Raphael Bostic
President and Chief Executive Officer
Federal Reserve Bank of Atlanta
June 3, 2025
Key Points
- The macroeconomy is reasonably strong overall as uncertainty persists. Inflation remains somewhat above the Federal Open Market Committee's (FOMC) 2 percent target, while the labor market shows signs of slowing but is still broadly stable.
- As of April, we had not yet seen clear signs of tariffs boosting inflation, though research suggests we might see upward pressure on prices over the coming weeks.
- Surveys and interviews with business leaders across the Southeast found sentiment turning increasingly negative in the spring. But the gloomier mood was not yet visible in hard economic data as May ended. Time will tell whether that disconnect lasts.
- Trade policy is but one source of unknowns. Fiscal, tax, and regulatory policy are all likely to see big changes in the coming months.
- The FOMC is finishing a monetary policy framework review we conduct every five years. I trust that the review will further the Federal Reserve's tradition of transparency and openness and help us in our pursuit to make our actions as clear as possible to the public.
As I write in late May, the macroeconomic picture in important respects remains unchanged from earlier this year. In this quarterly message, I'll offer a window into my thinking on the implications of this for the macroeconomy and monetary policy. Then, as this will be my last essay before the final phase of the Federal Reserve's monetary policy framework review, I will share a few thoughts on that important exercise.
Starting with the broadest measure of economic activity, gross domestic product (GDP) had been generally strong before contracting in the first quarter. A shrinking economy is obviously unwelcome. But the data were distorted by the trade tensions, as many businesses rushed to import goods before import taxes were scheduled to take effect. Imports count against domestic economic activity in the GDP calculations, and so that development reduced economic activity.
The Federal Reserve has a dual mandate from Congress to strive for sustainable maximum employment and price stability. As for the first objective, the labor market still appears broadly healthy. Layoffs and unemployment remain at low levels, and there are no glaring signs of serious labor market deterioration. There are some indications of potential weakness, however. For example, data show it's taking job seekers longer to find work. But, so far, these signs have had limited influence on aggregate labor market outcomes.
On the other side of the mandate, inflation has fallen substantially from peaks in mid-2022. But progress in lowering price increases mostly stalled in the early months of 2025 and the 12-month inflation rate, as gauged by the personal consumption expenditures price index, remains somewhat above our 2 percent objective. As of April, we had not yet seen clear signs of tariffs boosting inflation, though research by economists, including ours here at the Atlanta Fed, suggests we might see upward pressure on prices over the coming weeks.
That's a quick summary of what we know. Much remains unknown.
Trade policy is one wildcard. The picture is unsettled right now, with large tariffs applied to some countries and sectors, and potentially larger and broader tariffs looming at the end of cooling-off periods. The way things ultimately play out on this front will likely depend on the eventual shape of tariff policy, and on how firms and consumers react to additional costs and ongoing uncertainty. If most of the import taxes are short-lived and lead to agreements that lower tariff levels among trading partners, then inflationary pressures may subside. If elevated import levies persist, then the opposite will probably happen.
There have been some shorter-run responses as this transition proceeds. Surveys and our staff's one-on-one interviews with business leaders across the Southeast found sentiment turning increasingly negative in the spring. The prospect of potentially higher costs has led many business leaders to pause new major investments and continue their cautious "not-hiring-but-not-firing" approach to their workforce. To be clear, the gloomier mood surfacing in April and May was not yet visible in hard economic data as I put fingers to keyboard. Time will tell whether that disconnect lasts.
I'm particularly focused on how prices of goods and services and consumer demand change over time. For now, questions outnumber answers. Will businesses pass through any increases in input costs to the price of the products they sell? Will suppliers be willing to absorb some of the tariff costs? Will businesses producing finished goods choose to absorb some of that cost? Will the responses and resilience to the changing environment differ for larger and smaller companies?
To the extent that firms pass through higher costs, will consumers pay them or will demand decline instead? Will the many ongoing bilateral trade negotiations produce agreements and, if so, when and what will they entail?
Trade-related monetary policy considerations
From a monetary policy perspective, if tariffs do spur price increases, will it be a one-time bump or the start of a more protracted inflationary episode? If the first, then monetary policy can likely look past it. If it's the second, then there is a risk that inflation and higher inflation expectations could get entrenched in a more enduring way, which could warrant a policy response.
This represents a lot of moving parts. And trade policy is but one source of unknowns. Fiscal, tax, and regulatory policy are all likely to see big changes in the coming months as Congress works through its budget processes and the Trump Administration continues to implement its agenda. In each area, one could generate a list of questions as long as the set I just offered about trade. For now, neither I nor anyone has clear answers for any of these questions.
There is a great deal of uncertainty out there, making it quite difficult to forecast the economy with confidence. Given that, I continue to believe the best approach for monetary policy is patience. As the economy remains broadly healthy, we have space to wait and see how the heightened uncertainty affects employment and prices. So, I am in no hurry to adjust our policy stance.
Policy framework review in final stages
No matter how the economy unfolds, it's a safe bet that the Fed will stay in the spotlight throughout 2025. Scrutiny and criticism come with a job that is crucial to the welfare of the American people.
As a participant in the Federal Open Market Committee (FOMC), it is my duty to stay focused on achieving price stability and maximum employment, so that the US economy has a sound foundation that enables all Americans to live their best lives.
Monetary policy is most effective when the public understands why and how it is being pursued. As a consequence, it is good practice for policymakers to periodically take a look at how well our policy is understood. That is why the FOMC conducts a review of our communications and strategic policymaking framework every five years. The current review is in its final stages.
An important part of that project is hearing from the public via events we call Fed Listens, including one we'll host at the Atlanta Fed headquarters on June 4. If you're reading this on June 3, please tune into the session via livestream. Or you can watch a recording here. Each of the dozen regional Reserve Banks is holding a similar gathering of business and community leaders.
The framework review was also informed by academics and practitioners from outside the Fed System at the Thomas Laubach Research Conference in mid-May. In addition, the review involved many weeks of discussion among FOMC participants and staff.
I look forward to the results of the framework review. I trust that it will further the Federal Reserve's tradition of transparency and openness and help us in our pursuit to make our actions as clear as possible to the public. The better the American people understand our monetary policy approach and actions, the more effective that policy can be.
Though this review may result in some changes to the current framework, I assure you one thing that has not changed: my commitment to striving to achieve price stability and sustainable maximum employment, which together constitute the underpinnings of an economy that works for everyone.