Mary C. Daly’s Fireside Chat with the National Association for Business Economics

Date

Monday, May 22, 2023

Time

8:00 am PDT

Location

Virtual, with live audience in Paris, France

President Daly’s fireside chat with the National Association for Business Economics.

Transcript

Ellen Zentner:

So quick introduction here. Mary Daly became the president of the Federal Reserve Bank of San Francisco in 2018. Prior to becoming its president she served as the executive vice president and director of research and has been at the bank since 1996. So she’s joining us virtually from California. It’s morning there now, and she and I are going to have a conversation on a range of topics related to monetary policy before turning to your questions. And then just a reminder again, when you ask your question, please introduce yourself and give your affiliation first as I failed to do earlier, but I did do this time. Thank you. So we’re going to get started. Okay. So Mary, let’s start with the million dollar question. So how many more rate hikes do you see for the year? Sorry, I had to go there and specifically, and also do you think that the rate hike is on the table for June?

Mary Daly:

Okay, so I know it’s the million dollar question. I’m going to do my best to give a million dollar answer. Might not be the answer you want, but here’s the answer I have, which is I really think at this point in our tightening cycle, it is prudent to resist the temptation to say what we’re going to do for the rest of the year. Optimal policy, appropriate policy for the American people, for the American economy is about extreme data dependence and policy optionality. So that says it’s a distraction really to say what we’re going to do necessarily in June, which is still three weeks away, or what we’re going to do for the rest of the year. What we really have to talk about, the true million dollar question in my mind is what will we be looking at and what factors will influence that decision as we navigate just the very last step of the tightening cycle and in our efforts to bring inflation back down to 2%?

So that really is the important question and I know it’s tempting always to get in there and say, well, what about this meeting and what about the rest of the year? But in this case, at this point in the tightening cycle, it is really a distraction to have that conversation and a much more realistic conversation to have is what will we be looking at and how will we go about making the decision.

Ellen Zentner:

So in terms of that, what will you be looking at? What would you be evaluating in the data, be it metrics on inflation or employment to decide even if you had paused and you’re looking at that data to decide the direction of your next move?

Mary Daly:

That is exactly where all my focus is. So here’s what I’m looking at. I’m looking first at the data coming in, and that’s the whole dashboard of data, the real side data on consumer spending, the labor market, all aspects of the labor market, what’s happening with investment, what’s happening with the sense of confidence and sentiment that people have about the economy. Then I’m also looking at the inflation data, what’s happening not just in the headline numbers, which have thankfully started to come down on the backs of energy prices, but what’s happening in the decomposed variables of inflation, including goods price inflation which has been coming down, but housing inflation, housing services inflation, and the new term of the day, super core inflation, which is really that services inflation action housing. So those are all important factors and what I want to see there is ongoing slowing in those factors.

That’s going to tell me that the considerable policy tightening, we’ve already taken 500 basis points of interest rate hikes in the course of less than two years. I want to see that taking hold and slowing the economy and bringing it back down so that demand is more in line with supply. So I’m going to be looking at that. The second thing, of course, to look at is the credit tightening that has been occurring since the beginning of the year really, as banks responded to the forecast for a slower economy, they started to tighten lending standards and loans, but now we see that accelerating on the hills of the bank stresses. And while the bank stresses have calmed and the banking sector is safe and resilient, we do see institutions pulling back on loan volumes and raising lending standards. And I’m hearing that not just from my banks in the district, but also from the firms who borrow from those institutions.

And so we want to watch that carefully to understand the magnitude of that credit tightening and also the expected duration. If you put those things together, the lags in monetary policy that will take hold, the data coming in and the credit tightening against the general backdrop of uncertainty about the outlook, which I’m one of the benefits of being a regional fed president, I spend a lot of time on the road traveling, talking to contacts. I have nine states in the Western United States, talking to contacts across the distribution of firms, households, financial institutions. They’re all saying that uncertainty is high for them right now and that matters and I have to take that into account as well. So putting all those things together means you can see why we have to be extremely data dependent and why even three weeks in advance of the meeting, our next meeting, it’s still a lot of time to collect information before we make a decision about what to do in June or what to do for the rest of the year.

Ellen Zentner:

Okay. So you talked about credit has been tightening in the U.S. and that’s what the Fed has been trying to achieve, tighten credit conditions. And so when you think about how much credit tightening you would’ve expected from the policy rate increases that you’ve done versus what we’ve actually gotten, have you taken a look at, or taken a stab at how much further that credit tightening might be worth in terms of a Fed fund’s equivalent, how much extra tightening that might have delivered?

Mary Daly:

Maybe that’s the $500,000 question since we started with the million. I think it is an important question though, is the credit tightening that the banks are doing, how much is it worth in funds rate space? That is a very challenging question to answer. So I really think we all have to be Bayesian, we have to have a prior in case there’s econometricians in the audience, we have to have a prior about what we think and then we have to constantly update our prior as we get more information. So I’m going to hold myself to that standard. My prior is that the credit tightening that I’m seeing in the data and that I’m hearing from my context in the banking sector could be as worth as much as a couple of rate hikes. So if you think that’s worth a couple of rate hikes, then I want to be mindful of that and imagine that I need to learn about is that really true? Is it worth less?

There’s estimates out there that are, it’s not worth anything at all, all the way up to 200 basis points. So that’s a pretty broad range. My own personal starting point though is one or two rate hikes and continuing to watch to see if that’s really true. Do I see the economy slowing more than I would anticipate given just the funds rate increases we have made? And if I do, then will that be sufficient to bring demand back in line with supply and get that relief on inflation that we need to see to restore price stability in a timely way.

Ellen Zentner:

Do you think that some of the lack of agreement on the impact in Fed funds equivalent on credit tightening is also ties back to the divergence in views of policy lags from what we heard from Governor Villeroy just before you about lags that are anywhere from 12 to two plus years in terms of the policy, the full impact of policy. So what is your own assessment when you think about policy lags and what’s the argument that lags are shorter or longer than in the past?

Mary Daly:

Well, the answer to your question is yes I think it’s really challenging to figure out right now what’s going on to slow the economy. We’ve had in the United States over 500 basis points of policy increase. We know there’s lags, we don’t know how long they are, and then of course we have credit tightening too that’s taking place. So all of that’s it makes the challenging to know exactly when and where you’ll see the slowing that we anticipate. But let me go back to the lags question. So I start from the premise that there’s two components to the lags in monetary policy historically. The first component is when the Fed says, the Federal Reserve historically says we’re going to raise interest rates. It takes a while historically for that saying to be translated into financial market conditions. And then the second part of that lag is how long does it take for financial market conditions to translate into the slowing and economic activity.

So the really interesting thing about this past tightening cycle is that that first stage of the transmission was immediate. We actually said in the end of 2021 that we were going to taper faster and start tightening earlier, and financial market conditions tightened almost immediately. And then before we ever took our first 25 basis point increase and lifted off the zero lower bound, you saw financial market conditions tightening. And when we said we were going to continue to raise, they tightened quite a bit. So it basically took that first stage of the lags and just put it to zero. What didn’t go to zero in my judgment is the time it takes for financial market conditions to translate into economic slowing. And so we saw interest sensitive sectors, particularly housing start to slow immediately, but even that takes time to filter into house price inflation. We’re just starting to see that now in new asking rents, et cetera.

And it takes even more time for that translating into changes in the speed of the labor market, the speed of investment, the speed of consumer spending. And so we’re starting to see that now. So I’m not sure whether we’ll find out after we study this if it’s 18 or 24 months. My guess is it’s likely a little shorter than we’ve historically had, but it’s not zero. And so that fact that we haven’t seen it yet doesn’t mean to me that we won’t see it. It actually means that the time is getting nearer and we have to be extremely mindful that that built up slowing that’s already in the chain could start to show through at any point in time. And when you add the credit tightening that we’ve been seeing to that, it means that there’s a lot of factors pulling back the reins on the economy. And that’s why we have to be so critically data dependent because if we think it’s not here yet and then we tighten too much, we could easily create an unforced air where we’ve over tightened.

So we have to balance those two risks, over tightening versus under tightening, and that is getting more and more challenging as the risk get more and more balanced.

Ellen Zentner:

Thank you. So an unforced error for baseball season in the U.S. Yay. So we’ve spoken a lot today at the symposium today about inflation globally, the labor market. Are the two linked, are they too linked? Are they not linked? How are they linked? And so when you think about the labor market inflation dynamics in the U.S., do you see a link between the two?

Mary Daly:

So I go back to econ 101 and some of the things you learn when you first start out are the things that are the most persistent lessons. So we do know from econ 101 that supply and demand are related. I think we’ve seen that. We’ve seen that completely in the pandemic. And one of the factors that tells me that the strength of the labor market is related to inflation is that it’s the supply of labor against the demand for labor that creates wage growth. And then that wage growth is one of the factors that influence how the wage compensation influences how much firms have in terms of their costs. And so these things have to be related. The issue is there’s always things that are also in that equation that cloud that relationship and make it harder to see. So what I have always stepped away from is that, if we’re going to go back to Phillips’s curve parlance, I neither think it’s dead, nor do I think it’s always obvious that it’s alive.

So the caution I have is of course the labor market is related to wage and price inflation, but using that calibration as a tool alone will probably mislead us. What we really have to think about is what is going on with the labor market, what’s going on with inflation expectations? How much do firms feel they can pass along their costs to consumers before the consumers say, I’m done, I’m not buying anymore. And then on that front, I find these data they’re coming out of the BLS has a series on this where they’re just asking firms about the frequency and magnitude of price adjustments. And in the most recent data I saw, which is through December of 22 last year, you saw that frequency and magnitude of price adjustments were coming down.

Well, that’s just telling us that pass through is going to be coming down, that’s good for inflation. The labor market is slowing, that’s going to be helpful for costs. And then, of course, inflation expectations have been relatively well anchored in the medium and longer run, which is another factor which gives me some confidence that we can restore price stability in a timely way. So I want to leave with, I’m never going to discount the fact that the labor market and inflation are related, but I think it can easily be hard to see and we can’t use that particular relationship as the only way we calibrate policy. So many other things influence that equation that we also must focus on.

Ellen Zentner:

Thanks. I know exactly how to tell whether the Phillips curve is alive or dead. You just walk up to it and kick it. So let’s talk about risks. I want to know from you where the greatest risks lie. You could argue that there’s two significant developments this year that have, one been how resilient the U.S. and global economy have been, given the amount of policy tightening and then two, the failure of several banks in the U.S. So those are significant risks on either side of the equation. how are you evaluating the risk to your outlook today?

Mary Daly:

Sure. So let me just talk about risks in general and set even maybe a bigger table for it. So when I was talking about this at the beginning of the year, and if you asked me at the beginning of the year, I felt the risks were all on the upside for inflation and the strength in the economy. Growth has been coming in faster than most people expect. The labor market’s been persistently strong, exceeding most expectations. Inflation has been more persistent than many, many felt it would be. So you’ve seen this momentum that you mentioned really push the economy along and make inflation harder to get down. So that was where I was at the beginning of the year. After the bank stresses, which I will just go back and say there’s two ways that I think are important to think about the bank stresses.

One piece of it is that there was stress in the banking system, the Treasury, the Secretary of the Treasury working with the Chair of the Fed, the Vice Chair of the Fed for Supervision, the FDIC took decisive and quick action to settle those stresses and say the banking system is safe and sound. And that really calmed the waters in across the U.S. Now what is the second part of that? So that’s the financial stability part, and that is very clearly more settled and Americans feel the banking sector is safe and sound. The second part of that though is what happens to credit tightening? And that’s the risk you named. What I see it is, is this, of course banks tighten credit when they think the economy is slowing. That’s what we want them to do. It’s a natural equilibrating device. They tighten credit as they forecast a slowdown in the economy that helps them keep their balance sheets in order and ensures that they can continue to function doing the work that they do to intermediate financial variables and credit through the system. So that’s what we want.

The part that’s different is that they were on that path and then the bank stresses made everyone focus on bank balance sheets and then they’ve tightened credit more. The question and the risk is, it is a risk really to the outlook. How do we forecast? Is we don’t know right now how large that credit tightening will ultimately be and how long it will last. And that’s why I mentioned being a reserve bank president. I’m out in the field quite a lot. I spend a lot of my time talking to banks of all sizes across the country and my district asking, what is your, not just what are you doing today, but what do you think you’ll be doing in the next three to six months? How are you thinking about the outlook for the economy and credit? So if I balance those two components, one is pushing for momentum. We just have not been able to, we keep missing by underestimating the strength of the economy and it keeps outperforming our forecast.

So that’s more strength, but it’s balanced against this newer factor of more credit tightening than we would’ve forecast at the beginning of the year. And putting those two things together, what does that mean? And unfortunately, I can’t tell you what it means exactly for policy because I think it’s not certain. We’re in that balancing act where we have to balance those two different sides of that equation and come out with that thing I started with, data dependence. That’s why meeting by meeting decisions become really the most prudent path frankly because of these competing risks that are pushing in different directions.

Ellen Zentner:

Okay. So staying a little bit in that area of this is an international symposium and so to stay in that spirit, are there common threads or lessons we can learn from this cycle around the global dynamics? So we’ve had the synchronous rise in global inflation dynamics and as we mentioned, the global resiliency amid policy tightening. What are some of the common threads there?

Mary Daly:

I’m very happy you asked me that question because I think if you think about what economists are going to do for the next five years, I think they’re going to study the fact that despite so many differences in the fiscal response, the monetary response in many ways, the particulars of how countries dealt with the pandemic and how to come out of it, the variables have been largely similar. Every country, despite whatever they did at the central bank or fiscal level has had the same series of events. There might be difference in magnitudes, but the same dynamics have persisted, that the labor market and consumer spending was just more resilient than many anticipated. Whether that’s because the pandemic came and made us all go home and we didn’t like it very much. And so the minute we were unleashed, we came back out and we had all this saved money or we got it, either got it from fiscal support or we got it from just saving because we couldn’t do anything.

And we’ve gone unbridled out into the world and said, we want to live whatever two years we lost, we want to live it today. And that’s supported spending. So that’s a surprise on the upside in terms of demand. On the other side, the global supply chains just haven’t been as resilient as many people might have thought. And supply has been underperforming, it’s coming back, of course, but you put over, what would it be? Over exuberant demand, too much demand and too little supply, that caused global inflation regardless of whether you put a lot or a little fiscal into it, regardless of what the monetary authorities in the country said they would do. And it’s been really something that I’m taking away that the pandemic did something different and it did it globally. And then all countries, whatever different policy prescriptions they used ended up in roughly the same place. Too much inflation, a surprisingly strong economy and having to do aggressive action on monetary policy to try to bring those things back in balance.

I think the other thing that will be interesting to learn from this, and we’re still trying to learn it right now, is that we had a global tightening cycle, we still are in a global tightening cycle. And we still haven’t slowed the global economy as much as many worried with a global tightening cycle would occur. So that just tells you the strength of the momentum and how lags and monetary policy take a while to bridle that strength and deliver on price stability, not just in the U.S. but globally. So those are all things I think we need to continue to watch as central bankers. We have to continue to recognize that we are in a global tightening cycle and we’re not living alone.

The final thing I’ll say about this is that I’ve lived through this where globalization was everything, then people said globalization is dead. And now I think we’re living with the reality that maybe most of us knew was going to be the reality. We learned a few things about the resilience of the global system, but we’re still a global economy and we have to work with each other to understand how that impacts our own individual economies.

Ellen Zentner:

Do you think actually that just brings to mind because in the spirit of what you just said, would you still describe sort of global monetary policy as having conversations as opposed to coordination? Especially when we’re going through things like the global pandemic? How do you think about that?

Mary Daly:

Yes, I do think that is the way we do it. We have conversations not coordination because all central banks in every country, especially in the industrialized world, especially in the United States, we are congressionally mandated to work for the U.S. economy. That’s our job. We have to consider what’s going on in other economies because it impacts our ability to achieve our dual mandate goals of price stability and full employment. But nations work, their central banks work for the national economy and the mandated goals that they’ve been given. But we have to be in conversation with each other. It’s actually best practice to understand how other countries, other central banks are dealing with their own challenges because in many ways we face the same challenges and we can use the information from each other to do better work. So it is definitely about studying and being in conversation but not anywhere close to coordination. It just happens to be that we face the same shocks and we’ve reacted in similar fashions.

Ellen Zentner:

So there’s been a debate on the FOMC for some time. When you think about financial stability versus monetary policy, when you see signs of financial instability, is that solely macroprudential addressed with macroprudential side of things and monetary policy? It’s simply the raising rates and can you separate the two? Where do you come down in that debate or how do you think about that? Can you separate the two?

Mary Daly:

I do think you can separate the two and I think the recent episode we just had starting in March is an indication of how they get separated. So let me take the financial stability issues. As I referenced already after the bank stresses, the Treasury, Federal Reserve, FDIC came out in decisive actions, quick and decisive actions said that the banking system is sound and resilient, insured and uninsured depositors protected in the two failed banks. And with the help from Treasury, the backstop from Treasury, the Federal Reserve opened the bank term lending facility to facilitate liquidity provision. The banking stress is calm, the waters are settled, more settled. And that is an example of using the tools that are specific to financial stability to work on those things. Those are macroprudential and microprudential through supervision and regulation. You do macro and micro prudential treatments and you work on that financial stability part.

Within a month then we’re, forgive my dates, but the next meeting we’re raising interest rates 25 basis points. That’s the monetary policy. So both happen in roughly the same time period because we have tools that deal with the financial stability and we have another tool, the funds rate, which deals with trying to bring inflation back down to 2% while we do that as gently as possible, achieve our dual mandate goals. So I see those things as absolutely separable and when as you saw, when they’re done effectively, you can do both simultaneously in a way that is all about one goal, a stable and healthy economy, same goal, different tools, different ways of treating it.

Ellen Zentner:

Thank you. I think that’s very clear. So in the U.S. voices, at least someone like me that works at a large investment bank that has equity analysts that especially cover the financial sector, the voices have been rising for those that are arguing that the Fed should consider changes to the balance sheet policy in order to mitigate some of the financial stability risks, do you think the Fed should consider either altering the parameters of the RRP facility to reduce its usage or taper balance sheet reduction operations?

Mary Daly:

So I’m going to separate those two things. I’ve seen a lot that puts them together and I would say that’s conflating two different things. So let’s think of the ON RRP. That’s an operation that’s set up to do really one primary job, monetary control, make sure that the funds rate trades within the range and that we have the ability to keep it there because people depend on it trading in that range. And if you look at what’s happened since that we opened it, it is absolutely working the way we want it to. That doesn’t mean we don’t study to see if there’s other market impacts. Absolutely the New York Fed market desk studies that regularly, but I see that working exactly like we want to do, which is it’s the funds rate is trading within the range.

Now let’s take the balance sheet policy, which is a tool of monetary policy that is really about a policy stance and there we communicate it along with our communication about raising the funds rate that we were going to start normalizing policy. And that normalizing policy means the balance sheet needs to run off and get back towards an ample reserves level, which is part of our ample reserves regime. So we announced that, we said how it was going to work, we regularly study whether it’s working in the way we expect, which is to create very limited disruptions in market functioning and we haven’t seen those. And so we will continue to study that, but I would really separate those two things and say that our balance sheet policy is a tool of monetary policy and right now it’s on a path to normalize back to ample reserves, which is consistent with the normalization of policy, or the policy tightening now that we have in place with the funds rate. And I think both are working effectively and we continue to monitor and study them as a normal course of our business.

Ellen Zentner:

Great. And so using the balance sheet as a tool, would forward guidance be something that would be a tool on the balance sheet? Could you see something where tapering the reduction of the balance sheet is part of that forward-looking communication?

Mary Daly:

Well forward guidance is one of our, I’ve done a couple of speeches on this where if I stack rank our tools in terms of their nimbleness, agility and effectiveness, the funds rate is our most nimble monetary policy tool. Forward guidance is our second, in my opinion, most nimble and agile tool. And then we have balance sheet policy, which is, it’s like the tanker ship, we got the speedboat of the funds rate and the tanker ship of the balance sheet. So our forward guidance would be a composite forward guidance and I started our conversation by saying right now I’m thinking forward guidance is less about prescriptions on policy and much more about the forward guidance about what we will be looking at, what I will be watching as I determine what the right policy stance should be. So on the balance sheet, it’s really about bringing the balance sheet, in my judgment, back to ample reserves and making sure that we do that smoothly.

And so, of course, we’re studying that, thinking about that and if we determine that we wanted to ensure that we were getting to ample, then we would, of course, communicate that. But right now my primary focus is on what’s the right stance of policy and there it’s that data dependence thinking about how the balance sheet and the funds rate move together and what the right place is to land and hold until we can be quite sure that inflation is back on a trajectory to 2% in a reasonable amount of time.

Ellen Zentner:

Thank you. So I want to pivot back to the near term here. When we’re going into the June meeting of the FOMC, you all, and you and your colleagues are going to be producing another set of summary economic projections. And so the March forecast had a four and a half percent unemployment rate in the fourth quarter of this year. Right now we’re around three and a half percent. And so that four and a half percent in relation to where we are today looks pretty pessimistic unless one is expecting a recession because you would expect then that’s the only way you’re going to get the unemployment rate up that quickly. So that leads me to ask, if you were producing your SEP forecast today, or basically how has your outlook evolved since the March summary of economic projections, how do you think your numbers might change?

Mary Daly:

Well, I’m going to go back to something we talked about just a moment ago, which is no matter what variable we have written down and others have written down in the professional forecasting community, the data just keep exceeding it. So you think, and by exceeding it, I mean be stronger than we would would’ve anticipated. So if you thought the unemployment rate, so let me take it back to myself, when I thought the unemployment rate was going to go up to four and a half percent, if I take the median, if I take the median of the SEP, it’s going up to four and a half percent in the March projections. Well, since then we’ve gotten stronger labor market reports that show the unemployment rate’s not really, it’s going down, not going up, and it’s really not moving in that direction. And the slowing in the labor market while we see signs it’s starting to occur isn’t getting us yet close to the number of jobs per month being created that matches the new entrance, reentrance to the labor force. We’re still well above that number.

So that would mean for me that I’m going to come in thinking on the data side, the economy’s just stronger, the labor market’s stronger than I anticipated it would be at this point in time. So absolutely the way I have said it countless times, so I’ll just say it here for everyone’s benefit, the SEP is really only as good as the day it’s printed because, of course, we get new information out after the FOMC, after we release the SEP, and that influences our projections. So if I gave you a projection today that would be only as good as today and then by the June meeting I might have a different view. We have another labor market report. I can’t stress how challenging it is to be data dependent. It means you have to resist the temptation, which is always there.

And if I don’t have it myself, you all try to get me to have it to proclaim to say decidedly I know we’re going to do this, or this is what I think. But honestly prudent policy, optimal policy and think about who we’re trying to talk to. We’re trying to talk to businesses and consumers, households, not just market participants. We’re trying to talk to them and they want to know not a definitive thing that will reverse and change our mind on, but actually a path that we would have if the data evolved this way and a path you might have if the data evolve a different way. So my resistance to this is really trying to be self-disciplined that I don’t introduce noise to a conversation where the data are going to come in. The data should direct what we do, not us direct what the data will do.

Ellen Zentner:

Great. So with that, I’d like to open it up for some questions. Just as a reminder, you have a microphone next to you as a part of the chair itself. Please be clearly into it so President Daly can hear your question and remember to introduce yourself and your affiliation. So hands. Yes sir. First up, first advantage.

Michael Redmond:

Hi, I’m Michael Redmond from Medley Advisors. So I was just wondering, you mentioned how tight the labor market is and just how strong the jobs growth numbers have been and yet we’re still seeing household delinquency rates rise from the New York Feds report and the like. So what do you make of that disconnect? How are those people being left behind in this economy?

Mary Daly:

I’m really glad you asked that question. I’m also impressed that you have microphones at your chairs, but let me say that, that is an important question. So here’s how you square those two things in my judgment. Real wages in the United States for most groups are falling because inflation’s too high. So we see that wage growth and oh wow, that feels strong. But if you’re working in most sectors in the United States, you’re getting wage growth that you probably haven’t seen in a long, long time and inflation’s eating that away each and every month. So when I do a lot of community round tables and here’s what they tell me, we’re on a treadmill and the treadmill’s speeding up, I’m trying to keep up but I can’t, I’m falling further and further behind every day. So it’s not surprising to me that delinquency rates and other things are starting to inch up because people have just, they’ve come through a lot of their excess savings.

They now have a wage price equation that doesn’t work for them and it’s one of the things that really tell, just continually renews for me this idea that we must be committed to restoring price stability because inflation is what the people I speak to think about every day, whether you’re a small business, a household, what’s the number one thing they’re thinking about? It’s inflation. And why are they thinking about that? Because of the fact you just put forth, which is that the economy doesn’t feel like people are winning in many sectors despite the fact that if you just looked at the percentages on wage growth or the job market is strong, you’d say wow, they should be really happy when people aren’t happy. The important thing is as a policymaker is what’s happening and what I see happening is real wages are falling and people are falling behind.

Ellen Zentner:

Thank you. Neela.

Neela Richardson:

Hi, thank you for your comments. Neela Richardson, chief economist, ADP. My question is can you get to 2% inflation with unemployment below 4%?

Mary Daly:

It would be a historical anomaly and quite a feat, but let’s remember that, and I think this is really useful, I’m a labor economist by training, and three and a half percent unemployment is extraordinary, it’s not something we have all the time. And so having something that is above 4% and inflation that is at 2% for many, many people is a better equation than having the equation they have right now, which is the one I just described, which is, you have lots of job opportunities, but you can only work 24 hours in a day and seven days a week. And if you earn as much as you possibly can and you still can’t pay for goods and services or save and raise your family’s overall wellbeing, create wealth, then what kind of an economy is that? It’s not one that lives up to the expectation that if you work hard and do these things, you can have career mobility and you can afford to raise your family’s living standards.

So for me, that balance of will the unemployment rate rise a little bit above four, or to four and a half percent, seems completely reasonable when I think of the families I serve who are, I went on a fact finding trip and I talked to one young man and he had two young children, his wife and he told me that he is working literally as much as he possibly can. He has all the jobs he can take, he has three jobs and he can’t afford to keep up with the inflation. So that’s why my primary job right now is to get inflation back down to something reasonable for people. So don’t have to think about it and do that as gently as we can because I’m, you’re from ADP, I’m sympathetic to the idea that we don’t want an unforced air where we say inflation at 2% quickly no matter what happens to the labor market.

We have a dual mandate, we have to balance those two things, but ultimately the dual mandate shouldn’t be a trade-off for people. It should be something that comes together, a balance where people have jobs and they can afford to purchase the things they need for their family and raise their standard of living.

Ellen Zentner:

Great. Another question as short as Neela’s, that was beautiful. Right here in the center.

Thomas Kastrak:

Thank you. Thomas Kastrak with [inaudible 00:38:29] Management. Maybe a question on, you said you were surprised by the economic data and by the strength of the data, but are you also surprised by the resiliency in real estate prices and of real estate markets? Would you expect some deterioration there? Would you expect interest rates to bite a bit more in residential real estate and will it impact the economy in the end? Thank you.

Mary Daly:

Yeah, terrific. So I’m going to separate housing prices from housing price growth and from rental rates. So we have an imbalance in the United States between housing supply and housing demand. So that’s going to keep, that’s still there, even with rising interest rates, we still have more people who need house than we have housing available to purchase or to rent, and that’s going to create some support under the price level for housing, housing prices. What I was looking for was as interest rates rose, did I see a slowing in-house price appreciation? And we have seen that. I’m also looking for do I see a slowdown in rental rates, the growth in rental rates, and if you look at new leases, you see the slowdown in rental rates for new leases and that’s exactly what I would expect to see. Of course, historically and now is no different if you stack that up, new leases are only a fraction of total leases out there at any given point.

And so we have to work that through the system. And so I would expect housing price services inflation, which is both the housing price, the owner equivalent rent, and also the rental rates to bleed through to the second half of this year and into next year. So house price inflation comes down in those periods, but the dynamics I would expect are occurring. But in the United States and probably in many other places, we are really in a position where there’s too little supply for too much demand and that’s always going to support the price level even when the growth rate settles.

Ellen Zentner:

Okay. Well, we’re going to leave it there. President Daly, we really appreciate you joining us today and thank you so much.

Mary Daly:

My complete pleasure. Thank you.

Summary


President Mary C. Daly in conversation with Ellen Zentner, Managing Director and Chief U.S. Economist at Morgan Stanley for the National Association for Business Economics (NABE) – Banque de France International Economic Symposium.

President Daly’s remarks will be livestreamed and also available as a recording after the event.

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About the Speaker

Mary C. Daly is president and CEO of the Federal Reserve Bank of San Francisco and helps set American monetary policy as a Federal Open Market Committee participant. Since taking leadership of the SF Fed in 2018, she has chartered a vision of the Bank as a premier public service organization dedicated to promoting an economy that works for all Americans and supporting the nation’s financial and payment systems. Read Mary C. Daly’s full bio.