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Good afternoon. My name is Neel Kashkari. I’m President and Chief Executive Officer of the Federal Reserve Bank in Minneapolis. And I’m on the Board of Directors of the Economic Club of Minnesota. On behalf of our Board, it is my pleasure to welcome all of you to our final event of the 2020-21 season, featuring special guest, Mary Daly. Mary Daly is president and chief executive officer of the Federal Reserve Bank of San Francisco. As a voting member of the Federal Open Market Committee, Mary helps set American monetary policy that promotes a healthy and stable economy. Since taking office in October, 2018, President Daly has been committed to making the San Francisco Fed a more community engaged bank that is transparent and responsive to the people that it serves. She works to connect economic principles to real world concerns, and is a sought after speaker on monetary policy, labor economics, and increasing diversity within the economics field. President Daly began her career at the San Francisco Fed in 1996 as an economist specializing in labor market dynamics and economic inequality.
She went on to later become the Bank’s executive vice president and director of research before becoming president. A native of Baldwin, Missouri, Mary now lives in Oakland, California with her wife, Shelly. I can just tell you, it’s been my pleasure to call Mary a colleague and friend as we’ve worked together the last few years. And Mary really truly believes in the public service mission of the Federal Reserve.
And it’s great to have her with us. And Mary, thank you for joining us this afternoon.
Oh, it’s my complete pleasure. Thank you so much for having me. I look forward to our conversation.
Terrific. Well, I’m going to kick off with some questions that start on monetary policy, which is I’m sure top-of-mind for a lot of our audience. The Federal Reserve, the Federal Open Market Committee met last week, and decided to leave policy unchanged. Mary, where do you think the economy is now? And why did the FOMC decision last week make sense to you?
Sure, that’s a terrific question. So let me start by saying there are really three elements that I want to highlight when we think about the profile of the economy. One is, I think we have a very optimistic outlook. Two is, we are a long way from digging out of the hole that COVID caused. And three, we’re not out of the woods yet.
So let me start with the first one. You know, as we’ve got almost 50% of our population in the United States with at least one shot of the vaccine, you’ve seen this resurgence of activity. I sort of characterize it as the freedom induced demand shock. People are finally free. They’re vaccinated and they’re getting out and they’re doing things.
And this is really good news for the economy. It spurs hiring, it spurs production, it really puts us in a good place to launch a robust recovery. So that’s great. And it makes me bullish about the future.
The other part, though, that we can never forget, and we have to keep in mind simultaneously, is that we have a very deep hole to dig out of. COVID was the largest shock in U.S. history, really, to the labor market and to output. And it’s going to take some time to get back. And if you want to ever gauge that, just think of there are still 8, or 8.5 million workers who had jobs before the pandemic, and are now still on the sidelines. And that’s going to take some time to clear out. It’s going to get some time to re-engage those individuals.
And the final piece of this whole economic profile, if you will, is that we’re not out of the woods yet. You only have to pick up the news and look at India, look at South Korea and Japan, who are faltering on vaccinations for their populations. Look at India who is suffering with a terrible loss of life. From resurgence of COVID.
These are things that remind me in 1918… I know, Neel, you’re a student of history. In 1918, you know, people ran out of their homes when it looked like it was getting better, and they had mask burning parties, and they paraded around, and then the winter came, and they had a resurgence that actually ended in a lot of lost lives. So I just think we all need to be patient, realize we’re not out of the woods yet, embrace what we’ve got, and recognize we’re still a long way to go to recover. And that’s why I think Fed policy, the FOMC statement, and where we have positioned our policy, is perfect. Because it’s outcome based. It says when certain economic conditions for full employment and price stability are achieved, we’ll begin normalization. And until then, we’re part of the bridge that we’re building across the COVID pandemic so that we can bring as… all Americans through the pandemic and ready to regrow our economy and regain our lives.
That’s great, Mary. Thank you. You touched on the dual mandates, stable prices and maximum employment. Let’s start going a little deeper in the labor market. Where do you see the labor market today? How are you going to know when we reach maximum employment? And as a labor economist, are you concerned that there might be some permanent scarring through COVID that holds back labor supply?
So this is a top-of-mind question, and I’ll just remind everyone, it’s always useful that we released a new framework in August of last year, and this new framework was meant to treat a variety of things that we know we’re facing going forward, but one of the things that it underscored was the importance of full employment being a broad-based and inclusive goal. Not simply one single aggregate like the unemployment rate to tell us the story.
The other thing said is that we’re about eliminating employment shortfalls. Shortfalls from that goal of full employment. So then the natural question is what does full employment mean? And I think really it’s one of those things where you start with you know what it’s not. 8.5 million sidelined and not able to have jobs and really to r- re-engage in the activity that they once had? That’s not full employment.
Might not being able to absorb the workers who are coming in, just new graduates from college, all the other workers who had been sidelined, and actually getting some of those people who have said, “I’m going to retire back into the labor force,” if they want to. Those are all what were the goals of full employment.
So what I really want us all to think about is, full employment is a moving target. It’s something that if we’re really generating a good economy, can actually expand as the economy expands. We saw this in the last expansion, and it relates to your question about permanent scarring. It is so tempting, especially when we want everything to be right and we can just move on and everything’s perfect, to say that everybody who’s left on the sidelines, or doesn’t have a job, that they don’t want one, or they’re permanently scarred, or they can’t possibly come back.
And that was the narrative for literally millions of Americans who, if not for a strong economy in the last expansion, would have totally been forgotten. But yet those individuals came back to work, they got jobs, they’re loyal employees. And importantly, they’re loyal members of their community, lifting themselves, their families, and their communities forward.
So, it is far too early to declare anyone permanently scarred, but I think as a national narrative, the question is why would we ever think that was true? Why wouldn’t we always see the possibility for reinvention and re-engagement, if the conditions are right? And that’s the lens I bring as a policymaker. I want to prove that people can’t work, not assume they can’t, and make policy that determines that’s true.
I couldn’t agree more. You said how the narrative, everybody… Not everybody. So many people, including me, was saying that, because it sounded reasonable back in 2010, 2011, 2012. And just as you said, it was totally wrong. So, I mean, I’ve learned that lesson and I, I really appreciate your comments.
Sure, humility is an important part of this job, don’t you think, Neel? It’s just really knowing when you don’t know, and changing your mind.
Absolutely. Absolutely. So let’s look at the other side of the dual mandate, let’s look at inflation. So the FOMC statement last week said that upcoming increases in which we know are coming, because of math, they are likely to be transitory. Are you worried about high inflation? And how will you know if high inflation readings are transitory or permanent? And should we be worried about a repeat of the 1970s?
Okay, so let me start. That’s a terrific question. It’s actually the question that you see a lot in the news, is the idea that there will be runaway inflation and things. So I’d like to start by just putting some things in context. When we’re thinking about inflation these higher readings, the very first thing to recognize is we’re thinking about inflation readings of 2.4, 2.5, 2.6. Not 13, right? And we were completely tolerant of inflation readings of 1.4, 1.5, et cetera, on the other side of two. And so I just want to balance our risk assessment, and say that that same tolerance for 1.5 is something you want to have for 2.5. And, in the short term, because these things work themselves out.
So now back to the question of is it transitory, or is it more persistent? Well, the transitory part comes from a variety of things that I would call accounting. And, in transition dynamics. So the accounting part is that we had low price level readings when we were in lockdown. You know, prices dropped for many items. And when we just roll those months out and we get back to the 12 month map that doesn’t include them, then we’re going to end up with just a bump in inflation just from simple accounting.
But that doesn’t mean it’ll persist, it’s a one-time adjustment and then we’re through it. The other think, and I think that this is the more salient piece, is that we went out with a light switch. Right? COVID came, we locked down, demand fell sharply, supply fell sharply. And then we’ve been fighting the pandemic for so many months. Over a year.
Now, with the vaccinations, the economy starting to recover, I called it earlier, this freedom induced demand spurt, we’re seeing demand really pick up fast. But we can all go out of our homes and eat at restaurants and do these things, and we’ll buy things online and shop. Very quickly. Go on vacation.
But it takes a while for firms to ramp up their supply. And as a consequence] these transitional dynamics, when we’ll see some price pressure, because there’s a lot of people out there wanting to do something, and not all their suppliers are available yet. And that does push prices up.
But again, transitory developments that don’t actually bleed into the long-term inflation numbers. So that’s why I’m in the camp that this is transitory. And also that a little inflation would be a good thing for us. We took over a decade of strong growth in our economy, and we never achieved our price stability target.
And we recognize, by looking at other nations, the challenges that come with never achieving your price stability target. You know, Japan, Japanese situation’s one that is often mentioned. But the EU is struggling with this, too. So we don’t want to be in those same problems when we can avoid them. That’s the lesson that, that you learn from looking around. And so we’re really focused on insuring we get to price stability. And price stability is average inflation of 2% over time.
Terrific. There are two main policy tools that the Federal Reserve is using to support the economy right now. Low interest rates, the Federal Funds Rate, and Quantitative Easing. Given that the economy is clearly recovering from the COVID shock, when will it be the right time to stop QE, and will that happen before raising the Federal Funds Rate?
Neel, I’m going to take this opportunity to just add a third tool that often gets overlooked, I think, by many people. And it’s just worth noting: we have the Funds Rate as you, as you noted. We also have, and it’s in the list of tools. It’s my second-best tool. The Funds Rate’s the first-best. The second-best is this concept of forward guidance. Telling people what we are going to do and how we are going to think about it, what is often called our reaction function. And then the third one is asset purchases, as Quantitative Easing, which can be used both to stabilize financial markets in times of dislocation, but also to support accommodative financial conditions like it’s doing now.
So when I think of that toolkit, I see that toolkit is very well positioned to meet the needs of the economy we have, and this brings back to the question you asked, which is, what’s the right time to start thinking about withdrawing that accommodation, and what order should it go in?
So I think of the right time is when we’re much closer to achieving our dual mandate goals than we are now. And when I started, I said we have an optimistic outlook, a long way to go, and we’re not out of the woods yet. And if you apply those things to it, we have an optimistic outlook, but we have only had a couple of months of really good data. And then we extrapolate from that, and I think that’s reasonable, but there are wide risk bands around that, and there’s also a big hole to dig out of. So, we’re a long way, again, from achieving full employment and price-stability goals. And so it’s not really the right time to start talking about normalization.
When we ultimately do, that forward guidance piece is going to be incredibly important. Uh, the Chair, Powell, said this the other day. We’re going to let people know well in advance so that they’re not surprised. That what we’ve learned about the importance of transparency. And then I think of bringing our balance sheet, tapering our, our asset purchases, before we change the Funds Rate, as just the order of business that we learned from the previous times with this, and other countries have learned, really works the best, in terms of withdrawing accommodation.
Largely, I mean, just to say it in my terms, we know the Funds Rate is our best tool. It’s the one we have historically most practice at. It’s the one we have the most evidence is the biggest bang for its buck, so I save the best tool as our first tool, and I start relaxing the other ones which may have less firepower than the Funds Rate adjustment.
But, again, long way from doing those things.
Great. Thank you. So let’s shift gears. I think we went into monetary policy, and the currents of the economy in some depth. Let’s turn to the future of work. Right? A lot of people are speculating about what does the future look like. You know, as you know, the nature of work has always been changing, and I think the COVID crisis, my opinion, has probably accelerated some of those changes that were already underway. How do you see the future of work?
Well, I share your view that the nature of work is always changing, and we were talking about how we could all work remotely, we could tele work. But we were thinking it’s decades in the future and not tomorrow. And so then COVID came and we realized that these things that we had been talking about as possibilities, or high tech firms were doing but nobody else was, became the norm. And I think this has given us enormous flexibility. We recognize that people can be productive and, and beneficial to the firm, to whatever your business line is, when you’re in a situation that doesn’t have you in a cube in an office at a desk all the time.
We’ve also realized, at least here, in San Francisco, at our Federal Reserve that people divide their day differently than we thought they did. They don’t have to be so modular where it’s work and then it’s home and then it’s sleep and then it’s work. That they can do things, they can what we call “flex” your life a little bit. And that that’s a magical power. Especially if you have young kids or parents you have to take care of or community activities you want to participate in. I think it’s helped firms see that we should be output-oriented and not time-in-seat oriented.
And I think that’s going to be a beneficial piece. The part that’s going to be challenging is not being the humans that we are and snapping back to the inertial way we always like to, meaning revert, go back to what we know, because it’s the most comfortable or think that this was an emergency so maybe it wouldn’t work as well in normal times. And I think COVID has been a big enough shock and the lessons have been large enough that we’ll pull those threads through, but we’ll have to be intentional about it and incorporate it into our everyday judgment.
And I guess I’ll leave this question with this: that I’ve learned myself that many more people can be included in this flexibility than I thought. I will admit, I thought that maybe administrative personnel and other individuals who needed to be answering phones and other things, they should be in the office. And that’s just not true. They’re just as effective and efficient outside of the office. So I think that’s going to be important lesson. I told you I was going to end, but I’m not. But we’re meant to work together. And so we’ll be coming back and working at the office and most people will be coming back at some point because I don’t want collaboration, idea generation, innovation to suffer. And I think the biggest lesson, and this will be the last thing Neel, I promise.
The biggest lesson is let’s not be bi-modal. We all have, all have to be home and remote is the only way, or we all have to come back to where we were and it’s people in seats. Let’s use this to recognize flexibility counts. And that’s the pull through line for the future.
Yeah, that makes a lot of sense. I mean, I’m, you know, we’re wrestling with the same questions here in Minneapolis, in our bank. And one thing that’s in the back of my mind is, you know, if you give people the flexibility, some are going to work from home more often, some in the office. It’s not hard for me to imagine those working remotely saying, “Hey, I’m not feeling as included as my colleagues are, who are there in the office.” And, you know, there may be personal trade-offs that people have to make because some of it you can replicate, some of it you can’t replicate.
And if you want the full experience of, you know, working side-by-side with your colleagues, you’re going to have to work side-by-side with your colleagues. And so I guess my overall message to our staff is I want to go slow and let’s experiment, let’s see what happens. And not, like you said, not just pick one of the modal, the bi-modal outcomes and say, that’s the end-all be-all.
Let’s talk about education because in my opinion, education is only becoming more and more important in our knowledge-based economy. And you have a non-traditional educational path to becoming a PhD economist and reserve bank president. Could you talk a little bit about your educational path and then how does that inform how you think about these important policy areas as a policymaker?
Well, thanks for the question. So I’ll just start with a little background about myself, in that, you know, I grew up in a family in Missouri and we lived, what I think most people would call in my parlance anyway, pretty close to the bone. We were just one economic or health shock away from falling through. And so of course we had an economic and a health shock and we fell through, and I found myself leaving school, high school at the age of 15 as did my siblings. And I would have been in that situation, if not for someone, a mentor nudging me taking me under her wing and nudging me, “Get a GED.” You know, then I got the GED. She said, “Get a semester of college, then get a college degree.” And then here I am.
What’s the lesson there? Well, the lesson is, there are so many people in our country that walk a tight rope, the tight rope of if they didn’t get nudged and go my direction, they get nudged the other way and they fall through. And we leave thousands, millions of people on the sidelines and then we wonder if they’re permanently unemployed, permanently out of the economic mobility that everyone deserves.
And I think that’s the piece I try to pull through into policy. And it’s caused me to rethink something that I held really dear. And also I share that with you. So college was transformative for me, literally changed my life. I went from a narrow world that I grew up in to something that felt like the galaxy to me, it was so big and the opportunities so many. And so I was committed for the longest time to a four-year degree and a four-year time span is transformative. And if you look at the data, it is transformative.
But I also recognize that not everybody has that opportunity at any point in life. And we need to, as a nation, be flexible, think of education as a lifetime experience, allow people who have the time and the energy, the equal access and opportunity to get that four year degree. But if they want to get one semester, let’s accredit them, let’s make sure they carry that through. Let’s let them divide it out. Let’s rethink education so that you can get a certification after a year. And then you can come back and get the second certification after you worked a little bit.
So that we’re not sort of excluding people just because they didn’t complete things at the age of 22. I think that’s the tragedy of some of the things we see in our society is that if you don’t do something by a certain time, which is artificially imposed, then you’re left out.
And I’ve often go back to myself and say, “What if I hadn’t been lucky?” And I was lucky. “What if I hadn’t been lucky? Where would I be?” I’d be in a totally different place. Andwhat we really want in our country, I think, well, I know, and says, you want to scale me. You want to have all the people who were like me have the opportunity to be anyone they want to be.
Yeah. And not have to rely on you finding some wonderful mentor. I mean, it’s wonderful that you did. And she clearly is-
Yeah. But it’s luck, and not every kid’s going to have that luck of being able to find that wonderful mentors, and how do you do that? I’ll give you one example that you just reminded me of, of our own bank. You know, I’ve been here five years. I figured out a couple of years ago that we had an unwritten policy at the Minneapolis Bank, that to be an officer, an assistant vice president or above, you have to have completed a four-year degree.
Now, we have staff here, who’ve been here for 20 years doing an outstanding job. And we said, “Why do we have that? Why are we going to impose that requirement? We’ve already seen this person working for 20 years doing an outstanding job, are we really seriously think that’s going to be the barrier?” So we removed it. And actually we’ve had some promotions of really talented people who, who are now officers, just because we said, “Why do we have this artificial barrier?” And so I really appreciate your comments.
If we didn’t, and Neel, if I can just pull on this-
… and I want to just highlight it. Luck shouldn’t be the determinant of whether you’re successful or not in life. And I think that’s where we’ve left it too much to luck. And then I’m a unicorn, and we don’t want that. So I really appreciate that call-out. And I think your center that you guys are organizing for the system is on inclusive growth and opportunity. That’s essential. It’s the building blocks, really. It’s starting to figure out how do we take luck out of the equation so that you can just be showing up doing your work and then determining, having the agency determine your own destiny.
I mean, we’re going to go off script here ’cause you and I have not talked about this before. But I think it’s fascinating what you just said about luck. What I find in American society. We look at successful people and we say, “That person’s a genius, that person’s really hard-working.” And I agree that talent matters. I agree that hard work matters, but man, luck matters too. And those three components actually work very well together. But we just seem to dismiss it. Every successful person we see, we say, “Wow, this person is brilliant.” And we put them up on a pedestal ignoring the extraordinary role that luck plays for each of us.
Yeah. I completely agree. So I’m an ambassador of the luck proposition because if not for Betsy, you know, on the other side of that tight rope.
Yeah, absolutely. Well, let me stay on this for a second. You talked about becoming a PhD economist and you talked about some of the research you do. And I want to talk about the economics profession, ’cause you’ve done a lot of work on trying to improve diversity in the economics professional. We just had a conference that you spoke at on trying to look at racism in the economics profession and how to bring more diverse economists into the profession. I’m going to give an observation and I’d love to get your reaction to it. So I’m not an economist, I’m an engineer and then I went into finance and I’ve worked in a lot of high ego fields. Like I started out as an investment banker after business school, right? Investment bankers think they’re all geniuses. Then, after treasury, I worked in investment management. And if the investment bankers think they’re geniuses, well, the investment managers think that they’re masters of the universe.
But man, the economics profession has hubris unlike anything that I’ve seen before. And it’s so plain to me that it’s not all economists clearly, but it’s the profession. And it’s like for me, it’s how do you explain water to a goldfish? I’m standing outside of the tank. I can see the water clearly. I see the goldfish lives in water, but for a goldfish that was born in water, that lives in water, that is only known water, how do you explain to the goldfish that this water exists? And that’s the hubris that I see woven into the fabric of the economics profession that I see as a big barrier to keeping other people out. I’m just curious as an economist, but as somebody who’s also working hard on diversifying the field, does any of that resonate with you?
Oh, absolutely. I mean, it’s one of the things that I think we have to lean strongly against. And you know, you mentioned the racism in the economy segment in the economics profession. And we had a guest on in the panel that I was moderating, also an economist very well known. And he said this, and I think it’s useful to just highlight it. He said that we are a social science economists, but we want to be like physics. And so what we end up doing is we really make ourselves so quantified, so quantitative, so special that we end up excluding all voices. And that if we actually opened ourselves to other voices, we would be better.
And I completely agree with him. I characterized it this way, but several years ago, when I was giving a speech that we are a profession that invites people to our homes, and you’ve all met people like this, where you get invited to their home, but then they tell you how you need to behave to make them comfortable while you’re in their home.
And that’s what economics does. We invite people in. And then we say, “Here are the things you have to do so that we’re comfortable.” And what, it would be better would it, well actually is essential is we invite people into our home and say, “How would you change it? Or do what you want to do and let me see if I learn and grow.” And that’s the piece that’s hard because we have to give up the idea that we want to be physicists and really lean into the idea that we wouldn’t be social scientists.
The economy and economics is about people. We need to study people and study the behavior and the relationships, and to do that, you have to talk to people, and you actually have to be influenced by the judgments of others. I feel like oftentimes we’re wrapped in the prison of our own religion, that we have this religious order almost, and then it’s now become a prison, but we don’t even know it is.
So one of the things that many of us in the profession, and I think it’s a growing number, are trying to chip away at, is bring other voices in, include them and let them talk to us about letting go of our hubris. Let’s actually forget hubris and buy inclusivity, let’s go to that. And if we do that, we will be a relevant profession. Otherwise, we’ll end up guarding a castle that no one cares about anymore.
That’s a great, that’s a great analogy. So I’ve got one more question for you. And I know questions are coming in from the audience, which is, you’ve been outspoken that the Fed has a role to play in addressing climate change. Not everyone agrees. In fact, some members of Congress have pushed back and said, “Hey, climate is not in our lane, stay in your lane.” I just want you to offer your thoughts, in what ways climate change is relevant to the Fed? How was it in our lane?
Well, this is really important. And thanks for the question. And, let’s start with a little bit on just the language. So climate change is about how the climate changing and what the remedies might be to mitigate that change. And when you talk about that, then you clearly have to have our elected officials who they have the allocated responsibilities, the spending responsibilities, think about those issues. And they’re up to those tasks.
What we are studying at the Federal Reserve is climate risk–the risk that severe weather events and the increasing number of them and the increasing severity of them, the risk that those pose to the economy, to the community, to the financial system and to the payment system. And when you think about it that way, then this is clearly something in our remit.
But the natural question is, but this could be very politicized Mary, so why would you all study this? Well, I want to just remind everyone that we study trade policy. And before the expansion ended with COVID, there was a lot of work being done about how the trade relations that were deteriorating between the U.S. and China were going to impact the economy because already impacts supply chains, where supplies are located, what the future looks like in terms of free trade, how this was all going to balance out in the global economy. And we would have been remiss had we not studied those things because they affect the economy, which affects our dual mandate goals and how we fast or quickly we can accomplish them.
And so I think if you understand it through that lens, it’s easier to say, “Oh, okay. The climate risk is like trade policy.” We don’t do the mitigation strategies. We’re not engaging in the discussions or debates about how to do it, how to change the climate. What we’re doing is saying, this is the world we have, and this is the world we need to understand and study, if we’re going to stay on our dual mandate goals, achieve for the American people, what we’ve been given by Congress to do. And importantly do that across all of our responsibilities, not just the economy, but also the payment system and the financial system. So it’s a narrow remit, but we would re- be remiss not to work in our remit.
Great. Thank you. All right. We’ve got some questions that are coming in, so please, if you’re watching in the audience, please submit your questions. We’ve got a few questions already, which I’m going to start going through…
So first question, Mary, this is from Colin at Accenture, Mary: How many of our trading partners are behind the U.S. in vaccinations. What impact will that have on our economy?
Well, that’s a terrific question. It’s definitely going to be a headwind because we’ve seen the impact that the vaccinations have had in the U.S. economy. We can go out more safely, and we’re not done yet. I want to just underline, we’re not done yet, you know, just about 50% of one shot. So we have a long way to go to full immunity or fully putting COVID behind us.
But our trading partners are far behind us, and that’s going to be a headwind to the U.S. economy. And when I said we’re not out of the woods yet, that’s one of the factors, we’re not out of the woods yet. We could find ourselves with a very slow global economy if this vaccination issue doesn’t get resolved. And our global trading partners start to get these kinds of improvements we’ve seen in the U.S., been fortunate enough to see, and that could be something that’s a drag on our growth.
So we’re in a global pandemic and until the globe gets a handle on this, then the U.S. economy is going to be pushing against that. And we will not grow as fast and COVID will not be completely behind us.
I completely agree with what you said. I would just add the epidemiologist also remind us that the longer the virus is spreading around the world, the more opportunity there are for mutations, which could then come right back around on us. And hopefully not, it could potentially even reduce the effectiveness of our vaccines. And so, I think you’re right.
You know, related to that, Mary, we’re seeing some evidence in the U.S. that vaccine hesitancy, we’re starting to bump up against it, right? The daily vaccination rates are actually coming down, which is quite concerning because as you said, we saw a lot of Americans who are unvaccinated. If we really do bump up into, let’s say 30, 35% of the population that’s unvaccinated and won’t get vaccinated, how does that affect our economic outlook?
Well, you know, I’m going to say that the epidemiologists are going to talk to us more carefully than I can about herd immunity and what it means. So I won’t pretend to be an epidemiologist. That’s a hubris I will not take up.
But I will say that we’ve seen that the vaccination is the safest path out of the virus. And so I would like us maybe to start just by reframing vaccine hesitancy, which I think people think of as vaccine resistance. Instead of people are uninformed. We haven’t done as much work in our communities to really inform people about some of their concerns. And so here in Oakland, California, where I live, I heard somebody eloquently put this, “No one came to my community and in language I can understand, explain to me why the science was clear and the vaccine was safe. But when I met somebody who did that for me, then I was among the first in line to get the vaccine.”
So I think it is essential to our economy. It will cause us to lag the growth we could have if we fail to get our people vaccinated. But it’s really up to all of us to not see those people as resistors in majority, but to see them as people who maybe need a hand up to completely understand why this can be helpful to them, their families, and ultimately to our economy.
That’s great. That’s great. And you see, it’s, it’s very interesting, the other piece of this, but I’m sure you’re watching is how universities around the country are looking at this differently. I mean, some universities, I believe the University of California system has said that they’re going to have a vaccine mandate on all their students and staff beginning in the fall. The latest I heard from University of Minnesota was that Minnesota was not yet doing that. But, you know, that may become a bigger, that may become a bigger event around the country as people say, “Look, we want to reopen, we know in-person is important. And so you’ve just got to do it.”
Yeah. I agree. It’s something to watch.
So let’s turn, another question from Nate at Cargill. Mary, given your background in economic origins, what role do you feel the Fed has in addressing some of the income inequality issues in America, which seems to be only increasing since the financial crisis of 2009?
Sure. So let me start by saying that, again, we’re just one agency, one institution in the broader economy, and we will not be able to carry all the water to resolve the income inequality issues that are in our country that absolutely need addressing, but we do have an important role to play. So while we can’t do everything, it doesn’t mean we can’t do anything.
And the only thing we can do, I would turn back to the previous expansion we just had. So before COVID occurred, we were in, going in the completed in the 11th year of expansion, the longest in our history. And what we saw in that long expansion is that the gaps between Blacks and Whites, Hispanics and Whites, men and women, all the gaps, you could point to lower education, less education, more education, where you live in the country, rural or urban, they were starting to narrow. That’s a great thing, but we had a sustained economy which allowed people to come in.
Those at the lowest end of the wage distribution had the fastest wage growth by the end of the expansion. These are all real positives that I think are part of the Fed’s role. Our role is let’s keep the economy in a sustained expansion. Let’s not pull the punch bowl too far away, too quickly to sort of ward off some fearful inflation scare. Let’s actually stay there until we see what we want to see, which is full employment that causes wages to go to be bid up.
We see the tight labor market show through into prices. And we know that we’re there, that’s something that we can continue to commit to. And if we do that, then we will have done we’ve set the foundation. And then of course the rest of it to be done with employers, if you’re working for a private sector company, employers taking a second look at people that they might think have not had a long enough work history, or maybe had some episodic work departures, you know, just think of those people as what are their skillsets? Why do what Neel did, why do we these rules where you can’t be a certain thing, unless you have this degree? Let’s look at skills and abilities.
I think those are the things that will help us chip away at this. And investing in our people. We could invest in human capital, and think of that as perhaps our most valuable resource. And that would be something that would make us more globally competitive and really chip away at these gaps. So the Fed has an important role to play, but we’re not going to be everything in this story. It’s going to take all of us in all of our institutions and in the private sector to really solve these gaps.
So, related to that, it’s a question that I often receive, and I’m sure you’ve gotten before is okay, so the Fed is helping people to find jobs and helping wages to grow, but isn’t the Fed pushing up asset prices through quantitative easing, and then low-income folks don’t own stocks. So you’re really just expanding wealth inequality through your monetary policy. How do you respond to that?
Yeah. And so actually I gave a speech on this very topic because I also think, and Neel and I share this, I believe we should just talk about things openly. And it is true that when we undertake our policies, they promote a strong economy, and a strong economy boosts employment, boosts wages, boosts incomes, and asset valuations, houses, stock market, et cetera. And if you own an asset, that’s great. But if you don’t own an asset and assets are very unequally distributed in our economy, then wealth inequality rises while all these other inequalities shrink.
And you see this time and again, that income inequality, wage inequality, consumption inequality, employment inequality, they shrink, wealth inequality rises at the later stages of an expansion. So the remedy for that isn’t in my mind, and I’ve done a lot of thinking and work on this, it is not to sacrifice wage, wages, income, and employment in order to just save that wealth inequality number from rising, but rather invest in ways where people can purchase an asset out, asset purchases more than they have.
And so the best tool that the Federal Reserve has, but we will not, again, not be the whole story is the Community Reinvestment Act. I don’t know if you heard it, but Jay Paul yesterday said in his speech, thinking about CRA being extended to non-bank financials so that we actually widen the importance of these types of investments in communities and investments in people that allow them to get asset allocation and assets so that they can partake in this, right? Whether it’s buying a home or buying a stock or being in a retirement fund, that goes up when, when asset valuations rise, that’s the remedy for equalizing wealth inequality.
But I’m not prepared as a policymaker to sacrifice better job growth and better income and wage growth, just to keep that wealth inequality number in check. Because I think that in the end, if you don’t have money, you can’t buy a stock. So I’m all about trying to get money in people’s pockets and mobility and their future.
And I agree with you wholeheartedly. And I want to just share with you one other comment that I make, which is the most valuable asset most people have because they don’t own stocks, they don’t own a house, it’s actually their job.
How valuable is the job? So a $30,000 income job, how many assets do you need to generate $30,000 of income? At a 10% interest rate, if you could have, find a 10% yield, it’s a $300,000 asset, at a 1% yield, it’s a $3 million asset. So by boosting wages, we are actually making the most valuable asset most people have that much more valuable. And most of the wealth inequality analysis ignores the value of somebody’s job, which is actually really important.
I love that point Neel. And, and I guess I’m going to do a call-out for why diversity at the FOMC is so important. So you have an investment banking and investment management background, and that’s terrific, right? Because it’s a hole in the way that many economists do the analysis, not to include the job in the calculation of wealth. So it’s a highlight of why diversity matters, but diversity of thought.
Yeah, I agree. So we’ve got a question here from Scott, at Walrus Partners, it appears that many people will not return to the office at all, as the economy recovers. Does the Fed, or do you have a view on what that means for long-term occupancy rates and whether many cities now are several years overbuilt regarding office space leading to a significant slowdown in commercial construction?
Well, it’s a great question. So I think we can get there without assuming that most people won’t come back. I actually think people will come back, and just reflecting on our own teams here when we surveyed them in the depth of the pandemic, they didn’t want to come back. Now, of course, more of them want to come back. And so we’re going to end up with people when life resumed in a normal way, having probably the desire to stay at home a little bit, work at the office a little bit.
So I don’t think it’s completely, no one’s coming back to commercial space. And yet commercial space is going to be in lot lower part of a lot smaller part of the overall portfolio of real estate in cities than it has been before. And I think that those in San Francisco, let me just look through that lens, that’s a good thing.
So if you’re a commercial builder, you just have to switch to being a residential builder. But we have been under-housed and over-commercial populated for a long time in most major cities and house prices have risen beyond what most people can afford. There’s been people fleeing further and further from the suburb, to the suburbs and further and further out. Commute times have risen. So this can be part of a great rebalancing and recognizing that actually communities thrive when we build residential and commercial sort of together. And you have communities that have a variety of different components to the building.
So I think it will take a lot of innovation on the commercial builders and commercial real estate holders. And you’re already seeing it here in San Francisco buildings being repurposed for housing and other things. And that’s certainly going to be part of the future. And that’s real estate individuals, this is what I love about them, they have short memories and they, they move towards whatever’s going next. And I and I think that’s a good thing. You’re going to have to shake off the way it was and move forward to the way it’s likely to be. And I think it’s going to be a more mixed-use portfolio than has been in the past.
Great, well, let’s shift gears. A question that I get frequently, and I’m sure you do is about Bitcoin, cryptocurrency, digital currency. The big news in the past few weeks is that China announced that they’re going to issue a state-government-backed digital currency. You want to just give any high-level thoughts you have on the sector as a whole, if you have high level thoughts on the sector?
Sure. So one thing that I do for myself, and I think it’s useful just to keep doing for everyone, is to remember that Bitcoin and a digital currency issued by the central bank are totally different things. So Bitcoin is an asset. And many of these things that are called cryptocurrencies are simply assets. And an asset is: the property of it goes up and down based on demand and supply. If it’s a fixed supply and demand goes up, its value rises, but it fluctuates. That’s completely not a currency.
A currency is something that elastically moves back and forth with the economy so that its value isn’t effected by the rate of growth in the economy. So then you have to ask, okay, would a digital currency issued by China be preferred to the safe haven asset of the U.S. dollar issued by the Federal Reserve? And my assessment is no, not right now, because when you’re buying a safe-haven asset, or a safe-haven currency, you’re really looking for something that you believe in all the rights of that; it doesn’t fluctuate–that the rule of law protects it from being changed overnight, or you not being allowed access to it.
And those are things that historically the U.S. has given, and we have not seen China offer those same protections. So I really think this comes down to the same thing it always comes down to, which is people are buying or trading in a currency, not just because of its technological convenience, but because of what it’s backed by and the things that they want to do, which is protect themselves, insure themselves, have a safe haven. So I don’t think that’s going away anytime soon.
The final thing I’ll say on all of this is, but that’s not to say that we shouldn’t, and aren’t looking at it at the Federal Reserve. At the Federal Reserve, we’re actively studying these things, actively looking at the convenience factor of a digital currency and the other side of this.
The other side of this, which is privacy, fraud, other things that happen. So there’s gotta be two sides: the cost and benefits, in finding a currency, a digital one that really works and really can achieve the things that the U.S. dollar currently achieves. I think it’s certainly in our future.
And, you know, when I think about it, and this is such a new area, right? So we’re studying it, there’s a lot to learn, and let’s see what happens. We can learn from what people around the world are doing.
But I always ask myself what’s in it for consumers, and what’s in it for the Central Bank or the government? I’ll give you an example. So digital dollars exist today. I can send you five dollars via PayPal or Zelle right now. And so that’s a digital dollar. That convenience already exists.
So if there was a Central Bank digital currency, what advantage do you have, would you and I have as customers? Well, I see it from China’s perspective; they can track every dollar that we move, and the government wants to do that. They could tax us immediately, instantly in our accounts. I see why the government would wanna be able to do that. And if they wanted to, they could impose negative interest rates on our accounts, if we had this Central Bank digital currency. So I see the appeal from the government’s perspective, but as a consumer, that all sounds lousy to me.
I don’t want the government taxing my account or imposing negative interest rates or tracking every dollar I spend. So to me, whatever comes from this, it needs to work for both the government, and it needs to work for the consumer. They both need to be better off. And as yet, I have not heard anybody make the case of why it would work for both. Some enthusiasts will say to me, “No, no, no, you’re missing the point. We want an electronic currency that’s untraceable.”
Like cash. I don’t see why you’d want that. Why in the world would the Central Bank support that or the federal government support that? And so it needs to work for both, and I have yet to see the case made that both sides are better off.
Yep, and I think just to do something that I think is afoot for sure and will help is this FedNow project we’re taking up, which is our real-time gross settlements. One, because one of the things people really want is if I use Zelle or any of these other ones to send you money, there’s a lag. But if you have instantaneous clearing that the providers have to share, then I send you something and I get it, and you get it immediately, and there’s no lag in any of this.
And that’s already the convenience factor that really helps the consumer, and it solves some of the things that people might want with this digital currency. So I completely agree, this is a two-sided issue, and we’re really going to have to think through all the things carefully. And the technology’s evolving as well.
So more to come on this for sure. It’s a good discussion, but not one I think will be resolved next year or tomorrow.
So we have another question here, Mary. Michael from Robins Kaplan. “The pandemic seems to have further exacerbated gender gaps in the labor market, especially for working mothers. What tools does the Fed have to help address the lack of affordable childcare and other factors keeping women out of the workforce?”
So our tools are limited in terms of addressing those things. We have no policy levers that can address those things. But one of the things that we do–and all Federal Reserve banks and the Board of Governors participate in this–we have research that highlights the benefits of one thing over another.
And we can talk about, you know, if this many people are not able to work for whatever their barriers are, they don’t feel safe to work because of health issues, they can’t get there for transportation issues, they can’t find affordable childcare so they have a barrier, then that bridles our economy by X percent. And those are ways that we can give voice to these issues, and give facts to these issues essentially, and then it’s up to our fiscal policymakers to decide whether and how to remedy those situations.
This topic of affordable childcare is interesting, because when I got my job five-plus years ago and I traveled around our region, everywhere I went affordable childcare was one of the top issues that people raised up. And yet, at the same time, if you look at wages for childcare workers, they’re generally very, very low. And I was confused by that, because if there was really a shortage, I would think wages would be high, so what’s going on?
So I spent a bunch of time with our researchers to try to understand this market, and what I concluded, I’m going to say this, it’s going to sound provocative, is there’s not enough income inequality to support this market, and here’s what I mean by that. When you meet people who are expats, let’s say they go to the Philippines or they go to India, one of the things they all say is, “Oh my gosh, it’s so great because I can afford a cook and a driver and a housekeeper and a nanny. It’s wonderful.”
Well, how is that possible? Because there’s massive income inequality between those expats and then the poor in the Philippines and the poor in India. And here in America, what ends up happening is there’s not that huge a gap between the lower income workers and the middle class. And so in, you know, it’s, I’ll give you an example. If I have to hire a lawyer to write a will, I need four hours of that lawyer’s time, so that lawyer can actually make more money than me. That’s fine, I can afford that.
But in childcare, every hour that I work I need someone taking care of my children, so it’s a slice of my income has to go to that person. And so unless there’s a big gap between, let’s say the middle class family and the childcare workers, it doesn’t make sense, and you might as well just stay home and take care of your child yourself. And so that’s finally how I got to figure out why are wages so low for childcare workers, and yet so many families say it’s still unaffordable.
And then what’s the remedy? The only remedy can be through tax policy to try to give childcare workers a livable wage, but also make it affordable for families. Because you’re just seeing the private market is grinding because there’s not that big a gap in income. So it took me a long time to figure that out, but I think it holds together.
Well, I think, to pull on a thread there, so if you go to countries like Canada or most European nations, you’ll find that there is a publicly-provided childcare. And the reason they have publicly-provided childcare, or a public program that supports childcare, is it’s similar to what you just said is the remedy, you tax and support. And you do that because you recognize that having people work in the economy is valuable, but having their children also cared for is important.
And I think we might be at one of those, again, reckoning moments with the pandemic, because the national childcare we have in the United States is the school system, and as soon as the school system sent every kid home, then we realized we had nothing else. And so maybe this will grow something out of that and we’ll have something more like a Canadian system, or not, that’s for the fiscal agents to decide. But it will- it will definitely be, it’ll take something like you just said, it’ll take a public discussion of this, and- and most likely some sort of public provision of this, at least in spirit, to get this to get this done. Because the private sector hasn’t been able to solve it, and I don’t see them solving it quickly.
Yeah. So we have another question, we just have a few minutes left, we have another question, Colin from Accenture. “There’s been a lot of discussion about how rising executive pay has created greater wealth disparity. If- If executive pay were addressed by regulators, how might that impact corporate enterprise value and global competitiveness?”
So I think there’s a long study going back 20 years about… So I want to move it from executive pay to kind of a winner-take-all mentality, that you have a corporate entity and it has X value, and then you attribute most of that value to the executive, and you pay that person out. And that’s the winner-take-all mentality, and I don’t think there’s a lot of evidence that suggests that that winner-take-all mentality actually is great for the longevity of the firm. It’s really good for shareholder value at a point in time, but maybe not so good at the longevity of the firm.
And the reason is because if you’re in a winner-take-all, and you’re really trying to, you’re trying to get something in a short term period, you’re trying to show value today and you’re not thinking so much about value 10 years from now because you don’t even know if you’ll be there, you might move on and do something else. So I think the way to think about this is to go back and ask corporations really, and this will be part with shareholders, “What do we want? Do we want something that leaves a legacy and that we’re building for the future, or do we want something that we can just consume today, get, and then make rich quick and move on?”
And I think changing the way we think of corporations will change how we pay, as opposed to changing how we pay will change corporations. And you could go either way, but I, after a long period of thinking about this, much like Neel did on the childcare issue, I’ve come to let’s change the way we think about corporate entities and what they’re delivering in our society, and pay will change because of that, pay structures will change because of that. And if we do that, then we’ll find ourselves perhaps with fewer people in the top one percent.
But remember, and I’ll leave you with this, that much of the inequality that really is hard is the inequality from 90 to zero. The top one percent, the top 10 percent, yeah, they’re- they’re high and that’s something to address, but it’s not like it’s zero between 90 and the lowest percentile. There’s a lot of inequality there as well that is more addressed with education and investment in our people.
I would say one way that I’d get at that point is, you know, there’s a slogan that some people use that I’ve heard on Twitter, that every billionaire is a policy failure. And I look at how lucky we are to have Facebook and Google and Microsoft. There were all these great companies (Apple), that were created in America. Most countries would love to have one of those, and yet we have dozens and dozens of those. And so, you know, we certainly need to keep the innovation engine of America going, and then, as you say, use other policy tools to try to make sure that people can fully participate in the economy.
So we just have a couple minutes left, Mary, I wanna turn it to something maybe a little more lighthearted, just to share a little bit more about you. So you and Shelly, you’re vaccinated now: what are you looking forward to getting back to doing in your personal life that you weren’t able to do because of COVID?
Sure. So we are going on Friday for the first trip that we’ve had since the pandemic, and we’re going to Yosemite, where I love just being outside. And because we’re vaccinated and the CDC has allowed it, we, when we’re outside and not around people, we can take our masks off, and we can just partake in nature. And I love mountain biking, I love hiking, I love golfing, I love traveling, and I can get back to those things. And Shelly and I are just super looking forward to it.
But I’ll tell you the thing we look most forward to is: we went to our first socially non-distant dinner in two of our friends’ houses on Saturday. They’re vaccinated, we’re vaccinated, and I got to hug them.
And just hugging people, being close and connected to people who weren’t in my narrow pod of family, that is an amazing thing. So I’ll be traveling, and if you see me, I’ll be hugging.
Yeah, we’re going to be getting on a plane this weekend, too, for the first time since the pandemic. We’re taking our-
… our kids to North Carolina to see my sister and to see my mom, which will really be great.
Oh fantastic. It’s fun, isn’t it? It’s exciting.
Absolutely, very exciting. So just a couple of other quick questions, just in the moment we have left. Favorite author, maybe a book you’ve read recently? And favorite music.
Oh my gosh. So I love to read, but I don’t really ever latch onto a favorite. But I’ll just share that I love to read biographies, and the most transformational biographies in life were biographies of Eleanor Roosevelt. So that, I’ll leave you with. So it’s not really an author, it’s just that my favorite books are biographies, and she was the first person I ever read a biography of, so I fell in love with it, and I’ve read every one since. So that, uh-
That’s that. And music, I like all kinds of music, but Shelly and I have a nightly sing-off where we, while we’re doing the dishes and cleaning up after dinner, we put on some music and we sing. So the only requirement we have in our house is we have to be able to sing badly to it.
Oh, that’s great. That’s great. So I’m not going to ask you, but if you want to just demo it right now, we’d be happy to take it, but I’m not going to put you on the spot.
Okay. Well, Mary, this was a wonderful discussion. On behalf of the Economic Club of Minnesota, I just wanna thank you. You’re a terrific speaker, and you have a lot of great ideas, and so I just wanna thank you for taking the time to share with us all of your ideas.
Complete pleasure, Neel, thanks so much for having me, and to the club.
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