Why the Consumer Matters

Thank you for having me here. As Jennie mentioned in that kind introduction, I spend a lot of my time meeting with business and community leaders to understand the regional and national economy. I take those learnings to Washington, D.C., to help inform the monetary policymaking process. The health care sector is a major engine behind the U.S. economy, so I’m interested to learn more about what you’re seeing.

To set the stage, I’ll briefly share my own thoughts on the broader economy, but then I look forward to hearing from you. These thoughts are mine alone and not necessarily those of anyone else on the Federal Open Market Committee (FOMC) or in the Federal Reserve System.

Improved Visibility

Over the last several months, I’ve been saying, “It’s really hard to drive when it’s foggy.” In the context of high uncertainty about the implications of government policy changes, businesses have been on pause. They haven’t wanted to press on the gas; who knows what lies around the next curve. They also haven’t wanted to slam on their brakes; someone could run into them. So, I like to describe them as pulled over, with their hazards on, waiting for more clarity.

This hesitation, present among consumers as well, appears to have quieted the economy’s momentum. GDP growth slowed to 1.2 percent in the first half of the year, down from 2.5 percent last year. Job gains have also slowed, with the three-month average down to 35,000 (less than a third of the average 127,000 added in February through April).

But the fog is lifting. The tax bill has passed. Net immigration is down. Deregulation is underway. Tariff deals are being nailed down. Business, consumer and market sentiment have started to rebound. I recognize that visibility may still be challenging in the health care sector as you process through the recent changes to government funding.

What will all this mean for the broader economy? I want to make the case that it largely depends on the consumer.

Solid, But Stretched Consumers

For several years now, we’ve heard recession call after recession call, and again and again, the U.S. economy has defied the odds. We have the American consumer to thank; consumer spending makes up nearly 70 percent of GDP, and it has remained remarkably resilient, weathering the pandemic, inflation, and interest rate hikes.

That’s not to say consumer behavior has stayed constant. Consumers, exhausted from four years of above-target inflation and tired of high prices, are trading down. They’ve continued to spend, but they’ve moved from beef to chicken, from higher-price to value retailers, from brand names to private labels, from vacations to staycations. So, the level of spending has stayed solid, but we have seen real changes in the mix. I like to call this price elasticity in action and believe that these consumer choices have been key to bringing inflation down.

For the economy to falter, in all likelihood, consumer spending would need to pull back more fundamentally. Recently, in the context of high uncertainty, we have seen consumer spending soften; real consumer spending has all but stalled the past few months. I’ll be interested if you’re seeing anything similar with elective procedures. But I take comfort in the underlying dynamics. Unemployment is low. Real wages are up. Asset values are high. It’s hard to envision a sustained consumer pullback in such an environment.

So, what does a solid, but stretched consumer mean, in the context of the road ahead? I anticipate the ride will be bumpy, but bearable. Let me discuss this in the context of the Fed’s dual mandate of price stability and maximum employment.

Pushback to Price Pressure

Starting with price stability: Twelve-month core inflation, at 2.8 percent, remains above the Fed’s 2 percent target for overall inflation, and companies are set to raise prices further in the context of increased tariffs. Current policy has raised the average tariff rate to over 17 percent, and customs collections are already nearly 9 percent.

But this isn’t 2022, when we saw inflation balloon. For one, the Fed’s policy stance is more restrictive now. But beyond that, remember that back then, consumers were flush with cash due to pandemic stimulus, suppressed spending, higher wages, and frothy asset markets. They didn’t let price increases hinder their revenge spending. That fueled inflation.

That’s just not where consumers are in 2025. They feel stretched, particularly those with low and moderate incomes. They are more willing to defer purchases if prices go up. Should they feel forced to accept price increases for certain products, I expect they will forego spending for others. I’m sure your procurement teams are thinking the same way. This dynamic may already be playing out: Amid all the talk of tariffs and higher goods prices to come, we’ve seen people stock up on iPhones and cut back on services, such as air travel and lodging. If we see this kind of demand destruction more broadly, the inflationary impact of tariffs would be less than many anticipate.

Squeezed Margins Stressing Employment

That brings us to the topic of employment. If consumers draw a line when faced with higher prices, businesses will see volumes drop and margins squeezed. They will look for costs to cut. Employment could take a hit as a result, especially given the availability of new labor-saving technologies like artificial intelligence. That could start a vicious cycle if laid-off workers pull back even further on spending.

That has not happened to date. For the last year or so, businesses have been in a low hiring-low firing mode that has created an unusual but stable labor market. Unemployment remains low at 4.2 percent, near most estimates of maximum employment. Businesses like yours that found themselves short during the pandemic don’t want to take the risk of a recurrence. So, year-over-year compensation increases remain above pre-pandemic levels. And initial unemployment claims and layoff announcements are low on a historical basis.

Job gains have slowed recently, which is certainly worth watching. But I’m hopeful that even as businesses face cost and price pressure, they’ll largely avoid the type of large layoffs that would spike unemployment and lead to consumer pullback. As with consumers, how businesses have come into this moment matters. Firms are already running lean. They’ve been slow-rolling hiring for years in anticipation of a recession that hasn’t come. They’ve been downsizing via attrition. With businesses already light on staff, we should see fewer reductions.

So, any coming increase in the unemployment rate may well also be less than many anticipate. That’s reinforced by the reality that the labor force is not going to continue to grow at the rate to which we’ve become accustomed. Border crossings have plummeted, with some estimates that immigration is down by about 2 million a year. Hundreds of thousands are expected to lose temporary protected status. And my generation, the baby boomers, continues to age. Over the past three years, the number of people over 65 and out of the labor force has increased by an average of 1.3 million a year. While there may be fewer jobs to fill, there will also be fewer people vying for each job.

I do want to acknowledge that, during this period of adjustment to changes in government policy, the data could be difficult to interpret. What part of an elevated inflation rate is due to the one-time impact of tariffs versus increases in underlying inflation? How should we interpret reduced job gains should the unemployment rate stay relatively stable? And since fewer workers also means fewer spenders, how concerned should we be should GDP growth slow somewhat while the labor market remains in relative balance?

If the ride ahead proves bumpy, as I suggested earlier, fasten your seatbelts.

Well-Positioned Policy

I’ll conclude with a few comments on monetary policy. You’ll have seen that, at our July meeting, with the labor market near most estimates of maximum employment and inflation above target, the FOMC continued to hold the fed funds rate at a modestly restrictive level. We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear. As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.

Thank you, and I look forward to your questions.