Notes from Federal Reserve President Bostic in Jax - JBJ
Yesterday I had the good fortune of stopping by a Jacksonville Business Journal event for an interview of Atlanta’s Federal Reserve President and CEO, Raphael Bostic. He is a real MVP in the economics world because he also sits on the Federal Open Markets Committee (FOMC) as a voting member.
He basically gets a vote on the direction of the most powerful economy in the world. Pretty cool.
You may not have known this already, but working for the Federal Reserve as a research analyst was one of my original goals as a freshman in college. I’m obsessed with how markets work. I applied to several positions but I didn’t even get an interview. I was later told you needed to know someone already in the Fed to get an opportunity. So instead, I weasled my way in to intern at Goldman Sachs and PwC, which eventually led to a quick stint on Wall Street as a real estate investment banker (my job title was literally real estate financial engineer - analyst).
Anyway, here are my notes. Keep in mind this is NOT what Fed Prez Bostic said word for word. This is my notes on what he said, through my lens, and it probably includes some of my personal thoughts too.
“The target is 2% inflation and we WILL get to 2%.” - Raphael Bostic, Thursday, May 16, 2024.
Full Notes:
We had record inflation a year ago, we had to take control of it and get it back down so it stopped stressing people. (there was some conversation around making sure people trust the system and that it works for them).
Inflation rate has come down from 7-10% to 3-4% depending on how you measure it. Our target is lower than that, we need to get to 2%.
CPI has come in lower no matter how you cut it. Core, super core, etc
Shelter has been the biggest contributor for the index, but it’s the lowest reading we’ve had since 2021. It’s something we are watching. We are watching it closely.
One data point is not a trend. It just raises questions. If this continues, we will make adjustments as necessary. We are patient and watching.
We are looking at share of goods in the inflation goods/services basket. Specifically we look at stuff inflation rates above 5% inflation year over year. Currently - 41% of goods in the basket came at 5% or higher. That tells us there is still upward pricing pressure in the economy. The usual number is 18% of goods/services above 5% inflation year-over-year. So we are tracking these goods closely.
We look at everything in the basket, not just some things in the basket.
You can always try to explain away a number of why it’s higher or lower, but it never works out the way you think.
We build a narrative on the totality of the basket, not just one or two items.
We are constantly asking businesses: what are you seeing, how are the customers showing up, we look at everything in totality and do surveys.
Input costs are still going up, so margins are getting hit by businesses.
More concessions being offered by businesses, we are at limits of passing through costs onto the consumer.
He doesn’t know if there’s a rate cut in September. He says it all depends on data.
A year ago I said rates got to a sufficient level and we need to hold for a long time. We don’t know the definition of a long time.
He expects the economy to continue with momentum and for inflation to fold over time. Once inflation comes down, then yes we could reduce rates by the end of year. If things don’t go that way, I’m not locked into any policy or view, it’s all data dependent.
If inflation falls fast and employment collapses, I will change my stance. So there’s lots of possibilities. I am open to all possibilities.
Consumer is resilient. They continue to shop and go on vacation. Over time consumers get used to higher prices than what they had. Over time wage growth will out perform inflation growth.
US economy is like 8 different economies. People in different income levels have different experiences. Top wealth has more cash than needed, not stressed. On the flip side, there are people on the edge living paycheck to paycheck, pandemic helped them, and wages increased during pandemic. Usually lowest wage folks have the hardest time during recession, but they did fine through the pandemic. Since last August their spending is out pacing their income. So they’re back to that issue of paycheck to paycheck.
Small share of population that is not affected by economy and then a larger share that feels the pain.
At what point does consumer debt impact the market? Lenders say that delinquency rates have gone up but we can handle it and are not concerned. They’re not currently worried about the outstanding liability. We do look at this. We have to see if this weakness has spill over. But lenders are not concerned and seem to have prepared for an increase in delinquency.
Supply chain - it got crazy but now it is getting back to normal.
Way more people in the labor force than expected. Inflation is all about imbalance between demand and supply.
World is very dynamic. Business models have changed since Covid. Diversification away from China. Now we have tariffs just in the past few days. Could be harder to source inputs and raise costs.
If you don’t have alternative sources of these goods, do you just stop selling it or find another source. That’s the long term dynamic. At some point others will find opportunities to fill in those spaces.
Growth continues to surprise us. New things on my list to watch every 2 months.
Affordable housing is vital to economic growth. Affordability index is lowest level since mid 2000s.
Florida is a hot spot for concern about affordability. It’s just a supply and demand issue. There is too much demand and not enough supply. Moving from Northeast to Florida and it keeps putting pressure on prices. Supply side has to respond and alleviate the issue. Housing requires time. It takes time for it all to even out. Years.
****The market will go up and down the key is being disciplined and you must have behavior discipline to not over react.**** <— read this again
Insurance is a big issue and a big concern. It’s a big deal. Have to find a way to make insurance work for regular people. It can instantly make a place unaffordable.
Silicon Valley Bank was a wake up call. They died in 36 hours. That speed was not on anyone’s radar. We are now talking to banks all the time. This risk was garden variety basic risks, most people thought a risk like that would be too basic for a bank to mess up. We assume nothing anymore. Any risk and every risk, no matter how obvious, is looked at. The event created a lot of transparency for us now. So we are on the front end with them (the banks) now.
**The target is 2% inflation and we WILL get to 2%.**
We will not move the goal post (i.e. change the Fed’s inflation target rate to 3%). We are still in an inflation crisis. We will do what we said we are going to do, and then we can explore the next regime.
We have to do whatever we can to preserve our credibility and maintain a long term view. It is not dependent upon politics. Never had a conversation with colleagues due to politics. Never going to be a convo. It’s going to be doing what the right thing to do is based on our mandate. We stick true to this.
We are not ignoring AI into our economy. It is different and potentially transformational. The question we face is - the speed of how fast this will go into the economy. Businesses are reporting that they are not injecting it completely into their work. People are testing AI but not implementing it 100% in their biz yet.
One school of thought says it takes 30 years for new technology to fully integrate into the market. Some think it’ll take 20-25 years. Some think it’ll be 5 years. So that’s the question: how fast and we will see what happens.
The economy is very resilient and robust. It has evolved in a very rapid way. My outlook does not have recession in it. I am optimistic. I don’t rest on that, I have to verify that all the time through data. I reserve the right to change my attitude. I am going to remain vigilant.
We are in a journey to 2% inflation and expect the economy to have enough energy to resist a downturn. There’s so many scenarios that could play out.
We do surveys frequently so we can see the data before it shows up. If the Fed calls you, answer the phone, and answer their questions. This is very valuable to us.
Thanks for reading!
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JB (jon@movewithmomentum.com)
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