A Conversation with Mary C. Daly at the 2025 California Bankers Association Annual Conference

Krista Snelling:

So, we’re going to go ahead, and dive right in here, Mary, with the economy. Can you tell us a little bit about your outlook for the economy over the next 12 to 18 months? And how you’re thinking about monetary policy right now.

Mary C. Daly:

Absolutely. So, let me start with the end of the question, and just say that from my vantage point, monetary policy is in a good place. It’s well-positioned to respond to however the economy evolves. Right now we’re moderately restrictive, meaning we’re going to continue to put downward pressure on inflation, and achieve our 2% target. But we’re not so restrictive that we’re cutting off growth, or the labor market in a way that isn’t productive for the U.S. public.

Americans have been waiting for inflation to come back down to 2% for quite a while. So, we’re very committed, I’m very committed to continuing to put pressure on it to get there.

Now the word of the day, no matter where I go, is uncertainty. Uncertainty about policy changes, whether they’re tariffs, or deregulation, or tax policy, or immigration, that might change the trajectory of the economy. And there’s certainly lots of commentary out there about how that might happen, but so far when we talk to businesses—we had a bankers’ roundtable just a little bit ago, we had a business round table earlier today—I travel across my entire district, which is the nine western states, and what I’m hearing is cautiously thinking about how to go forward.

Of course, you don’t run forward when there’s a lot of uncertainty, but many businesses, you don’t stall out either. So, you continue to do the things that pencil out, you continue to think the economy is going to evolve in a good way, and when you step back from the uncertainty, and you look at where we are, and we’ve got solid growth, solid labor market, and declining inflation. That’s exactly where we want to be, if we’re going to deliver a sustainable growth path that benefits all Americans, all businesses.

So, for me, I think we’re in a good position. I’ll say one last thing… We are in the tennis world here with Indian Wells down the street. So, if you’re a tennis player, I am not, but if you’re a tennis player, you know what being center court means.

I see policy as being at the center court. It can respond to the economy, if inflation persists, or accelerates. We can respond if growth, or the labor markets start to slow unwantedly.

So, we have ourselves in a good position to respond to whatever comes. Right now the word of the day is patience, patience to see, not guess, and guessing leads to bad outcomes. So, let’s not guess. Let’s watch.

Krista Snelling:

Awesome. Thank you. So, you talked a little bit in there about unemployment and inflation, and a lot of people in the universe may think that you guys are just dead on those data points, and all of that.

But I know, I’m also on the CDIAC right now that was mentioned during the introduction, the Community Depository Institution Advisory Council. And I have seen how you and your team aggressively seek out feedback from people within your district.

So, it’d be great if you could share how you approach your policy preparation with all those different data points.

Mary C. Daly:

Absolutely. It’s a critical part of what we do. It’s always a critical part of what we do. From the beginning when I started at the Fed in ’96, I worked on something we call the Beige Book, and that was one of my first roles. And I just started at the Fed as a research economist, and learning about the Beige Book, and how important it is that we survey people who actually live in the economy, and can tell us not what happened yesterday, but what’s most likely to happen going forward. So, we source information from a wide variety of groups across all industries, all states, and just not myself here in the 12th District, but all the Reserve Banks across the country.

One of the unique features of the Federal Reserve system, which I really think is important to highlight is that we are across the country. You have the Board of Governors sitting in DC. That’s a very important part of the Federal Reserve, but we also have 12 regional Reserve Banks. And those regional Reserve Banks have presidents, outreach teams, economists, who are regularly sourcing from all of the people across the country to hear how people are experiencing the economy, how they’re reacting to uncertainty, in this case, how they’re reacting to thinking of the tight labor market that we just came through, and the looser one we face now. So, we’re getting that information, CEO roundtables, surveys. We have boards and councils. And we’re using that information to tell us what the future looks like.

Ultimately, policy that works well has to look forward. It can’t look backward. Right? Monetary policy, we move our interest rate lever, it takes a while to percolate through the economy. So, we have to be acknowledging the forward pace of the economy, and what’s going to happen. So, that we can make the best policy to assist the economy, and meet our goals.

So, each one of you, if you’ve ever filled out a Beige Book survey, if you’ve ever participated in a roundtable, if you’ve been on CDIAC, thank you, that is how we source our information. So, that we can actually serve the American people, and do our work.

So, I appreciate the question. It is a feature of our system that many countries actually look to and learn from us that collecting information from people who actually do business, spend money as a consumer, buy a house, or work in the economy is a very good way to understand how the economy is working.

Krista Snelling:

Yeah. So, your district includes nine states, plus three Pacific territories. So, you’re here with us at the California Bankers Association today. So, it’d be interesting to hear from you what is the same across your entire district? And what are you hearing that’s different across the different regions?

Mary C. Daly:

Yeah. That’s a great question. So, we do have a unique district in that it’s the largest in geography. It’s also the largest in population, and it’s the largest in gross state product, or the value we add. That’s a feature of the fact that the Fed was founded in 1913, and west of the Rockies, there wasn’t that much in 1913, but now there’s a lot.

And so, I had this unique vantage point of knowing how people in all of these districts, or all of these states, are reacting to the economy. And one of the things that is true is across the board, people feel like the economy is doing fairly well, and it’s just a matter of resolving the uncertainty, so we can continue to do very well.

And I was out in Salt Lake, I was up in Fairbanks, I’m here today, wherever I go, I hear this spirit of, “Hey. It’s not that bad out there.” I’m able to find workers, I want loan demand since we’re at a banking conference, loan demand is remaining solid, credits are good. There are projects out there. And now it’s all about what’s happening in the future.

Now where it’s different is that, depending on where you sit, what industry you’re in and what state you’re in, you might find that you’re in a better position, you have less uncertainty than others. So, if you’re in a highly tourism-driven state like Nevada, and especially Las Vegas, you’re getting nervous, because international tourism might be coming down, you’re worried about the domestic durability when consumers get a little pinched. But if you’re in Utah, then you’re feeling pretty good, because there’s a pipeline of projects, people are moving there. I’m going to Boise, Idaho on Friday. They’re bursting at the seams. They’re putting up skyscrapers in Boise, and we’re trying to fill them in San Francisco.

So, those are differences that really relate to the industry you’re in, how you fared after the pandemic, what the population is doing, is it moving to your state or away from your state as in California?
One other thing I’ll mention, which isn’t in the Fed’s purview, of course, we don’t have an instrument for this, but wherever you go, housing is… If I ask people, “What keeps you up at night?” If you’re a civic leader, or a business, a consumer, it’s about housing, workforce housing, in particular. That we just don’t have enough housing to meet the demand, and that’s true across the nine states in the 12th District, but it’s also true across the country when I travel.

Krista Snelling:

Thank you. Turning to the banking sector, a hot topic for all of us, can you give us a little bit of a primer on the role of the Federal Reserve Board of Governors, and the Reserve Bank banks?

Mary C. Daly:

Now I’m sure all of you know this, but it always bears repeating, because sometimes it’s hard to remember, especially when we have different regulators in the United States, they’re all organized slightly differently.

So, the Federal Reserve has a unique structure, as I already mentioned, and one of the unique features of the Federal Reserve is that the Board of Governors is the group tasked by Congress with having the regulatory pen. I do not have a role in regulatory policy. I don’t have a vote. I don’t have a say. That really is done by the Board of Governors. And the same is true of supervisory policy. So, supervisory policy is set by the Board of Governors, and voted on by the Board of Governors, and led now after Dodd-Frank by the vice chair of Supervision along with his or her colleagues.

What the Reserve Bank presidents do is ensure that we have the people in our banks who are able to meet the requirements of the supervisory policy and regulatory policy set out by the Board of Governors. So, I’m tasked with ensuring we have the right staff on the topic, that if the Board is saying, “We want to go this way,” that we are hiring the people and making sure they are well-managed, so that they can complete the tasks.

So, now that’s not to say that as a Reserve Bank president, you don’t have a voice, because I’m actually out in my community all the time. I’m regularly sourcing information from banks. And so, we can, and regularly do, speak with the vice chair of Supervision, speak with the Board of Governors, and let them know what we’re hearing, where there’s a concern, where there’s a benefit that needs to be talked about more for banks.

And that back and forth of information means that, even though I don’t have direct rule-making authority, or supervisory authority, I do have a way to get the information back to the people who are making those decisions.

I think it’s a unique structure, and it’s worth explaining to people more than once, but it is something that has been doable. Now you might ask, “Well, why do you do it?” Why do we do it this way? And Congress set out the original rules, but I think they’ve stood the test of time in this way.

We do not want a bank in Kentucky to be supervised or regulated in a different way than a bank in California, or a bank in Texas, because we have, more or less, a national banking system. And so, you don’t want different regulations, rules, supervisory rules to affect how people can compete, how banks can compete across the country. So, this makes the efforts across the country more homogenous, which I think makes our banking system stronger.

Krista Snelling:

Awesome. Thank you. What are you hearing about lending conditions and credit in your district?

Mary C. Daly:

So, I will say I’m surprised, but it’s worth really repeating. So, I started out in the last month going to Fairbanks, Alaska. And it was right after some of the announcements of policy changes, and I thought that we would hear that loan demand was stopping. The interest rate, while we lowered it 100 basis points last year, it’s still in moderately restrictive territory.

And so, I didn’t know how that was going to continue to suppress loan demand, slowing economy, announcements of policy changes. And what I heard is the bankers, whether you’re a bigger presence, or a smaller presence, and wherever you were located in Alaska said: Loan demand is good. Credits are good. There was some pent-up demand when interest rates were elevated that is now coming off the sidelines, and while, yes, there are policy changes, there are many projects that can still be completed even if those don’t get resolved right away.

So, that was really interesting, and I talked about that, but then I went to Salt Lake shortly after, and heard exactly the same thing. I came here just this afternoon, and heard roughly the same thing.

It varies by industry, loan demand is not equally strong across industries, but in general, if you’re at a bank, you have loan demand if you want to make them, and you have the ability to price them in a way that helps the bank maintain its balance sheet, and its risk program, but also allows the businesses to grow. And I think that is what a sustainable economy looks like, good loan demand, but you have an opportunity to be risk managing your own balance sheet.

Krista Snelling:

How about the effects of uncertainty?

Mary C. Daly:

Well, the effects of uncertainty, it’s interesting. We have to ask two questions. So, if you ask people, “What keeps you up at night?” Everyone says, “Uncertainty.” Then I ask, “Well, how is that uncertainty affecting your behavior?” “Well, a little bit, but not yet.” Right?

So, right now it’s more like what we think of in economics as a sentiment shock. There’s been a shock to sentiment. People feel a little bit nervous about what could happen. They certainly are thinking about that as they make business plans, or spending plans. But if you look across the spending numbers for consumers, or across the business numbers for businesses, you’re not seeing that in actuality yet. You’re not seeing your businesses pull back in large scale. You’re seeing businesses continue.

Now if you’re in an industry where you depend a lot on importing intermediary imports, or you import final products to sell to retailers, well, then you’re in a different world. And so, then you’re looking for the policy on tariffs, in particular, before making next steps. But if you’re in building, you’re in construction, you’re trying to put up a new factory, or you’re trying to put up a new plant, well, then you’re continuing to move forward in a way that I think is good for the economy.

So, I think the uncertainty… We don’t want to get overly pessimistic on the uncertainty, but we do want to watch. And from my vantage point, I watch whether the uncertainty itself becomes a depression to activity. So, I don’t see that happening now, the hard data don’t tell us that, but if it persists long enough, we know that uncertainty shocks can end up being demand shocks. That’s how economists would talk about it.

I think just simply said, if you feel uncertain for long enough, sometimes you just pause, and if you pause for long enough, that affects the economy. So, we haven’t seen that in large scale, but I’m certainly watching that.

Krista Snelling:

So, a hot topic for people in this room is fraud. It is a nonstop, never-ending treadmill of a battle for us. What are you hearing in your role, and how do you think about it from a macro and payments perspective?

Mary C. Daly:

If you think about what keeps bankers up at night, at least, what I’m hearing keeps bankers up at night, it’s cyber risk and fraud risk. And then you want to know, “Well, what are those things?” In many ways, they’re coming together. So, check fraud is certainly something on top of people’s mind, but so are customers being duped by and people stealing their accounts, and then their accounts can’t be given back to them, and then what do you do?

The thing that I do hear again and again is that banks really want to protect their customers. They want to make sure their customers are safe and secure, but that’s getting harder and harder to do.

And so, you can’t coach everybody, and you can’t do it individually. So, from a macro perspective, we’ve heard this long enough and we’re hearing it more and more, that I think it just calls for more thoughtful and collective action in terms of thinking about this problem nationally, not just from a bank-to-bank, or a Federal Reserve only.

Now we don’t have a lot of levers in the Federal Reserve to solve fraud. This is something that’s bigger, but I actually know from the reach-outs we do with the CDIAC teams, and the CDIAC boards, and also with all our other councils and boards, we are actively seeking information about what are the top fraud risks you’re worried about, and then what would remedies look like?

One of the things that remedies can be is just educating people more about how just because it’s on paper, and you’ve always been using it, it doesn’t necessarily make it safer than using an online account. And just those types of things, or how do you spot a scam? And how do you make sure you can not give your money away if someone is asking for it and pretending to be your local community bank, or your local large bank?

So, I think those are the things that I’m thinking about, but from a macro perspective, when something’s happening at a large enough scale and frequently enough, then you have to think about it more globally than just bank-by-bank, institution-by-institution, or even person-by-person.

Krista Snelling:

Yeah. I was very impressed. One of the first surveys that I filled out after joining the CDIAC in January was a very detailed one about fraud, and it was one of those things where I’m like, “How many characters do I get when I’m answering this question?” So, I really appreciated being asked, because I can only imagine the earful that you guys must…

Mary C. Daly:

Well, that’s the first step. You can hear people bringing it to you, but then the next step, if you’re an institution like the Federal Reserve is to do widespread data collection.

People think of data collection, often times, I think they use it in too narrow of a perspective, data collection as, “What do you get in hard information quantities?” But data collection also includes surveys of what you’re all seeing, so, that we can add those up and say not just, “What are we hearing when someone meets us at a conference?” But, “What are we seeing across a broad group?” And then, “What are the top things that we should really bring to the attention of people who have control over remedies?”

Krista Snelling:

Yeah. That’s awesome. So, a little bit of a softball here for you. We are here at the California Bankers Association again, and wanted to recognize and appreciate your words about the importance of community banks, and just understand from you about what do you think the opportunities and challenges are for us?

Mary C. Daly:

Sure. So, I was at the American Bankers Association community banking national conference in Phoenix. And I was honored to go, because I got to talk about how important community banks are to our communities.

So, one of the things that I’ll say, before I talk about what the challenges and opportunities are, is that I’ve been working at the Fed since 1996, and I was in the research department, and then now as president, and I have seen countless times when we have a crisis, an economic crisis. Right? That community banks are in the front of the line to help their communities. And the one that’s really right present for me, because it’s not that long ago was when we had the pandemic, and we had the PPP program, and many of the businesses that wanted to use it weren’t from an SBA bank.

And they went to their community banks, and their community banks used the PPPLF and facilitated the lending to those businesses. And it’s just something that when your times get rough, you can rely on your community bank, because your community bank is there. They’re going to manage the risk well, make sure you come in with a strong balance sheet, make sure you show up when your customers need it the most. So, I take that in, and I mean that.

So, then I think, “Okay. What is so valuable about community banks?” Well, one thing is we have the whole distribution of banks. Right? We need banks of all sizes to really ensure that we’re intermediating financial services through the entire population. That’s how we have historically run the most inclusive financial system in the world in my judgment. It’s also a dynamic one.

So, with everything, if you’re in any kind of business, you need to change as the world changes. There’s always that famous leadership phrase, “What got you here won’t get you there.” Right? So, just because you got here by doing this business doesn’t mean that that’s the business you’ll do going forward.

I think innovation is really important, and ensuring that the opportunities to take smart risks and do smart innovation are present, so that you can continue to evolve as your customers’ needs and interests evolve. Right? We were having a conversation at the roundtable about the joining of community banking and fintech and how people want financial services on their phone, or they want digital payments to move faster, you think of FedNow, which was in part trying to allow community banks to get onto rails for instantaneous transactions. And so, those are the things that I think are the opportunities.

The thing that is doable, the thing that you did do all along, that will continue to get you there, that breaks that leadership rule is serving your customers, relationship banking, being in your communities, having people understand that if they go to your bank, they’re participating not only in getting their financial services, but they’re participating in building the ecosystem of their community.

And I think that’s something that’s always been in the DNA of community banks. I can tell a community banker a mile away, because they say, “Community first and banking second.” It’s not, “Banking is my job. Community banking is my job.” And I think that’s really important to highlight.

Krista Snelling:

How about the challenges?

Mary C. Daly:

I think the challenges are that—I talked about this a little bit at the ABA, and it’s a good time to remind you of what we already talked about—I don’t have any regulatory authority, I don’t have any supervisory authority, I just have… I’m an economist, I’ve worked at the Fed my entire career, and I’ve seen firsthand where the challenges are. And this is one of the reasons that tailoring was created is to ensure that we’re taking the regulatory and supervisory portfolio, or the management, and right-sizing it to the risks that the banks pose.

And so, as we get a new vice chair of Supervision in place, this will continue, but I think that’s one of the things that I think are really important is continuing to advocate for yourselves about where are the risks that you really face, and then how do we right-size? And I mean we in the royal sense, not that I have the pen, but where do we right-size the regulatory and the supervisory frameworks? So, that it fits the risks that are out there.

Krista Snelling:

Yeah. That’s great. Let’s talk about technology and innovation. So, you’ve established the EmergingTech Economic Research Network to study AI’s impacts. What have you learned?

Mary C. Daly:

We’ve learned so much in just such a short time. So, one of the reasons we were doing this is because there was a big conversation occurring nationally about whether AI was going to be transformative, or simply helpful.

And so, depending on who you talked to, they’d say, “Well, it’s going to be like computers or the internet. It’s going to be very helpful, but it’s not going to be electricity.” Think of electricity as a transformative technology. I think we can all agree to that. So, is AI going to be like electricity, or is it going to be like Pets.com and the internet boom? Right? Those are the kinds of things you have to think about.

So, we built this network to learn: What is the latest research? How are businesses using this AI technology? What is the curve of adoption and how will this transform, or not transform, our economy? And in the early days of doing this, we had CEO roundtables, and we talked to businesses, and they told us repeatedly that they’re experimenting, and they’re using it for back-office operations. Right? Not for their mainline business, because… So, they’re trying to do things faster, better, cheaper.

And remember, we had a very tight job market as AI was rolling out, and companies were trying to figure out how they could take some of the more routine work off the hands of their employees. So, that they could deploy their employees to do more business-oriented growth work. So, that was what they did.

Beginning late last year, the model started getting better, the ability to use them started getting better, AI is now embedded in any of the services you buy, whether it’s a payroll service there, or a communications service that’s embedded in there. And so, we started hearing something completely different. We started hearing that businesses are using AI to change even what they thought was possible. And that’s when the technology becomes transformative, when you didn’t even know what you could do if you had AI, and now suddenly you get AI and you’re generating ideas, and you’re moving your business faster, and you’re doing things that you never even dreamt were possible.

So, the example I like to use, because everybody has one is when the first smartphone came out, the Apple phone, it was just a Blackberry with a better screen. So, that’s what we thought, “We’re going to get a cooler screen, but it’s just like a Blackberry.” But if you now think about the phone, think of all the things you can do. Those were things that weren’t thought of before we got the phone. So, I think of AI as something that we don’t know what we can do with it until we use it. When we start using it, then we start learning what we can do with it, and then the expanse becomes much wider than we might have thought.

So, I’m now having learned all of this from businesses, I’m now thinking that on the continuum between it’s an ordinary technology that helps us grow a little bit versus it could be a transformative technology. Although, we don’t know how long it takes. I think it certainly looks more transformative than ordinary.

Krista Snelling:

Yeah. Interesting. So, Mary is available to take questions, but given that we’re livestreaming here, all the questions need to go into a microphone. So, if you have one, raise your hand, but I’ll ask the first audience question as the presenter’s prerogative here, which is what is the biggest thing that is different with how the Fed operates between when you got there in 1996 and today?

Mary C. Daly:

That’s a great question. There are so many things that are different. But when I came to the Fed, we were very much an organization that was… We were always earnest. We were always dedicated to our work. We were always thoughtful about how our work would impact Americans.

But we were less good at communicating all of that. Much less good. So, we were more vague, we were more behind a screen. I went out and did community events, but they were not nearly as open as they are now. And I’d say we listened, but we listened less than we spoke. And now that pendulum has totally gone the other way, and we listen more than we speak. At least, I try to.

And we source information from a much wider group of people, and we value that information at the same level that we value a published statistic that you might see in the headlines. And I think that’s been a change that I have welcomed, I have spearheaded in our own organization. I think it’s critical that if you’re making policy that’s meant to serve every American… Ultimately, the Fed works for all of you. If we’re meant to do that, then we should listen to the people we serve, and we should incorporate what we’re hearing into the decisions we take.

So, I think that’s the biggest change I’ve seen, and it happened not with a light switch. It happened overnight. But each successive chair who has been leading us, each successive president and research team, et cetera, has just engaged more towards that.

And as you know from the number of public engagement people from the San Francisco Fed you might have met, we’re doing public engagement and that is, essentially, listening to the people we serve, making sure that the people we serve have a voice. So, that when I go back to DC, I’m not speaking out of a textbook that I read and a model I ran. I’m speaking about how I might use those things as helpers for me, but I’m taking the information that we source from everybody.

Audience member 1:

Thank you, Mary, for being here, certainly, number one, but you talked about the district being in a good place. And so, I’m just curious, if you want to get more down to specifics, like San Francisco in particular, which has obviously been hit pretty hard over the last few years, do you see economic growth happening there, or where do you view the city?

Mary C. Daly:

Sure. It’s an important question. So, I’m bullish on San Francisco. You just have to look out the windows of most of the city buildings, and you would find a way to be bullish, because you see that we have a beautiful place to live, we have really smart and engaged and entrepreneurial people, and we have a sense that we can go forward.

Now it is true the pandemic hit San Francisco hard, and a lot of disruptions occurred in the city that made people a little more skeptical. And I’ve answered this question so many times in terms of other people from other parts of the country saying, “Isn’t San Francisco dead?” Someone actually tried to get me to say that on CNBC, or some other show, and I said, “No. It’s not dead. It’s just sleeping.” And so, I think we’re waking up, and you’re seeing more businesses come. You’re seeing things open. You’re seeing people return to the office to work. I think that’s a very good outcome, because when people come into the office to work, one, they’re using their collaborative skills with people, that’s going to help the younger generation, or your newer employees.

Most of us, I would say all of us, learned in an environment where we could watch people do their job, and we could learn from them. If you’re on Zoom, that’s harder to do. You can see the daily interactions of people. So, I think that’s a positive, but it’s also really good for business. Right? It means the trains are full, the restaurants are being utilized again, small businesses can start to thrive that support the workforce.

So, I’m seeing a positive change. Now it’s not going to happen overnight, but if you’re in San Francisco… You might laugh at this. One of the first jobs I had was to… In San Francisco, when I came to work here, I did the Beige Book, and I was also asked to think critically about the claim that Silicon Valley and San Francisco were dead as IT centers, that their time had come and gone, and that it was all going to move to Austin, Texas, or Seattle, and that’d be the end of us.

And so I wrote the critical review, and said I didn’t think that was true, and I think I was right. Ultimately, what I have found about San Francisco and the whole Bay Area is that it’s good at reinventing itself. It may fall for a little bit. It may be hit. The dot com hit us. All these other things. But ultimately it comes back. So, I still remain bullish on San Francisco, but I’m not waiting for a miracle. I’m just watching the things happen that are positive developments.

I think we’ve moved from green shoots to green sprouts.

Audience member 2:

Has the Federal Reserve Bank looked at the economic impact associated with the Los Angeles wildfires and what that impact might be the longer it takes for recovery?

Mary C. Daly:

Absolutely. So, the first thing I’ll say, because so many people are still struggling is that the first thing we always do is acknowledge that there are real people, real businesses, real lives that were impacted, and our hearts go out to them, and make sure that our employees and all the people who live in the area know we are thinking of them.

And then we start studying. What are the immediate impacts? What are the longer term impacts? And then longer term impacts are beyond just the geographic area that the fire takes place in.

I remember after the fire, there were businesses in southern Utah, and Nevada, and Arizona who are having their insurance re-priced, because of what had happened in LA. And urban areas were finding it harder to get insurance. And so, those are bigger effects, and we do absolutely study those things, because they affect the allocation of economic activity. And then, of course, they could affect our banks, and all the other things that occur.

So, we talk to the banks. Our banking team reached out to all of our banks, especially in the community, and regional banking portfolio, and asked, “How are you doing? Are you able to serve your customers? How are your customers doing? How are people faring?” When we learned that, we come away thinking, “Well, for the short time, people have their situation’s needs met.” Right? They’re just sad and upset, and they’ve lost so much.

But then the next step, of course, is to not just be sad about the tragedy, but be busy as people move through the tragedy. And so, we’re seeing rebuilding. Now the interesting thing about fires, and we do a lot of work in that, but we do things across the country about weather-related events, and other natural disasters like fires, is that communities do rebuild. It just takes time. But then you see people… I was up in Santa Rosa. Santa Rosa is rebuilding after that fire, things of that sort.

So, I think there’s a positive momentum there, but it is going to take time, and I guess for all the people in the room, it’s important that we don’t forget the people. Once the fire and the sadness is a little bit distant from us, it’s really important to recognize the effects keep going on. And I think we have effects—we’re seeing that right now in California. Insurance rates are going up across the board. There are real impacts across everybody’s business in all locations, whether you were directly in the fire, or not.

Audience member 3:

I’ve always felt that there was a difference between money and wealth. And industry creates wealth, governments create money. And I guess I’m curious, if you see that the same way at the Federal Reserve, or as an economist that you recognize the value of wealth as being much more than that of money?

Mary C. Daly:

Well, I have to say I’ve never really thought about the distinction so much, and I don’t think of governments creating money. I think of governments, fiscal agents can spend money to provide services. The Federal Reserve doesn’t… We don’t do what people think, which is we create money out of the sky to fund the government.

Actually, what we do is we move the interest rate up and down to ensure that we can achieve our goals of price stability and full employment. So, that’s how we manage our business. What is important is that people earn money, and then they invest in assets, and those assets can be themselves, or physical assets outside of themselves, capital, a house, and that creates wealth for them. And I think that’s really important to recognize that if you’re going to think about generational wellbeing, you want to move beyond just money that you earn, and you want to move to wealth.

And the wealth differences in the United States are much larger than the income differences. So, one of the things that I’ve studied in my career is what is the transmission mechanism from getting from money to wealth? And I think that’s about investing in assets, whether they’re the stock market, a house, a business—you help people get to the place where they can convert their earnings, their money into wealth, which they can pass along to their children, or to whoever they want.

So, that’s how I think about it, but I’ve never really thought about the distinction between governments and businesses, because I think it’s more of a continuum of… we’re in a capitalist society where businesses drive the economy, and consumers and businesses together make the economy. So, that’s how I think about it.

Audience member 4:

Given current government deficits, and then growing entitlement programs, in the context of a pending tax cut bill, less the impact of the Department of Government Efficiency, how do you think about the Treasury being able to continue to effectively finance the budget deficit in the context of that?

Mary C. Daly:

Well, one of the things that I stick to, because it’s really important for preserving Federal Reserves… we have to stay in our lanes, if you will, and our independence depends on it, and we don’t make Treasury policy. The Treasury does. So, I’ll leave that to Secretary Bessent to comment on. And say that we have a history of doing well in that space. So, I have every confidence we’ll continue to.

Audience member 5:

This is related to your discussion of wealth a moment ago, I’m told consumer spending drives the economy, stupid. That’s what it’s all about. But do you, as an economist, look at consumer spending differently today with the wide disparity between the haves and the have-nots? Compared to how you might have looked at it years ago.

Mary C. Daly:

Inequality where you have this disparity has been high and rising for 40 years now. And so, I think 40 years ago, we had to change from looking at the average and thinking we knew everything to looking at the distribution to learn more about how the spending patterns would emerge. So, consumers are about 70%. Consumer spending is about 70% of the economy. So, that’s what it means by the consumer drives it. And if the consumers suddenly pull back, well, then businesses wouldn’t be able to do as much, banks wouldn’t need to loan as much, and that’s why you get that idea that consumers are driving it.

Ultimately, though, what has been true after the pandemic, at least, is that consumers across the income distribution have been spending. And so, there hasn’t been as much difference in the spending habits. Maybe the spending levels, but not the spending habits of those in the lower income tiers than in the higher income tiers.

One of the things we think about now is that the savings that everyone accumulated, but, particularly, that at low-income consumers have accumulated, either from stimulus or just from working and having not too much to do, we couldn’t go anywhere during COVID, well that’s more or less completely run off.

And so, now those consumers are really their labor market earnings to their spending, and that’s one of the reasons we watch the labor market so carefully is it’s a good barometer of whether consumers will spend. It’s another reason I think this consumer sentiment, while we haven’t seen it affect spending yet, it absolutely could, because if people are worried about their jobs, and they’re already stretched a little bit, well, then, of course, they might pull back. So, those are the kinds of things we look at.

The broader issue of the disparity between those who are at the bottom of the income distribution and those at the top, that’s a general topic where the Fed doesn’t have a lot we can do about that. In fact, we don’t have any tools for that, but we certainly acknowledge it, and we also think about how it affects our measured variables. Like, whether it’s the labor market, or consumption, or wealth, back to the gentleman’s question, all of those things matter.

Audience member 6:

As you alluded to, the Fed’s dual mandate of price stability and full employment, and the main tool you have is monetary policy. Could you share additional toolkits that you have beyond the monetary policy? So, we can fully appreciate the Fed’s role in achieving that dual mandate?

Mary C. Daly:

So, let me talk about our core responsibilities that Congress gave us all the way back in 1913. So, we have three responsibilities. One is monetary policy, and that is, as you said, price stability, full employment. That’s in the monetary policy mandate.

The second one is a safe and sound payment system. So, making sure there’s cash where it needs to be, and that people understand that their cash is available when they need it, but also working on the Fedwire, ACH, all the other services you might use, ensuring that the payment rails are safe and sound and secure, and modern, making sure they’re modern and reliable.

And then the third one is a safe and sound financial system, working with other regulators, the OCC, the FDIC to ensure that when people go to their banks, they have trust that their banks will have their money, and that is a safe and sound system. So, that’s how we put our work together.

Then if you look at the monetary policy on price stability and full employment, our key tool to achieve those two goals is moving the interest rate up, or down, or keeping it the same. But it’s the movement of the interest rate that helps us support price stability, full employment. We move it up when we’re off the price stability goal, and if inflation is too low, or unemployment is too high, we move the interest rate down to help support the economy.

We have two other tools that we use when we have limits to our interest rate. So, whenever you hit the zero lower bound, or the effective lower bound, we started using what we call forward guidance. And I’ve used forward guidance more than we did just in emergencies. And forward guidance just means we’re not only telling you what the interest rate is today, but we’re communicating what we think our path will be going forward.

So right now, I’m not giving much forward guidance, because the uncertainty is so high, any guidance I give would simply be speculative, and then wrong. So, that’s not a time when you would use a lot of forward guidance, but we have used it in other periods. The most recent one being when we knew inflation was rising too quickly, and was going to be high, we started talking about not only how much we were moving the interest rate today, but what the path of interest rates would be going forward.

And I know as bankers, you’ve thought about this, because we said the direction of change is up. And so, that’s in an effort to get inflation down, and that’s a hyper-forward guidance.

And then, of course, the third tool we use, and it’s perhaps the least… It’s the third tool on the list… is the balance sheet policy, buying assets during times when we want to provide more support to the economy, we’re stuck at the zero lower bound.

Now we’re in a process of normalizing our balance sheet, because we’re not trying to support the economy in that way. We’re trying to normalize our balance sheet, bring it back to ample reserves, but those are how we execute on price stability, and full employment.

And then for the other goals, we have whole teams of people who are constantly working on the financial system with many of you, in fact, and then also working on the payment system.

Krista Snelling:

That’s great. Okay. Well, we’re about all out of time here. So, thank you so much for being here, Mary.

Mary C. Daly:

Thank you very much. I appreciate it.