I talked to a lot of bankers. One of the questions I asked them in pretty much every meeting was, "Compared to where your customers were before the pandemic, where are their bank balances now?" And what I heard consistently—and continue to hear, to some extent—is that balances were higher for everybody, and much higher for those with the greatest assets. If you have a lot of extra cash in your bank account, you may not need a loan to buy a TV or some other durable good, in quite the same way. Or, if you're a business, you may be able to buy that tractor or that computer system with cash rather than needing a loan. To the extent that that's true, our efficacy is going to be lower. It's not that the policy mechanism doesn't work. it's that it's going to hit people at different times in different points in the cycle, and so we're continuously trying to understand how businesses are feeling like that. One other question we ask is—like in our surveys—we'll often ask businesses, "For your capital expenditures, are there projects that you had planned for this year that you're postponing because of the economic environment?" That's another way that we can get a sense of the extent to which our policy context is affecting outcomes in the way that we would expect. It's something we always ask about, and it's an important perspective to keep in mind.

Davidson: You mentioned the pandemic, Raphael, obviously affected pretty much everything under the sun. As we get a little farther from the real thick of that crisis, can you talk a little bit about lessons you've taken from that period? Are there things that you think are going to be lasting changes that could even shift how you are viewing the economic outlook?

Bostic: The pandemic was incredibly disruptive for everyone's lives. There's just the personal, in the sense that we had to change our day-to-day rhythms, we had to worry about the well-being of our family members, to make sure that they were all healthy and safe. We had to relearn how to do a bunch of things from a remote posture that we had not actually ever really tried before. I know for us in our bank, we basically forcibly went remote. We had been doing a little of it, but we had to learn pretty quickly how to be fully functional in that context. And then at a global level, businesses realized and discovered they were exposed to parts of supply chains that were far more disruptive, I think, than many might have anticipated, prepandemic. And so, it's caused a rethinking—at a family level, at a corporate level, and at a strategic level—and in some ways, some of those changes are likely to endure. One, for example, at the strategic level is: prepandemic, businesses were very ruthless. They were just ruthless. I think you can't be more. Can you be more ruthless? [laughter] Like if you're ruthless, you're just ruthless.

Davidson: Maybe there are levels, I don't know.

Bostic: But they were ruthless in trying to find their lowest-cost provider of inputs, and that has a cost minimization impact, but it also leaves you exposed if anything ever happens to that provider. I've talked to many businesses who are now diversifying their supply chain. I think that will persist moving forward. And that has implications for cost structures, for pricing, and potentially for what inflation will look like, because the inflation dynamics in some of these new places might be different than the dynamics in the places where they were producing before. And at a workplace level, we've changed a number of our policies that I don't think we will go back on. One is, we've tried to make life easier for our essential workers, so in our garage now, they get guaranteed spots. They don't have to worry about how to get to work if they want to drive in. That was not how we were structured before. Many of them were in a queue and didn't have that ability. But the reality is, they're the ones who have to be in every day, and others don't, so we should prioritize that. And then of course, there's so much focus on "hybrid" as a model for working. I think hybrid working will be around, at a higher level than it has been historically. How much higher? There's debate on that, and you're seeing companies evolve pretty quickly and pretty continuously as we've gotten further away from the pandemic. Some are going to five days a week, some are going to three days a week, some are going from two to four—we're seeing lots of different models, and those can be interesting. And then at the family level, a couple of thoughts: one, we saw lots of two-earner families become one-earner families when they were sitting home and decided—and realized—that the second salary was covering childcare, and maybe one extra dinner. A lot of families decided, "Well, we can do this differently." That's interesting. The desire for workers, for individuals, to have a workplace that accommodates them more, I think, whether it be hours of the day that you come to work, whether it be can you bring your pet in or—there are lots of different things that have evolved that are quite interesting. You know, we saw a big bump up in retirement right at the beginning of the pandemic. It'll be interesting to see how people make decisions about when they want to retire and what that looks like. I think there are so many things that can change, and it's going to be an opportunity for academics and researchers and analysts to really…you're going to have many years of work to try to figure out how this all sorts out.

Davidson: Yes, it's all so complicated that there's always going to be work for economists. Well, I wanted to ask you a little bit more about one particular point you just made having to do with hybrid work, working at home, working in the office, etc. When the labor market was really tight—when it seemed that workers, to put it in kind of blunt terms, sort of had the upper hand—workers had the power. I could demand that a prospective employer allow me to work at home, most if not all the time. Now the labor market appears to not be nearly as tight. Does that mean that the power has shifted to some extent—or maybe even dramatically—back to the employers, and therefore they can maybe be a little more demanding, and "I'm happy to hire you, but you're going to have to come in four or five days a week"? Or are these things a little more subtle, and maybe take longer to really shift?

Bostic: Well, before I answer that question, your question triggered another real change that I think is out there, which is that a lot of workers now are much more sophisticated and savvier about where their work opportunities are. And so, a number of job occupations have become much more nationalized, where people who know about the opportunities in far-flung places can apply for them and do that work while distant. That's actually a very significant change. Even within markets, there are changes. Everybody knew when Walmart moved to $20 or $25 an hour. Everyone knew when Bank of America did that, and those dynamics—that increase in information—is what gave workers advantages that they didn't always have and was a contributing factor to the power dynamic, along with the tightness. Now, to your actual question—I do think, as labor markets have eased a bit…two things to say: I think employers can be more selective. They're not as concerned about the cost of attrition, so if people leave, they're much more comfortable trying to find a replacement—which means that they don't have to be as responsive to worker demands. But the second thing, which I think is also quite interesting, is that we have seen that workers aren't quitting as much. Workers actually recognize the weakness, the relative weakness, out there, and I think—I haven't talked to all the workers, but many of them, my sense is they are less confident that if they quit they'll find a job with the same quality, the same security, and the same growth potential as they might have two or three years ago. So I think the realities are things that people are recognizing, and they are changing the calculus for both employees and employers as to how they manage their relationship.

Davidson: Shifting gears a little bit to talking about what it's like to be on the FOMC, it's kind of rarefied air, I think most people would say. I looked this up recently, and it surprised me to find that there are 12 regional Reserve Banks, and there are only two presidents among the 11 others who've been in the job longer than you have now, and you came here seven and a half years ago. And of the seven members of the Fed Board of Governors, six have taken office since you joined the FOMC. So, there's been some turnover among your colleagues, and I don't say that as a criticism.

Bostic: Oh, no—you're just saying I'm an old person, I think, is the other way to put this.

Davidson: You're a little more gray than you were when we first got to know each other—but I am, too. Anyway, I think we all understand the fundamentals of formulating policy don't really change with the composition of the Committee. However, can you talk a little bit about just how the discussion—how the dynamics—might change, maybe just in subtle ways, when different people come on to the Committee?

Bostic: It's very interesting. First of all, as I stated, it's a privilege to serve, to be on the FOMC, to be able to engage and interact with really smart people who are quite thoughtful and take the mission extremely seriously. You're getting everyone's best work. And I say all the same: I learn from my colleagues, they all have insights that I don't have—I don't have all of them—and so it's really just great to work with them. The interesting part of seeing the shifts really comes because different people come with different points of expertise. I sit, at the FOMC table, next to the Kansas City president. So, today I have Jeff Schmidt. He's started banks, he's a hardcore banker who knows how to run private-sector organizations, and so his perspective is going to be informed by that, and his voice is going to have a lot of that background in it. That's quite different than, say, Austan Goolsbee, who is an academic who's done policy work, a brilliant leader and professor. He's going to come in with a lot of economic modeling and theory and reaction, in addition to the fact that he is personally very comfortable in the media setting, and so he engages in a lot of questions, and in quite different ways. And then you go to Michael Barr, who is an attorney who has worked in the policy arena on bank regulation for a long period of time, who has worried a lot about access to capital and credit and banking services. So all of these folks, as they come in, we all see the same GDP numbers, we all see the same unemployment numbers. But then, how we read it, and the types of things that we might put more weight on as important factors—they change, depending on your perspective. And so it's just always interesting to listen, and the thing that I've really appreciated is that everybody listens. We all are trying to take the totality of all of this, the insights that everyone brings, to try to evolve to a shared understanding of what an appropriate policy rate should look like. And the engagement is quite interesting. I actually personally like them, all of my colleagues, and so it's just really a pleasure to work in that context.

Davidson: All right—well, I think that's probably a pretty good place to end it. Raphael, thank you very much. It's been a good discussion. I hope the listeners out there enjoyed it. Thank you for making the time—I know your schedule is insanely busy, so I appreciate it.

Bostic: Always enjoy making time for you, Charles. The conversations are always quite interesting.

Davidson: Well, thank you. And come back next month—Domonic Purviance, who's a housing expert in our banking Supervision and Regulation Division, will be here to discuss the state of housing markets across the Southeast and the country. Thank you very much for listening.