Survey of Business Uncertainty: Panel Member Economic Briefing and Policy Discussion
This "mini-conference" with Federal Reserve Bank of Atlanta president and CEO Raphael Bostic and executive vice president and research director David Altig discussed economic conditions and the evolving stance of monetary policy amid our uncertain landscape.

After a Q&A session with President Bostic moderated by survey director Nick Parker, assistant vice president and economist Brent Meyer explored the current economic outlook and explained how input through the SBU has shaped our outlook, forecasts, and policy recommendations.

Transcript

Nick Parker: Hello and good afternoon. I'd like to welcome each of you to this policy discussion and economic briefing organized by the Atlanta Fed's Economic Survey Research Center. We've organized this event exclusively for our business uncertainty panel members as a thank you for all you've done and continue to do to help support our research and provide our policymakers with otherwise unavailable insight into the potential path of the US economy.

As I'm sure you'll hear today, your feedback has provided valuable perspective for policy discussions and also allowed us to make important contributions to the academic literature. I, along with all of my colleagues in the survey center and our academic partners at the University of Chicago and Stanford University, want to thank you sincerely for all of your efforts. Today, we're excited to be joined by Atlanta Fed president Raphael Bostic, as well as Atlanta Fed research director Dave Altig. They'll be discussing the current state of monetary policy and afterward they'll be taking your questions during the Q&A session. Please feel free to enter any questions you might have into the chat.

Later you'll also hear from the head of the Economic Survey Research Center, assistant vice president and economist Brent Meyer. Brent will provide a briefing on the current state of the US economy followed by a Q&A session. Thanks again for joining us today and I hope you enjoy the discussion. Without further ado, I'll turn things over to Atlanta Fed research director Dave Altig to begin the discussion.

Dave Altig: Thanks Nick, and thanks everyone for joining us. Thanks Raphael, especially to you, for joining us today. Wasn't part of the plan, but I think we would really not be able to avoid saying a few things up front about the situation in Ukraine. I know you'll have an opportunity to talk about how it's feeding into the outlook and your view of the US economy, but there have been some interesting developments which are outside of that. For example, the unusual extraordinary sanctions and restrictions on the Russian Central Bank. Just to kick things off, do you want to make a few comments about that before we get into the meat of this?

Raphael Bostic: Sure, I'd be happy to. First of all, I just want to say good afternoon, good morning, wherever you are. It's good to see you all. The events over the last four or five days have been incredibly difficult to watch. All I can say is I have the Ukrainian people and everyone who's involved in the conflict in my mind and I'm hopeful that we can find a way forward that minimizes the harm and the distress that people are having and also minimize the loss of life. It's important to talk about these economic issues, but sometimes there are just bigger issues that you have to face and reflect on and it is really very grounding and sobering as we enter this.

The Ukraine situation is terrible, but it's also got me thinking more broadly about conflict all over the globe. Some of it's been going on for a long time without the same sort of coverage and I think it's in all of our interests to be mindful that there's a lot of hardship everywhere and we should be keeping everyone in our thoughts and our prayers.

Altig: I'm sure we all agree with that. Let's get to our wheelhouse here. Inflation is everywhere you go, not just at the grocery store, but seemingly in all conversations these days and particularly for those of you who have to make monetary policy. Tell us a little bit about your baseline view of the inflationary environment now and where it's headed.

Bostic: Well, you're exactly right. I hear about this everywhere I go. When someone knows what I do for a job and for a living, inflation is pretty much the next thing they want to talk about. It's a tough environment today and inflation is elevated well above our 2 percent baseline and it's really driven by the imbalance between the strong demand and the struggles in meeting supply. Our target's 2 percent. For the rest of 2022, I think we're going to be hard-pressed to get below 3 percent. There are some scenarios where the year-over-year inflation by the end of the year is going to be somewhere in the 3.2 to 3.3 percent range. We'll have a good ways to go, but I will also say we're paying attention. This is something that will be front and center for me for pretty much the rest of the year in terms of making sure that our effort is sufficiently strong to address the elevated levels that we have today.

I'm going to be watching pretty closely the month-over-month inflation trends. We've got some baseline issues that are going to make it difficult for us to get much below the 3 percent level anyway, but I'm optimistic that with our actions and as we get further away from the pandemic's deepest impacts, we can start to see steady movement toward our target.

Altig: What do you think are the key elements of what has to happen for us to get to your target?

Bostic: I think a couple of things. One, we have to really start to see some easing of the supply chain challenges. Very early on, in our surveys for example, as well as some of our other contacts, we were hearing from businesses and business leaders that the supply chain was making it very hard for them just to do basic things in terms of producing and that led to relative shortages in the stores. Then you wind up in an auction situation where prices are going to get bid up and a lot of that is what we've been seeing. We've got to start to see that resolve, and I'm hopeful that we will see that.

A second thing, which is very timely, has to do with the broadening of areas where inflation is happening. In today's environment, I think a lot about energy prices. There's going to be a significant upward pressure on that, so I'm hopeful that we can get to a peaceful solution in Europe that will allow us to step back and not have so much doubt and uncertainty around that. There's also the labor market. When I talk to businesses today, and our surveys, you guys have really given us some guidance on this, finding workers is a big problem and until we're able to do that businesses are going to continue to have challenges in meeting that elevated demand. I'm going to be looking to see if we can see that resolve as well. There's been a lot of work that we've been doing on this that I think can help guide the things that we look at.

Altig: You mentioned the labor market, so let's pivot slightly. You have a dual mandate as a member of the Federal Open Market Committee. You have to achieve maximum employment, as well as your price stability goal. I think the chairman at the last press conference made the comment that while we think we're at maximum employment, at least for now, is that a sentiment you share and how do you actually think about maximum employment and whether or not we've achieved it?

Bostic: When I look at things, I try to figure out how strong the labor market is in terms of our policy stance. I think by just about every measure you're going to have to conclude, and I've concluded, that it is quite strong. If you look at just jobs being created on a monthly basis, over the last eight to nine months, we've been averaging 550,000 jobs a month. I've been watching this for a long time. You don't get that kind of average at this length of time, unless you have a very, very strong labor market. That is one thing.

If you look at unemployment rates, they have come so far down from the highest levels that you're starting to see lots of folks say, "I've got real opportunities here and choices about the types of jobs I want." That's another sign and it's a real change from other periods that we've seen where workers haven't felt like they've had that optionality in terms of where they're going. That is very much reflected in quit rates, for example, where we're seeing lots to workers saying, "I'm going to try it. Let me go try the market and see what's going to happen." If you look at the job opening statistics, they are at historic levels as well. Businesses want to hire lots of folks and jobs are still going empty at the end of months, which suggests to me that the labor market is incredibly tight.

What I take away from this is we don't need to have our policy in a maximally accommodative stance. It's a real strong signal that the economy has legs to stand on its own and there's a momentum that is carrying through that will allow us to continue to see job growth through the course of this year as we think about getting our policy into a more regulatory stance.

Altig: I'm going to ask you about your thinking about the policy path forward as best you can answer it, but do you think that there's going to be the possibility of a conflict between this employment mandate and objective and fighting the inflation on the inflation front that worries you?

Bostic: We talk about this a lot. I'm always worried. There's something worrying me; that's not news. I think what's interesting in this period is that when I started here everyone talked about maximum employment and keeping stable prices as this thing that was a conflict. If you were really going to push maximum employment you were going to get to a place where inflation was going to start to spiral out of control. That's been Fed mantra for many, many years. I actually don't think we're in that space right now. First of all, this is a pandemic so usual rules don't necessarily have to apply. As we evolve into a new steady state, I think you're going to see some interesting dynamics, and this is one of those places where that's true. I think there's a way that we can continue to see job growth while at the same time getting inflation to fall back into a more normalized place.

In many regards, I don't feel that tension right now in terms of how we're thinking about policy. Now, of course, this is a very turbulent time and lots of things are going on. If it turns out that expectations start to shift, where workers feel like they have to demand certain levels of wages because the dynamic that we have is not going to change and they don't want to fall behind, and businesses also feel like that dynamic is not going to change and they're worried about falling behind, there is risk, but I don't think we're seeing that right now. Our survey respondents have said pretty consistently, while we understand that in the short run we've got this inflation issue and things are going to be higher than usual, over the long run, three, five and 10 years, we're not seeing the same sorts of movement in terms of expectations. That's very encouraging because it says to me that we're not in a spiral environment right now. I think about this as the wage gains we're seeing now are playing catch up on inflation that's already happened, but that can flip.

I've been using two words for the last several months, observe and adapt. I'm going to observe to be sure that we are not missing a flip if it is to happen and to make sure that the trailing indicator where I think wages are now are staying that way. Then if we start to see changes, I'm going to be willing to adapt how I think about a reasonable change in terms of a policy trajectory.

Altig: You mentioned there the beliefs of business people, and their employees, and the survey, so that's a nice opportunity to ask you about the Survey of Business Uncertainty and how you use the information that comes from that in your own deliberations about monetary policy and your other policy responsibilities.

Bostic: I'm so happy to talk about this because I talk about this all the time. You guys probably are not following me, like every speech I give and every talk I give, but I talk about survey responses and the information we're getting from these surveys all the time. I thank Dave, and Brent, and Nick for all the work they're doing on this because this puts us in a very different position than we were in 15 years ago. Going into the Great Recession, we didn't have this kind of information that was coming in real time and it meant that we had to wing it in terms of figuring out where policy was. I wasn't here. Dave, maybe you could talk about that if you want to. I do feel like in today's environment we are absolutely not winging it because your participation and your giving us information is allowing us to get insights into the challenges that people are facing in real time, in ways that are not showing up in the aggregate data that comes out at the same time. It's a really important supplement.

When we do our briefings, and we're going to break into that in a couple of weeks, we definitely go through all the national numbers, but we always have an extended segment where we review the responses from the SBU and some of the other surveys that we do. That really informs us because it allows us to compare what we're hearing from our surveys with the data as it's coming in. Over the last 18 months, the stuff that we've been getting in the surveys has actually been different than what we see in the aggregate numbers, and in many regards it's led it. The aggregate numbers have moved to where your survey responses have been and that's allowed me and us collectively to bring that information to our policy colleagues and have it inform how we approach policy in a very interesting way.

I gave a talk yesterday at Harvard. I was talking to students who were taking the very first econ class I ever took, which was actually quite interesting. In the introduction, the professor said this is President Bostic, blah, blah, blah, but he also said over the last year and a half he has been out in front and a visionary in terms of understanding where things have been and are likely to go. Now, I don't actually think I'm a visionary, but I think our infrastructure allows us to have clarity on what's happening on the ground. That only happens with your participation and your sharing your challenges and your insights with us, so I'm in incredibly grateful for it and I literally talk about this every day. You guys should just know how much and how important you are to us being able to do the job in a great way.

Altig: Does anything, one or two items, stand out to you as eye-opening moments when we brought the survey results and it altered the course of our conversation and our thinking?

Bostic: There are a lot of them. I would say, for me, perhaps the first one in this pandemic period was the migration of the expectation about how long this was going to last. When we first started, feedback that we heard was, oh, five months, six months in April. Then we got to September when it was supposed to end and the survey response is, oh, 12 months, 18 months. Then we got a year in and now it's 18 months, [or] I have no idea. That really helped me understand and appreciate that I've got to step back and I'm going to have to not have any preconceived notions about what the trajectory of anything is going to be because we are learning so much in real time about what the experiences are, how deep and intense these new bottlenecks and challenges have been. It's been very helpful. You guys have no idea. I still talk about that when I give my talks, just to remind people that we're in unprecedented times and the work and the responses that you've given us have given us an easy way to talk about that and a real way to do it.

Altig: Yeah. I guess I should add my thanks to the SBU participants for keeping my boss happy. Happy boss, happy Dave. That's the rule here. I said I would give you an opportunity to talk a little bit about your view of monetary policy going forward. Are there any salient points you want to make?

Bostic: I'll go back to the surveys and the feedback that I've gotten. About a year ago, we had to do what the dot plots, we call it the summary of economic projections. I don't do acronyms. If you hang around me long enough, you'll know that as well. As part of that, they ask when are you going to move your interest rates and how are you going to move them over time? From the survey responses I was getting from your survey, from this survey and others, it was clear that the economy was coming back stronger than anyone had anticipated going in and that made me comfortable saying 2022 is going to be the year we're going to do our liftoff. That continued through most of last year and caused me to say, "OK, we're going to have to do more and we're probably going to have to do it earlier than we had ever expected." I think that's really come to pass.

At the last SEP, I was at a place where I thought we would move three times this year, assuming that inflation did start to come under control and that the labor market momentum continued as well. We'll have to see where that is. Inflation has continually surprised to the upside in terms of where our models were a year ago, and if that continues then we might have to do more, but I'm really going to, I said those two words before, I'll say it again, observe and then adapt. We're going to get a couple inflation readings in the next couple of weeks. If they come in stronger, as in inflation being higher than what I'm expecting, then I'll be open to moving maybe four times if necessary and we'll see how that goes over time.

One other thing that I've been trying to say very often, as often as possible and try to say as clearly as possible, is that I also don't have any preconceived notions about the nature of the trajectory. Lots of folks have been asking, are you only going to move every other meeting? Is every move only going to be 25 basis points? All those sorts of things. For me, I really am approaching this, everything's on the table. If the data points to us needing to act more strongly, I'll be comfortable with that. If it points to us needing to act more persistently, I'll be comfortable with that as well. I think everybody just needs to just watch and try to interpret and get a sense of what's going on.

Let me say one other thing on this, which is for all of you survey respondents, your feedback is actually very important. I tell people all the time, if you're seeing things that you're not seeing covered in the news or that you think is important or useful, they can give us insights, you should go and do that. Please do reach out to Nick, or Brent, or Dave and let us know those things because we're trying to be as real-time informed as possible and that can really help us get to a good place.

Parker: Well, that's a great transition. We're going to switch over to some questions from the audience. The first question they had was, what can fiscal policy do to make fighting inflation easier for the Fed, and in contrast, what fiscal policy developments would make fighting inflation more difficult for the Fed?

Bostic: I'm usually not supposed to comment on fiscal policy, so one of the things that they told me right when I got here is never tell the Congress what to do. So I think that's important. I guess more broadly though, where we can get to a better place is if we see investments that allow us collectively to be more productive in our output because productivity, strong growth, having foundations that allow businesses and others to do the things that they want to do, is where we want to get to. That's been important. If you look over the arc of the pandemic, the fiscal supports have been incredibly important in making sure that we didn't see business crater and that we didn't see families get to places where they were at high levels of precariousness and desperation, because in those environments growth is not going to happen as robustly and you're going to have to do a lot of short-term expenditure just to try to keep people level. If we can get to a place where we don't have those sorts of concerns, I think that's the best environment for us to get to.

Parker: Great. Thank you for that. The next question: What concerns, if any, do you have about the labor force participation rate and what implications a low participation rate carries?

Bostic: Labor force participation rates. We talk a lot at our building about what's happening in labor markets, how fast are people coming back to work, and we know that the return to the pre-pandemic rate has been difficult. There's been a challenge in seeing that. We've got lots of work that's happening in our building on this issue. I'll just talk about a couple of them. Just last week, we had a Policy Hub report by an economist here named Julie Hotchkiss, which tried to ask what are things you can do to get the rate up? Usually, I'm an economist, we're economists, the idea is if you want more people to do something, you pay them more to do it and they should come back.

Well, Julie's research was actually very interesting because it really asked the question, "Does everybody respond the same to a given proposal of a wage increase?" What she found was the answer is absolutely not, and that Baby Boomers respond the strongest, Millennials respond the second strongest, and then the Gen X-ers respond the third strongest, which is very interesting. The most significant part, I think, is the Gen X-ers respond half as strong as Baby Boomers do, which would suggest that to get them to come back at the same numbers, you've got to pay them twice as much more. We'll have to see if businesses are willing to do that. That would introduce a whole host of challenges.

It also really points to the idea that nonwage and non-salary types of features of work are actually going to become more important. As we talk to businesses through a number of surveys, we're seeing more engagement and entertaining of those sorts of things, saying you don't have to come to work every day, or we'll put an office in your home, and you can bring your dog to work if you want. All those sorts of things we're starting to see a lot more of.

A second thing in terms of labor force participation: what we knew was through the pandemic, there were a lot of disruptions to what turned out to be pretty important sectors. I think about child care as one, where we know that very early on, our Bank did a report about the child care sector, noting that so many child care providers are small family-run organizations, they don't have a lot of savings, a lot of buffer, and they were going to be at risk. Those reports turned out to be providential. We lost lots of them. What that's done, fast forward to today, it says if you're a family and you have young children, you may not have anywhere for the children to be watched while you would be at work. Melinda Pitts has done some work, she's another economist here, showing that of the populations that have not come back as much, the one that was the biggest was women with young children. That's another thing that we are going to need to reconcile and resolve if we want to see labor forces come back as robustly as it has before.

The last thing I'll just say is we have also seen through the pandemic a tremendous pull forward of retirement among older workers. In our Bank, we have lots of folks who were retirement eligible who are still working anyway. Across the country, we've just seen a lot of folks step back and say, "Wait a minute. Do I really need to be doing this?" So they've left. We've been having a lot of conversations internally about, "Well, they've left for now. But when things settle out, if wages continue to increase so rapidly, will some of them come back?" That's an unknown that can really help facilitate some of their returns. We just have to watch and see how all this plays out. It's going to be a very interesting time and it'll make the work that you guys are doing and your participation actually more important so that we see these trends before they actually show up in the aggregate numbers.

Parker: Great. Thank you. All right. Next question: Aside from increased working from home, what sort of lasting changes to the economy do you expect after the pandemic?

Bostic: Well, that one is a big one, right?

Parker: Easy question.

Bostic: Allowing people to work from home is a pretty significant change that has the potential to ripple through the entire economy in terms of demand for space, in terms of where people work, in terms of the price of housing, and other things across metropolitan areas across the country, so that's a big one. I think that businesses are going to think hard about how they get their work done. Some of that will be in terms of investing in different sorts of things in the workplace, so you're going to have hybrid meetings and the like. Some of it will involve investing in automation to try to reduce the volatility and the dependence on workers.

I actually think we've also witnessed over the last year and a half a real shift in the set of businesses that are competitors. When I talk to a lot of restauranteurs and others, they say they are having to compete with outfits like Amazon fulfillment centers that they never had to before. It's really putting pressure because that work environment and the setting is just quite different than what you see in restaurants. We're starting to see a collective shakeout in terms of who's working where and those choices moving forward. I think we're also going to see something pretty interesting in terms of workers more broadly in terms of what value is and what the value proposition of work is relative to other pieces of their lives. All of these are... I mean, they've always been questions, but I don't think much of our workforce was actually thinking about these questions.

When we've talked to businesses on the automation, for example, many of them have told us, "Well, yeah, we've been thinking about it, but not that robustly." Then the pandemic happens and then not that robustly turns into, "Oh, we'd better start drawing up some plans because this is real." All of these things have been interesting. We're not going fully back to where we were before and it'll be interesting, I think, to watch it happen.

Oh, let me say one other thing, which is around the supply chain. For 30, 40 years, the mantra in supply chain was efficiency, get it to lowest costs, be just in time, and all those sorts of things. I do think that really minimized the waiting of the second moment or volatility around production. When you're in a just-in-time environment, if anything breaks down in that chain, your ability to produce changes wildly. The amount of variance you're going to get and variation you're going to get in your production is much higher in that environment potentially. The other thing we're going to see is a bunch of firms are going to say, "We're not doing that anymore. We're going to find ways to have a more diversified and more certain supply chain so that we don't have that kind of volatility," which then translates to the imbalances that we're seeing today, because so many firms just don't have the ability to continue providing that supply when there are any disruptions anywhere.

Parker: Great. Thank you for that. Dave, a question for you: What else can monetary policymakers do about the ability to find qualified workers at the moment? I've heard you're working on something called cliffs.

Altig: More broadly, we spend a lot of time at the Atlanta Fed and in the Federal Reserve System talking about workforce development generally. What has to happen in our training systems, in our educational systems, to advance the mobility of workers and households in the economy. Now the benefit cliff issue you alluded to is a special part of the problem in our workforce development systems. What it really is about is the problems faced by individuals who have low income, who may have difficult personal circumstances. Think of a single mother with several children who are trying to give opportunities to through skill development and training. Well, that single mom might be on public assistance, which is not very robust to increases in income. That is, means-tested systems, which are of course there for a purpose, but they also mean that there's a tax on human capital development and on any advancement of any sort.

Surveys that we have seen, not the ones we've conducted ourselves, but for example, in Alabama, where we're very involved in their workforce development system, interviewed unemployed and underemployed individuals in the state. A third of them said they had turned down opportunities for better jobs, they turned down pay raises, they had turned down training opportunities, for fear of losing public assistance to such a degree that they would be worse off, their families would be worse off. We're working on ways to both help build robust workforce development systems, and in particularly address these pockets of problems that have been recognized, but they've not really had a coordinated effort for resolution to them. That's one of our key priorities here at the Bank under the leadership of President Bostic, of course.

Bostic: Under the leadership Director Altig. Our Bank has tried to emphasize the importance to our broader economy that every person get the skills and be able to be productive to their greatest potential. That's the way you get to the best maximum employment. That's the way you get to an economy that is stronger and more resilient. The work that Dave and his team are doing on advancing careers and the benefits cliff is some of the most important stuff that's happening at the Bank in that it can really help a large group of people across the country evolve to fill positions that we actually need filled, and at the same time move them off of assistance so that they're self-sufficient. That should free up resources for us collectively to do a ton of other things that can be valuable.

Altig: I'll add to this that we're pretty firmly convinced that employers are part of the solution to this problem. Even within the Bank, we're trying to think about how our colleagues within the Bank may face some of these problems that are pretty invisible for people who are outside of the circumstances where this sort of stress occurs. If there are any employers out there who would like to talk to us about this work, we would be more than happy to share our thinking.

Parker: Yeah, absolutely. It's a wonderful project. The more I hear about it, the more I like it. I think it's fantastic. Raphael, what do you look for to prevent overcorrection as frequently tightening cycles lead to recession?

Bostic: We look to you guys. We want you guys to tell us when things are really changing. Look, the whole point of what we're trying to do through the surveys and through our outreach, we have a regional economic information network, is get real-time intelligence about what's going on. The surveys and your responses really give us true and important insights as to how close to the edge we are and what's the likelihood of our going over the edge and pulling everybody into a more uncomfortable position. I think that stuff is really important, aside from the usual measures like yield curves and all the things that people have pointed to for a long time.

In today's environment, particularly in today's environment, when things are evolving so rapidly, it's going to be responses from people who participate in this survey and others that are going to give us that initial glimpse. For me, I feel like we're well-positioned because you guys are going to keep doing this stuff and tell us what you know, and it will get us to a place where we'll know when we're getting close and we'll be able to moderate our approach to make sure that doesn't happen.

Parker: Great. So how much more complicated is the Fed's policy landscape today versus just a few weeks ago? Dollar funding costs are up. Oil is $103 per barrel. Treasury rates are falling. How do you weigh inflation growth and financial risks differently today than at the last meeting?

Bostic: Well, it's changed a lot. In particular, it's introduced a lot more uncertainty as to what's going to happen with any of these factors. This is the Survey of Business Uncertainty. I know you guys don't like uncertainty. We don't either, and we already had a lot of it before. We're in this pandemic environment. There's a lot that's going on that we've never seen before and we're trying to, in real time, make sense of. All of the turmoil that we have today is just going to exacerbate that uncertainty. Now, again, I'm hopeful that this gets resolved fast so that some of this uncertainty goes away, but if it doesn't it will actually mean that we have to be even more diligent to get information.

I think about the pandemic. When it first started, we accelerated our efforts to get information in real time pretty significantly because we knew that information was going to be really, really important moving forward. We may need to consider doing something very similar in this environment because energy's changing a lot, as the ability of people and goods to move through Europe changes, and it looks like that's going to change a lot, that has implications for the supply chain, it has implications for production, a whole host of things. We're a week in now, so there's a lot that still we have to figure out before then, so our hard job just got a whole lot harder.

Parker: Well, this is the last question and then we're going to wrap up so that we can give Brent an opportunity to give his presentation. Are you planning on holding this event again? Would you do this again with us?

Bostic: I'd do it again. Here's what I would say on this. I love doing things that people find valuable. If this is a good use of your time to hear from us about how we're thinking about the economy, what we're seeing, and what we know, I'm happy to do that. One of the things that I've seen in my role here through my whole time here is I go out, one, people have a very limited idea about what the Fed does, and two, they often have in their head fears, and concerns, and beliefs about what's happening that doesn't completely jibe with what's really happening. If I get a chance to just talk to them in regular language so that you don't need a PhD to understand what's going on and people feel like they leave with a different appreciation for where things are, I'm happy to do those things. What I would say for you and the audience, tell us if you like this, if you like this format, if you like the information that we're giving, and we'll figure out how to move forward.

Parker: How to make it work. All right. Well, do you have any last thoughts, any closing remarks?

Altig: I just want to thank everyone who's a participant in this survey. I think you've got the notion that this is pretty vital to us in terms of how we do our jobs and it really is a great contribution, we think, to national monetary policy and hence to the nation. So thank you.

Bostic: Plus one to what he said. Thank you guys very much. We really do appreciate it.

Parker: Well, thank you both for your time. I think this has been fantastic. Thank you very much.

Parker: I hope you've enjoyed this discussion. We're going to take a quick break. When we come back, Brent Meyer will provide an economic briefing, so stick around. Afterward, Brent's going to take your questions, so feel free to enter any questions for Brent in the chat. Thank you so much.

Brent Meyer: Hi. Welcome back. Thanks for sticking with us. Raphael and Dave are a very tough act to follow, but I'm going to give it my best shot.

What I thought I'd do today with our time together is split my talk into two separate pieces. The first is a broad economic overview to give you a look at what's happening with the macro economy. The second is to dig more deeply into the prospects for high inflation to continue or be persistent going forward. One salient feature of the environment that we're in right now is looking at inflation expectations and the potential for inflation expectations to become unanchored or deteriorate into something called a wage-price spiral, hence I titled the slides, "Are we spiraling?"

Before I dig too deeply into this and get myself into trouble, I'll start with the disclaimer. These are my views and mine alone. They don't necessarily reflect the Federal Reserve Bank of Atlanta's views nor the Federal Reserve System. Sometimes they're in alignment and that's fantastic. Let's continue. There we go.

Let's start with a summary of the current economic conditions. Heading into this year, the increase in COVID cases due to the omicron variant likely tamped down on Q1 growth, maybe demand a bit, but things look set to rebound as we move throughout the year. Consumer spending and consumer demand in general has been quite strong. The recovery and services spending has lagged and we're going to talk about that a little bit. Overall, businesses in particular, our panel participants, you in general have seen a strong demand and anticipate that continuing over the year ahead. Against the backdrop of this really strong demand that we're experiencing, we've dealt with supply chain constraints and disruption. More recently, and perhaps more generally, labor constraints and labor shortages have developed and risen to the point where we're seeing very strong wage growth. We're seeing price pressures become elevated throughout the market basket, and inflation in general is elevated at the moment. Alongside this increase in inflation and the continued strong demand, there's an expectation from market participants and others that we'll see some increases in interest rates as we move into 2022. Those expectations have actually increased.

Let's start by looking at the broad trend of real gross domestic product, or you can think about this as output. It's adjusted for inflation. It's looking at the real trends in production and consumption. What we're seeing here with the real GDP is an immediate sharp, negative hit to growth, to output, alongside when the pandemic hit the shores in the US in mid- to late-March. The contraction in second quarter GDP was the sharpest on record going back to at least post-World War II. The interesting thing, and Raphael talked a little bit about this in his remarks, is we've seen a pretty rapid recovery back to the previous track. That black line, straight dotted line running through the slide is the look at real GDP growth, the trend in real GDP growth.

What we've seen is GDP has recovered back to that trend pretty much. Now going forward, professional forecasters actually see us overtaking that previous trend. By the middle of 2022, they anticipate that growth will have overtaken that trend and pushed beyond maybe what we would call potential GDP growth. Basically what that means is professional forecasters see the end environment of that is likely a very, very strong demand continuing. It's an environment where we tend to see increases in wages, prices, and inflation.

Now, interestingly, SBU panelists, you all have given us your sales revenue projections, and we've taken that and actually deflated that by a standard price statistic. This is looking at your real expectations for sales revenue over the year ahead. These are your responses aggregated on average. What's interesting to note here is that SBU panelists, those in the audience, see growth continuing on at trend and not rising above trend like professional forecasters do.

The interesting part about this, or one potential explanation for why that's the case, is you all are living with the broad-based and significant supply chain disruption, and the challenges of finding qualified labor. You're seeing that on the ground, and that might be something that's mitigating your expectations going forward. To be honest, Raphael said this, you all see what's happening in Main Street, in the real economy, much more quickly than we do in our economic data. At the beginning of the pandemic, here's survey evidence that you told us back in 2020 when the coronavirus had just hit the US. We'd asked a special question around the impact for coronavirus developments on your sales revenue expectations for 2020. It wasn't until March 12th or 13th that we really saw firms close the doors and send home all workers that could work from home.

Cities were beginning to shut down. There was a lot of social distancing that was mandated. That didn't really happen until the 12th or 13th of March. Well, that first week your expectations were for something negative, and that's a pretty moderate hit to sales revenue growth due to the coronavirus, but it wasn't until after that first week and after coronavirus really hit that you guys all said that this was going to be much, much more severe for the year ahead. Honestly, that's something that we took on board and we were paying attention to pretty much right off the bat. So in this previous picture where there's some disagreement about trajectories of the forecast, we're going with you guys.

Another thing that our Survey of Business Uncertainty participants are telling us is that they're living in a heightened uncertainty environment. It's an environment that we've seen that visibility is low. We've seen this sharp increase in uncertainty pretty much since March of 2020. That has ebbed a bit relative to the heights, the depths of the pandemic there in mid-2020. That's ebbed a bit, but it's still well above where it was pre-pandemic.

I think what's really interesting about this slide is there seems to be an alignment between what you all are seeing when it comes to your sales revenue expectations and the uncertainty surrounding your sales revenue expectations and what markets are seeing when it comes to a standard volatility index measure or uncertainty index measure based on S&P 500 options and futures.

These are the one-year ahead volatility measures, or one-year ahead VIX measure. It's slightly different than that one-month ahead measure; it's really designed to be an apples-to-apples comparison. The main takeaway from this slide is what you all are seeing on Main Street, it's also getting reflected in market participants' views as well.

I really love wonky econ graphs, and this is maybe the wonkiest graph that we could create from your responses. This is looking at a little bit more granular dig into that heightened uncertainty. This is looking at your expert expectations or the distribution of all expectations on average for firms. It's looking at your future sales growth rates over the year ahead.

What we're plotting here is the distribution from the 90th percentile at the top, the orange line to the 10th percentile at the bottom, the green line. What we saw over the course of the pandemic is a sharp decrease in that lower tail, in that 10th percentile, that's suggestive of a lot of negative tail risk. That made a ton of sense at the time, but also one key finding that you were sharing with us through your expectations is that there was a very strong rebound. The upper tail moved quite sharply in later 2020, and still into 2021, and currently. Basically what this story is telling us is that the tail risks...the potential tail risks to the economy switch from sharply negative, the downside, to sharply to the positive, the upside.

We're going to head to the next slide here if I can get my clicker to work. Let's pivot to consumer demand and consumption. This is a look at real personal consumer expenditures, and this is benchmarked or indexed to the end of 2019, basically before the pandemic set in. We've indexed the index of consumption to 100 in the fourth quarter of 2019, and you can see the sharp decline early in the pandemic and the depths of the pandemic in mid-2020. You can see how quickly consumption rebounded from that COVID-induced recession, earlier in the middle of 2020. In fact, relative to the end of 2019, real personal consumption is almost 5 percent above where it was prior to the pandemic.

Now, here's what's kind of interesting, and maybe this is pretty obvious, but as soon as doors were shuttered and social distancing took place, household demand for durables and nondurable goods rose sharply. It was replacing service and experiential spending with basically outfitting your homes for a new office at home, or a Peloton bike, or an at-home gym. We've seen this very strong demand for durable goods, and it's up quite sharply and continues to be strong.

What's kind of interesting is services consumption has been slower to recover, again in a pandemic with social distancing measures in place that makes a ton of sense, but it still has recovered gradually. At some point here in the near future, we'd anticipate a further switch back on the part of households towards a more normal or maybe a pre-pandemic mix of goods and services, shifting away or a tilt or a rotation away from goods consumption towards services consumption more fully, so we anticipate a bit more strength going forward in services consumption.

Against the backdrop of very strong demand—consumer demand remains strong; businesses, the [survey] participants, you all have told us that demand remains strong—we've seen the supply chains falter and fail to keep pace with the strong demand, and production has been impacted across the globe due to COVID-related shutdowns. This is a measure of global supply chain pressures, or you can think about this as supply disruption. It comes out of the New York Fed and one of the perhaps most interesting pieces here is that supply chain pressure has remained elevated. It rose throughout 2021 and has peaked recently, or is rising to a peak. We'll see whether or not it increases from here. But again, in the midst of very strong demand supply chains are failing to keep up.

At the same time, there has been a dramatic shortage of available labor. These pictures show that the labor markets are extremely tight by standard metrics. On the left-hand side, this is looking at the number, the level in millions, of job openings. These are the number of posted vacancies that businesses have out there. On the right-hand side, this is a measure of the hiring balance. It's basically a measure of how many hires there are relative to vacancies. You can see that the shortfall in hires over vacancies has been extremely large. This is rather unusual and it's reflective of the tight labor market environment that we see.

You all have told us in your responses that hiring appears to be very challenging. One interesting aspect of this is recruiting or hiring is perhaps the most challenging for the smallest firms in the panel. That's perhaps unsurprising given that smaller firms find themselves typically less well-positioned to pivot in unusual times. They maybe have smaller pools of available labor to draw from and smaller geographical reaches. Still this is an interesting finding and backing up that the labor market is very, very tight. One reason it is so tight is because the labor force is actually smaller than it was before entering into the COVID pandemic. It makes it hard to generate and sustain the large employment gains we need to satisfy demand for labor. There are a few factors, and Raphael and Dave touched on these a little bit in the previous session, that are contributing to this.

One was we saw a spurt or a surge in retirements shortly after the onset of the pandemic. These individuals of retirement age 55, 65, and older, have left the labor force. It's challenging to think about situations where they return very fully. Raphael mentioned the child care aspect of this. Then there's the other aspect that, again, I think, speaks to Julie Hotchkiss's work on the responsiveness of younger workers toward wage increases. This really speaks at the potential shifts exacerbated by the pandemic, structural shifts in the economy that the pandemic brought to light more fully in the want for different work-life balances, or maybe the pandemic has allowed individuals to reevaluate their consumption and leisure tradeoff.

There's one more aspect to this that I think looms large, and that's immigration. Relative to the pre-pandemic trend, there's been a decline in immigration, and this is adding to supply chain problems. There's a shortfall of about 1.5 million foreign-born working-age workers in the US now. That again, is exacerbating this lack of labor availability. Again, Raphael mentioned this, against very strong demand for labor we've seen a sharp increase in wages, and that's the orange line on this chart. Wages have gone up quite rapidly since the beginning of the pandemic and that nominal wage growth is continuing to accelerate. However, when you adjust for inflation or increases in the cost of living real average, hourly earnings are flat, if not declining a bit, against the backdrop of high price increases. This is this start of where I wanted to pivot to thinking about the potential for a wage-price spiral to set in more fully.

We're dealing with very high inflation rates at the moment. Inflation's the highest we've seen it since the '80s. I think roughly half of the US population wasn't even around back when inflation was this high. The other aspect of this is not only are the aggregate Consumer Price Index levels very high, but the share of the Consumer Price Index, the share of the goods and services in the consumer's market basket that are rising at these very high rates, is broadened out quite a bit. In the last month that we have available, about 70 percent of the Consumer Price Index, 70 percent of the consumer's market basket, rose at rates in excess of 5 percent. That hasn't happened since 1982. It starts to engender these comparisons or questions between the current time period and the Great Inflation time period, roughly the mid-1960s through early 1980s.

Are we doomed to repeat that Great Inflation period? Or are there other historical comparisons that we can point to and try to dig into? Maybe those differences between those historical bouts of high inflation that were not persistent, and the Great Inflation, which was a very strong, persistent increase in inflation for a very long time. For those of you that are unfamiliar with these pictures, the one on the left was shortly after the end of World War II. It was a picture that was taken right on the street during a parade. The one on the right is a button from the Ford administration. I believe it's 1974-ish. WIN stands for whip inflation now, and those are cool buttons, if you can get your hands on them.

Let's dig into a little bit of this reflation period, the end of World War II. Shortly after World War II ended, there was a short and mild recession. Basically, as the economy was shifting from war-based production to a more consumer-based economy. The wartime price controls were lifted. And in the backdrop, you have US households that were attempting to do everything they could to support the war effort, buying war bonds, not going out and spending a lot. They had a lot of excess savings. As soon as that war ended, there was a lot of euphoria. The pent-up demand led to this surge in consumer spending, and that surge in consumer spending outstripped the ability of the economy at the time to meet that demand. Hence, we saw the supply constraints like we're like we're seeing at the moment, and we saw a very sharp increase in inflation.

Year-over-year growth rate and the Consumer Price Index rose to near 20 percent by mid-1946, but here's the interesting part: That inflation surge was short-lived, and inflation quickly stabilized after that. The other interesting thing is during that surge, the price pressure was very broad-based across almost every category or broad category of the Consumer Price Index. These data come from the Council of Economic Advisors in the [Biden] administration. They had a post on this, I think, last summer. One thing that you can see here is that we had this bout of very high inflation ending right around August 1948. Then in the subsequent period, the subsequent almost year or so, there was a retrenchment in prices across all the consumer price indexes. Basically there was a very high inflation and then it was followed by a bit of a retrenchment in prices after that. That would be a pretty optimistic scenario if that was something that was going to happen in our current environment.

Let's contrast that against the Great Inflation; this spanned over two decades and included four economic recessions. It included the abandonment of Bretton Woods, a global monetary system established during World War II. There were two very large energy price spikes and energy shortages that were quite severe. From 1971, through 1974, there were unusual implementations of peace time wage and price controls.

Economists have a lot of fun debating this period in particular. It's our one and only period of very high sustained inflation that we have in post-World War II history, and one origin or argument is that the prevailing monetary policies at the time basically allowed or accommodated a lot of these sharp price increases, the energy price increases, and that changed the mindset of households and businesses such that through this excessive growth in the money supply and through quite accommodated policy, businesses and households started to anticipate much higher inflation rates in the future, much higher increases in wages and an increase in prices. This is what we're really talking about when we're talking about a wage-price spiral—the movement from workers demanding higher wages because the purchasing power of their current paycheck has diminished due to the increase in prices. They bargain for higher wages, and if they get those higher wages that increases the cost on businesses who then feed through and increase their prices because their margins are squeezed and their costs have increased, and then that cycle continues and continues on.

When we're talking about these two periods in time, one thing that we can look at, one clear difference between the post-World War II reflation period and that Great Inflation period from the '60s to the '80s, is the behavior of inflation expectations, of how individuals were thinking about the nominal side of the economy. Here, the orange line is inflation is the year-over-year growth in the CPI, and the blue line is expectations from the Livingston Survey. This was twice a year, and it is a survey of larger firms and professional forecasters. There's some question about whether or not this is truly representative of the expectations of households and firms, but unfortunately, going back to the post-World War II period, this is about as good as it gets as far as looking at data on inflation expectations.

You can clearly see that coming out of World War II, even in the midst of very strong inflation growth in 1946 and '47, the forecasters were anticipating a retrenchment. They were actually expecting a bit of a decline in inflation going forward. That contrasted very sharply with this Great Inflation period where, by the mid-'70s, inflation and inflation expectations were moving in lockstep one for one. If you're reading the newspaper and you hear economists talk about unanchoring of inflation expectations, that's it in practice.

One thing I wanted to make clear about this wage-price spiral or an unanchoring of inflation expectations is the way that we're thinking about expectations is not whether or not households or business owners or business decision-makers are thinking about the Consumer Price Index and forming some expectation of that price level or inflation rate measured by the CPI or some sort of aggregate price statistic. That's not really what we think is top of mind for businesses and for households. We actually think that by attempting to elicit and think about ways that inflation impacts firms and impacts households by asking questions that are relevant to those individuals, you're going to get a better read on whether or not these high levels of inflation are really getting entrenched into our economy.

That's basically quoting directly from [Fed Chair] Jay Powell, a recent speech. It's a good way, I think, to communicate how we're thinking about the potential for a wage-price spiral down the road, and whether or not inflation expectations are going to become unanchored. It's through the lens of households and firms. Are they thinking about their own costs, their own prices and wages, in a way that is going to be ever-increasing?

On that end, I wanted to take us back to the current situation and see if we can see evidence of a wage-price spiral, a nascent one starting to build. I wanted to start with survey measures of short-run inflation expectations, on all aspects. The professional forecasters, the businesses inflation expectations, which we measure here out of the Atlanta Fed, and households measured from the University of Michigan. They're asked about prices in general, but basically households, businesses, and forecasters are all anticipating high inflation to continue over the year ahead.

Now, going forward into the longer run, looking over a 5- to 10-year period, inflation expectations haven't risen nearly as much as they had in the near term. Inflation expectations have risen since the depths of the pandemic. They're a little elevated relative to recent trends, but they're by no means as disconnected from pre-pandemic trends as the short-run inflation expectations have become. That is some comfort, at least, that to me suggests that this sort of wage-price spiral has yet to fully take root, and we have yet to see long-run inflation expectations become dramatically unanchored relative to pre-pandemic periods.

I wanted to leave you with this before I take some questions. While there's some comfort with long-run inflation expectations not seeing a very sharp increase relative to history, we are picking up some weak signals looking at wage growth over the year ahead. Sixth District firms are seeing pretty strong wage growth continuing, about 6½ or 7 percent, as Raphael mentioned earlier. My view is very similar. I think some of this is playing a bit of catch-up to how sharp and rapidly we saw inflation increase in 2021. Some of this is playing catch-up. We'll be asking questions like this in the future, trying to gauge whether or not you all think that this is something that is a near-term phenomenon or something that is going to be much more longer lasting.

I'll stop after this. I just want to leave you with one more, maybe reassuring difference between our current environment and that of the Great Inflation period. I would argue that everybody's expecting us to do more than make Whip Inflation Now buttons, so these are the target probabilities for short-term interest rates as of the March FOMC meeting. These are market-based probabilities. Almost all the mass in the market is on at least a 25 basis point increase in March. If we look over a longer time period, this is the FOMC's, the Federal Open Market Committee's summary of economic projections, this is colloquially known as the dot plot. The light blue dots here are the committee's median projections as of the December 2021 meeting. Those red dots are the current market-based expectations we're seeing relative to where the committee was back in December. We're seeing markets anticipating a bit of a higher rate path, at least in the near term going forward. Again, this is suggestive of a removal of accommodation and getting back to a neutral stance. One open question on the outlook is how the inflation environment is going to evolve and whether or not that will require monetary policymakers to maybe move beyond neutral when it comes to the path of interest rates.

Thank you very much for your attention. Thank you for your continued participation in the SBU, and I'll take some questions with the remaining time I have left.

There a question from the group. What would you say is the biggest challenge for monetary policy at the moment? That's a fantastic question, and it's a question that I would happily punt to Raphael if he were still here in the room with me. There are myriad challenges at the moment. If we just narrowed in on the inflation side of the mandate, the price stability side of the mandate alone, there are questions around whether or not households are going to fully shift back towards services spending, and we'll start to see the goods prices maybe retrench a bit, or at least flatten out, and whether or not that's truly going to take root and lead to an inflation forecast that would be lower than what we saw in 2021.

There are questions about the situation in Ukraine and whether or not that'll have spillover effects on the real economy here in the US. What's going to happen with energy prices? One thing that I mentioned during my talk is that in that Great Inflation period we saw two very sharp energy price increases that maybe exacerbated or fully helped unanchor long-run inflation expectations in that time period. If we continue to see an increase in energy prices, that may be perhaps a contributing factor that would push up long-run expectations. It's not typically the case that that happens, but this is an unusual environment in the midst of strong demand and tight labor markets. It is certainly possible that we could see that contribute to inflation expectations increasing.

Conversely, energy price shock like that actually impacts household budget constraints or household budgets such that if the price of energy increases the prices of gasoline go up, prices of energy increases, prices of all goods and the transportation of goods increases, that may tamp down on some of the excess demand on the part of consumers. I think even just taking that one piece of the FOMC's dual mandate, just looking at the price stability side, there are myriad challenges on the horizon. Yeah, I don't envy those policymakers having to make those tough decisions. Glad I get to sit where I sit.

Here's a question that I can't answer, but I like it. Where can a person buy a pair of socks identical to Raphael's? I don't know. I'll find out, and maybe we can shoot it around to the panel, maybe a link to wherever Raphael gets his cool socks. That's a good one. There's also a question here talking about some of the academic research informed by the Survey of Business Uncertainty. Here I'll just spend a couple of minutes. Some of what economists tend to do on a day-in day-out basis is incredibly boring. I don't want to bore you with those details. But this is a very unique one-of-a-kind survey. It's the first of its kind to both ask panelists in a very freeform way about their subjective probability distributions. Basically, to think in a probabilistic way or a scenario-based way about what's likely to happen in the future.

Just gathering up those responses has been very informative to thinking about how uncertainty impacts the aggregate economy, how uncertainty on the part of firms can impact the situation on the ground as a whole? That's one area where we've been spending a lot of time. Those of you that have been with us for a while know that our academic partners, Nick Bloom and Steve Davis in particular, are very interested in thinking about the changes that the pandemic is having on the economy. One of those changes is this ability of individuals to work from home and expectations for working from home and how that's going to continue after we're back in a more normal posture. In a broad sense, that's really thinking about something that had been happening; working from home had happened prior to the pandemic, but what the pandemic did is, at least in my view, exacerbated or accelerated that trend. There was a trend towards an increasing share of work being remote, and the pandemic exacerbated that. The question is, how is this going to transform the economy?

If this is a lasting facet of how we work and our working arrangements, is this going to be more or less productive? Is this going to give workers a bit more flexibility in how they deal with balancing work and their personal lives? If so, maybe that leads to an increase in productivity. If not, if workers are all sitting at home unmonitored and distracted by a lot of things, maybe we'll see a lower productivity on the horizon. These are some of the questions we're really trying to dig into. At the same time, sticking with working from home, that also means that more of these sort of events are done via the computer, and people are not traveling as much, in particular business travel. One of the responses that we've gotten from this panel in particular is that business travel is expected to be a lot lower in 2022 going forward or after the pandemic is over.

We're plumbing a lot of different areas of how fundamentally uncertainty impacts the macro economy and also how the current situation is altering the balance and potentially altering how work is performed in the future. These are a couple of the exciting areas. I think we're running out of time here. I would just like to close by saying, thank you so much for your continued participation in the Survey of Business Uncertainty. From the bottom of my heart, it's really meaningful. As Raphael and Dave mentioned, it's something that has become a vital part of how we help inform monetary policy and academic research going forward. Thank you very much and thanks for attending.