Mary C. Daly’s Keynote Closing Remarks at Princeton University Griswold Center for Economic Policy Studies Symposium


Saturday, Mar 04, 2023



Princeton, New Jersey


InflationMonetary Policy

Media Q&A Transcript with Federal Reserve Bank of San Francisco President Mary C. Daly

Catarina Saraiva, Bloomberg:

Hi President Daly, thanks so much for taking our questions. I just wanted to kind of get your thinking around the upcoming FOMC meeting, just how you’re thinking about rate increases at that. There’s been some talk of potentially ramping back up to 50. Just wanted to get your take on that, and then how many more increases you think are necessary.

Mary C. Daly:

Sure. Thank you. So in terms of the next meeting, it’s really too early to discuss the specifics of a policy adjustment in the next meeting because we have more data before the next meeting arrives. So right now we’ve had a month of data, one release in the labor market, a release on inflation, that were stronger than we expected and I think stronger than most expected. And so that’s important to recognize, but it is not an indicator, necessarily, that the trend has changed. And so I’m looking for additional information before making any decisions about the upcoming meeting.

The thing that I will say though, in terms of the broader question, and the one I really think is perhaps most important is not the pace of tightening, but the level at which we raise to, is I would return us to the December SEP, which is now a couple months old, but the December SEP had the range for the median, think about the median and the one above it, because I think they were very close, the distribution of dots was fairly uniform, is that it’s between 5-5.5. And then you get these two pieces of data in that say things are a little hotter than we thought and I’m looking for additional information about that, if that’s really still going, or if that was a one-month or a one data release blip. Because the data is going to be bumpy, for sure, as we do this tightening and adjustment.

And for me though, that puts me in a place where I’ve already leaned towards more, and I just want to continue to look at the data. But my perspective is we have to get confidence, full confidence that we’re on a disinflationary trend and that we’re heading towards 2% price stability over a reasonable time. And we will continue to tighten. I will continue to support tightening and holding that rate longer once we’ve arrived at the place where we think is a good settling rate. Holding that for longer until the job is fully done. I think if anything, the data have come in a little hotter, which would mean the policy is a little more restrictive and for longer.

Ann Saphir, Reuters:

Hi, thanks for taking the question. So I wanted to ask, longer than what? And how long you’ll hold the rates for. Longer than all of this year, which everyone has already said, so does that mean until halfway into next year? Does that mean all the way to the end of next year? What timeframe are you thinking? And if you could give a little bit of color on your personal dot, it sounds like you are thinking about increasing it. And by how much? How high do we need to go? Thanks.

Mary C. Daly:

So let me start with the timeframe. I mentioned this in the speech and I’ve said this before in scrums, I think prudent policy demands that we recognize the uncertainty that’s before us. And recognizing the uncertainty before us means not putting down prescriptions for a world that we don’t know how it will evolve. So I really am in this meeting by meeting positioning, where I’m thinking about, okay, what does the world demand today? What does the world demand as we go? And I think that’s a plus. I actually think that prescriptions are imprudent at this point. Because they tell you that we’re going to head someplace, and we have such wide confidence bands around that, that I wouldn’t feel comfortable noting that.

What I would say is that I, and I have said, and I’ll just say it again for emphasis here, is that the data that we’ve got so far this time, from January, have come in hot, stronger than I expected. And if that is repeated in the next data releases, then I will take two things away from that. So let’s take inflation and the labor market. If the inflation numbers come in again hot, then it would look like the disinflationary trend that we thought we were on since June has in fact not, we’re not on that trend in the same way we thought we were. So I would have less confidence that we were consistently on that trend, and then I would want to adjust policy for higher and longer. How much depends on what those data show and whether or not they even confirm that we have interrupted this disinflationary trend or if we are simply in the middle of bumpy data, which is a normal process when the economy’s transitioning.

And in terms of my dot, I never share information. I don’t even share information after the dot, so I can’t share any information before the dot. And I don’t do that just to be obfuscating. The FOMC meeting is a meaningful thing. We go and we discuss with each other, we bring the data, we bring the conversations we’re having. One of the benefits, as you know, of the regional Feds is we’re out talking to people all the time. We’re bringing that information together and we’re thinking about these things. Not only for the meeting we’re at, but for the future meetings. And I don’t want to front run any of those discussions because I learn from them.

Liz Kiesche, Seeking Alpha:

Hello. Hi. Now, the Fed uses, basically, the interest rate to try and reduce the demand. Are there other scenarios that are possible or likely for getting that demand to enough balance without a recession?

Mary C. Daly:

Yes. I would say the modal outlook in the summary of economic projections we put out in December is for that to happen. My modal outlook is not for a recession. My modal outlook is for the labor market to cool. Right now, it’s adding jobs. Jobs are being added at a number far higher than what is sustainable in the longer run. We probably need 90,000 jobs, 90,000 to 100,000 jobs just to keep things steady in the labor market, the unemployment rate steady. We’re adding well over that 100,000. I mean, even adjusting for the seasonal factors and other things, you’re still adding far more jobs. So there’s a place to get job growth down. The unemployment rate will, in my view, will go up a little as the SEP shows.

I think the of median the SEP in December was actually a very good summary of how I see the economy unfolding. Below trend growth for GDP, the unemployment rate rising over the course of this year, inflation coming down, but still being above 3, so still more work to do to get it down to 2%. And from my vantage point, that would be a smooth transition to a sustainable economy, and the one that we are really working hard to deliver.

Nick Timiraos, Wall Street Journal:

Thank you, and thanks, Mary. I know you said it’s too early to discuss the specifics of the next policy adjustment because there is more data that will arrive before that meeting. But I was wondering if you could talk a little bit about when you do scenario analysis, what kind of scenarios, if any, in your mind would justify reaccelerating, doing 50 in March as opposed to what seems like a pretty well expected 25 at the next meeting?

Mary C. Daly:

So I appreciate the scenario analysis, and I totally do scenario analysis. But actually the thing that’s the most salient for the pace, for me, is whether we know with certainty where we need to go versus we’re not certain about where we need to go. And so last year, that’s why I was very comfortable, incredibly supportive of the 75 basis point hikes we were making, and even the 50 basis point one we made, because we knew where we needed to go. We needed to go to a restrictive stance of policy, which was not where we had started. And we needed to do so as rapidly as the markets could digest, and people and households and businesses could absorb. So we did that. But now we’re in the second phase of tightening, as I’ve described it. I mean, people use phases, these other things, but I say phases. So phase one is get it up to restrictive. Phase two is find the place where you’re going to let it stay for some time.

And that is, in my mind, the most challenging part of the program here of tightening, because we have to watch the incoming data, we get releases like we got for the latest ones and they’re showing something different than was happening before. We’re reversing some of the slowing in employment growth and inflation we had been watching. And so that just means we have to look at more data. So if we get such a confirmation that we absolutely have to be very much higher than we had forecast, and so we’re going to, and we know we have to get there, or we find something that changes our mind about just how restrictive we really are, well then of course we could move more quickly. But the quick actions we were taking, those aggressive rate increases, to me, were really about having certainty that we needed to get to a destination. And now I have less certainty about what that ultimate destination is in terms of the settling rate.

And then after that it’ll be phase three, which is how long do we hold it? And there it’s a little less challenging even than phase two because you have the dial. And you can dial back if you need to, you can dial up if you need to. But this piece where you say where are we balancing lags, balancing the data, balancing the bumpiness, where are we and where should we really hold? At what rate should we start holding?

So that’s my scenario, is the certainty part of it. So it would be enough of a preponderance of evidence that the economy is on a track that’s going to require significantly more tightening that would lead me to say that we should change the pace. So most of my energy right now is focused on thinking about the level at which we’ll hold.

Shu Takaoka, Jiji Press:

Hi, and thank you very much for taking my question. President Daly, you have mentioned in the speech, the high inflationary pressure in international trade that is less global competition. And in this case, what is your analysis on China’s reopening? Will it become a driver of demand at the global level and add inflationary pressure further? What is your analysis on that point?

Mary C. Daly:

Sure. It’s a great question. So it could go one of three ways. Either the opening increases demand but doesn’t increase supply, and that’s inflationary. It could be neutral. Or it could, supply, it opens and supply surges back up and demand isn’t as strong in China and so they offset. And so right now I’m not seeing much of an effect on inflation, actually, coming from the reopening. Supply chains were already getting better. They’re a little better now. They might get a lot better going forward as COVID, as caseloads in China go down and other things. But we haven’t seen a big inflationary surge coming to the United States from China reopening.

And I think a lot of that’s because they’re, just look at other countries that have opened, a lot of the reopening means you’re consuming domestically provided services rather than foreign provided goods. And so the big piece coming from the global economy with China was, are they going to really repair fully their supply chains? And will the rest of Asia follow suit, and we’ll really have those supply chain networks come back to full capacity. And I think we’re on that path, but there’s probably more to come in the positive direction there.

Greg Robb, MarketWatch:

Hi. Thanks. I want to circle back to the labor market. You said some interesting things in your speech about it, but then you said this on the call, that we’re adding more jobs than the, 90,000 jobs was all we need to hold the unemployment rate steady and we’re adding much more. But are we, if we’re in this thing where we have so much less supply than we need for jobs, does that add up? Where does that fit into that? I mean … I guess some economists, yeah, some economists just think that the Fed shouldn’t be really focusing on the labor market because it’s kind of going through this transition, and if you really want to slow it down, then you’re going to really slow the economy down. That’s my question, thanks.

Mary C. Daly:

Well, that’s … So yeah, so the labor market, when you think about it, would I, this is the sequence, I don’t think that anything you said disagrees with how I think about it. We raise the interest rate, it slows the economy. When the economy slows, firms hire fewer workers. When they hire fewer workers, employment growth comes down to something that is consistent with labor force growth, which is between ninety and a hundred thousand, depending on what your assumptions are. And you get more sustainability in that equation. So that takes some pressure off wage growth, and you just have basic agreement between the supply of workers and the demand for workers. So that’s what’s happening, and that’s what should happen, that’s what I mentioned.

So when you look at the job growth reaccelerating—and we have to wait and see if there were seasonals that really affected that, we think there were, and weather. … One of our team, Dan Wilson, does this weather calculation. He shows that warm weather in the East Coast, which is not usually the case, really let more workers work in construction and other things. So these things all matter.

But if this trend of reaccelerating growth in the labor market continues, well then that would tell you that the transmission of policy through the economy has not been sufficient. It’s either the transmission or the rate, and I’m guessing it’s the rate. I’m estimating it as the rate of increases, the interest rate rather, needs to be higher. And that’s why I’m supportive of additional increases to bring the economy back in balance.

But that’s how it works. It’s not that we’re targeting, oh, it has to get down to this. These are just benchmarks to tell us how hot or not the economy is, how loose or tight it is. And right now all indicators, it doesn’t matter which indicator you look at, tells you that the labor market is strong.

Greg Robb, MarketWatch:

Thank you for that, and just a quick follow up. Is it possible to bring down inflation without a decline in the aggregate number of people employed? Like, could some industries be growing even though the economy is cooling, kind of thing?

Mary C. Daly:

Well, there are scenarios. So if you look at the whole spectrum of potential outcomes, there’s a scenario, and many people have talked about this scenario, where you cool the economy and what happens is firms just stop posting vacancies and take the existing vacancies they have posted away. And not a single negative thing happens in the labor market. That is absolutely possible, but it’s not my modal outlook. I think that a combination, another possibility is that you have to do all of this. Another possibility that another group has put out is that it all is going to happen on layoffs and cuts.

But my modal outlook is that you can reduce the demand growth for the general economy, slow hiring, bring the supply and demand back in balance, it will have a modest increase in unemployment consistent with what we have in the SEP median, I think that’s a reasonable benchmark, and bring inflation down and restore the sustainability of our economy. So that’s my modal outlook. But those risks, those other scenarios, definitely are within a possibility set, but they’re not in my estimate very likely.

Courtenay Brown, Axios:

Hi, President Daly. Thank you so much for taking our questions. So we’ve spent a lot of time this afternoon talking about the actual data that is informing your view of the economy. I’m wondering if you can share some anecdotes, things that you’re hearing from your district, conversations that you’ve had with folks in your district that are informing or helping inform your view of the economy and maybe makes you believe that the economy, the labor market, things are still a little bit out of balance.

Mary C. Daly:

Sure. So I’ll start with the labor market then. So what we’re hearing is that it is easier to find workers, but it’s still hard to find workers. So imagine it felt like almost impossible to find workers. It is getting easier. There are more applicants for every position, and there’s more interest when firms post a vacancy. But they’re still finding that it’s hard, and it is challenging. And so what that looks like for the CEOs and hiring managers I talk to is that it still takes time before you can actually fill the job, because you have to go through multiple negotiations or try many times to post your opening and get the right person because people still have a lot of job opportunities.

The other thing I’m hearing is that there’s a lot of competition for any particular worker. So they’re taking time to find, to look through their full alternatives. So that just delays the process. But I do hear that it is getting easier. It’s just not easy yet.

I’m also hearing that their wage increases that they’re offering are lower than they were in the past. And the demands that their workers are making for higher wages are smaller than they were last year. So they’re still higher than they have been historically, but they’re falling relative to the rate of increases that employees are asking for, are falling relative to last year. So that’s a positive direction on the wage growth, a positive direction on the improvements in the labor market supply and demand. But the level’s off. So this is why it’s so hard at these transition times in an economy. The direction is positive, but the level remains too high. And so we have to work on both. Watch the direction and look at the level simultaneously. So that’s where I see that.

On inflation, outside of the labor market, I’m hearing some very encouraging news that people, firms are able to get forward contracts. So remember back in the, when inflation was really rising, firms couldn’t even get forward contracts without putting in notes about price provisions, that this is going to go up, you’re going to get a, you know, have to take the, time and materials was the constant thing. So now they’re getting forward contracts, they’re able to lock in pricing. And that tells me that producers feel comfortable providing intermediate inputs with a forward contract to other producers. And that’s a good sign for inflation. It says that inflation expectations are coming back down, as realized inflation has come down. So I see that as a positive. I’m hearing a lot of that.

And the other thing I’m hearing, and I think this is, it’s not quite to your question, but I will offer it all the same because it speaks to why I’m resolute to really bring inflation down. I’m hearing increasingly that inflation has been very challenging for small businesses in particular, even medium-sized businesses are starting to feel the strain of just constant inflation that squeezes margins, makes … So they’re already having challenges getting workers, then their margins are squeezed because they can only raise their costs so much before a larger firm can do something different, and then they are just feeling squeezed. So in these communities, there feels like an urgency to bring inflation down so that they can, they’ve been hanging on, but they feel like they’re getting closer and closer to a time when hanging on won’t be so easy.

Courtenay Brown, Axios:

Can I ask you just a very quick follow up, because it seems like some of the things you mentioned, aside from your last point, it appears that things sound like they’re progressing in a way that the Fed would very much appreciate, but that seems to contradict the very, very hot data that we got for the month of January. So how do you square those things in your mind? Anecdotes versus data.

Mary C. Daly:

Yeah. No, that’s exactly right. So the anecdotes, as you said, would suggest that there’s more slowing than the recent read on the data would suggest. And so that’s why I’m uncertain about the recent read on the data, whether it’s a one-month blip in a bumpy data period, or if it’s more suggestive of something that has been happening that we haven’t been able to pick up in the other contact information that we use. But in the end, we’ll get additional data releases going forward and then we can respond to those data releases. And I’m prepared, if the economy is really on a, if the momentum in the economy is reaccelerating, and inflation is moving off of its deflationary trend, or disinflationary trend rather, and into a period of accelerating inflation, then I’m prepared to do more in terms of the level of the interest rates that will ultimately be necessary to really bring us to price stability. And I think I said this in the speech. More is likely to be needed and for a longer period of time.

James Politi, Financial Times:

Hi. Thanks for this. I was interested in the section of your speech that dealt with the shift in your assessment of kind of global disinflationary forces that we had before the pandemic compared to the situation now. Do you think that it’s becoming more broadly accepted that a combination of kind of de-globalization, the energy transition, the problems with the labor shortages, are going to ultimately have really changed the paradigm in that space, not just in your thinking, but across the Fed? And ultimately, if that turns out to be true, isn’t the natural conclusion that the 2% target will have to be raised?

Mary C. Daly:

No, I would have the opposite conclusion if those forces … So let me just unpack that into two questions. Okay, so let’s just start with the first question. I don’t think, you know, my speech was not intended to say that we have answers to these. In fact, I decidedly don’t have answers. It’s to say that these are important things for us to think about. And so I think we’re just starting to think about them as academic economists, as Fed officials. Because really the first priority last year was getting policy in a position where we could really fight the inflation surge and bring it back down. But now as the pandemic is mostly receding, and even the shocks on supply chains are mostly receding, then it’s really an important time to start asking, what will we be left with? Will the factors that were affecting us prior to the pandemic, will they still dominate? Or will these newer factors that you just mentioned, and I mentioned in the speech, will they be the forces that really shape the inflation outlook?

Now, to the second point of this question, if the disinflationary forces that were there prior to the pandemic fall away, and they’re dominated now by these new forces that push inflation up, and so our job is to pull inflation down to our target rather than try to get it up to target, well then the case for raising the inflation target falls away. Because the inflation target increase that was being discussed prior to the pandemic was everything to do with the zero lower bound being constraining, and you needed to get more policy space in order to offset negative shocks to the economy. But if we already have policy space because inflation’s trending higher, then we don’t have to think about raising the inflation target.

And that’s a good thing for people who depend on having low inflation, which are a lot of people. Think of low- and moderate-income people, older people who are on fixed incomes. They’re not excited about us raising the inflation target because that just means things get more and more, or less and less affordable on a month-to-month basis. So I think that the 2% target is, that’s where our credibility is. That’s what we told people we’re going to do. We have to bring inflation down to 2%. That assures our credibility. It is what Americans expect us to do. And I am not at all in a mode to entertain that we don’t do it simply because it’s challenging. But I don’t think the case is there either for it.