Fireside Chat with Mary C. Daly at the Stanford Institute for Economic Policy Research

Mark Duggan:

Exactly. Hello everyone and welcome to today’s event featuring Mary C. Daly, the president and CEO of the Federal Reserve Bank of San Francisco and Happy Tax Day. I just want to apologize in advance. I have a little bit of a cold, so I apologize. I’ll try to not minimize any negative impact for all of you from that, but just want to get that out and I hope re today being tax day, I hope there aren’t any procrastinators among us out there, but I will admit that I was myself on the IRS site about two hours ago, making sure to submit in time and it was clogged up, but it finally worked. So in any case, I’m Mark Duggan, the tri director of the Stanford Institute for Economic Policy Research and I’m so glad that you’re here with us today. And just a note before we get started that this event is being streamed and recorded.

I’m really thrilled that Mary Daley is here at SIEPR as a return visitor. She was first with us five years ago back in 2019, shortly after taking the helm of the San Francisco Federal Reserve Bank. She gave an excellent talk back then, and I know this is going to be a very informative and special hour with her here this afternoon. Instead of our usual format where our guest makes a formal presentation, Mary and I decided to instead have a pretty broad conversation, sort of a fireside chat type thing before opening things up to your questions. And given my slightly debilitated state, I might lean on all of you a little more than I otherwise would. So thank you in advance for coming up with some great questions for President Daley. Our hope is to cover a wide range of topic that Mary and her colleagues at the Fed are working on and thinking about and to have this experience very much tailored to the interests of our community here at SIEPR. And I want to give Mary a very special thank you not just for spending time with us here at this event this afternoon, but also for meeting with a group of about 30 Stanford students earlier today. A core part of our mission at SIEPR is to create opportunities for up and coming economists, students, early career faculty and scholars, and giving our students a chance to spend time with someone of President Daley’s Caliber is hopefully as inspiring as it is informative to those interested in pursuing economics. We are also deeply committed to connecting our roughly 120 faculty and their expertise with economic policymakers. And Mary’s visit with us today is a prime example of how we try to build and maintain that bridge between the university and the policy world. So again, I’m really grateful that you’re here, here with us today, Mary and I know we’re in for a real treat in the next hour.

I’m looking forward to hearing your perspective on a wide set of issues, including this country’s strong economic growth and labor market, choppy, recent inflation numbers, AI’s impact on productivity, immigration’s effect on the labor market, and so many other issues. But before we kick off our conversation, I think she’s here somewhere. Oh, there you are. Okay, great. Mary, let me introduce you to everyone here as President and CEO of the Federal Reserve Bank of San Francisco, Mary leads the largest and most diverse Federal Reserve district home to one fifth of the nation’s population. I’m going to give this a try. California, Oregon, Washington, Arizona, Nevada, Utah, Idaho, Alaska, Hawaii, Guam, American Samoa, Northern Marinara Islands, Mariana Islands. Anyway, I think I’m almost there, but it’s all big. It’s a lot of territory that she covers that she’s responsible for and it is. And I lost my home to one fifth of the nation’s population.

She also sits on the federal open market committee to help set the fed’s monetary policy. Mary began leading the San Francisco Fed in October, 2018 and it started working at the bank quite a bit earlier in 1996. First as an economist specializing in labor market dynamics and economic inequality. She has since served as research advisor, vice president and head of macroeconomics, senior vice president and assistant director of research and executive vice President and director of Research. Through her speeches and talks like this one here today, she helps demystify key issues faced by monetary policymakers, including topics such as inflation dynamics, financial stability, and the relationship between monetary policy and inequality. She is a research associate at the IZA Institute of Labor Economics and is held visiting research positions at the Congressional Budget Office, Cornell University School of Public Policy and multiple universities and research institutes here in California. President Daley earned her PhD from Syracuse University, a master’s degree from the University of Illinois at our Urbana Champagne and a bachelor’s degree from the University of Missouri, Kansas City. She also completed a National Institute of Aging postdoctoral Fellowship at Northwestern University. With that, please join me in welcoming President Mary Daley to Sper and get your questions ready.

Okay, so it’s okay. Mary or President.

Mary C. Daly:

Mary’s preferred.

Mark Duggan:

Okay, Mary. Okay, great. I just want to be—

Mary C. Daly:

I love, you can call me President Dick Mary if you prefer—

Mark Duggan:

President.

Mary C. Daly:

Mary. People have various levels of comfort with what they addressed me as and I’ll take any of those.

Mark Duggan:

I don’t want to make any mistakes. Mary’s fine. Just try my best up here. You’re—

Mary C. Daly:

Doing great. Even with a cold.

Mark Duggan:

Right? Even with, okay, so you lead, maybe you can just, we’re going to get into inflation, maybe R star and other stuff, but maybe you can just at a high level talk a little bit about what your job is like and as you come into work each day, it’s amazing to me how big the area the San Francisco Fed covers and just talk a bit about what it’s like being the president of the San Francisco Fed and what a typical week or month looks like for you.

Mary C. Daly:

Sure. And it’s terrific being the president of the San Francisco Fed. I mean, it’s terrific honor to serve. We have a sign on the front of our lobby which says our work serves every American and countless global citizens. It’s a touchstone. I put that sign up the very first day I had the job as president and it embodies what we try to do, what we work towards every day. So how does that translate into a day-to-day activity for me? Well, my job is actually quite varied. When I first thought about becoming a president, I had watched other presidents before me have the role, including one of my dear friends and mentors, Janet Yellen, who is now the treasury secretary. So she’s had a lot of things which I can model, but seriously, which I asked her one day, what do you like about being president?

And she said, you have so many different things to do. Any day is different from the last day, but here’s the things that you do. And this is actually how my day looks on any given day. I spend a day like I did today where I came here, I met with students, I met with professors at Stanford, I met with the Latino Action Business Network and learned about what the challenges of running Latino businesses are, how they are challenged to scale, had an opportunity to come here and do this fireside chat with members of the community and think carefully about how we do our policy and how it affects people. So that’s a given day. We would call that a day of public engagement on any other given day, I’m reading research papers and talking to research teams and business leaders and market participants about, and the shadow open market committee of which there are a couple of members here who are talking to me about how do you think about making monetary policy from an academic and modeling perspective.

Sometimes I’m working on leadership issues about not just the Federal Reserve Bank of San Francisco where we have roughly 2000 employees, but also the whole Federal Reserve system because Congress gave us three responsibilities that we all have to collaborate on. One is monetary policy, which you all know, dual mandate, price stability, full employment, that’s a big part of my role. But we have two other mandates including a safe and sound payment system and a safe and sound financial system working in collaboration with the OCC and the FDIC. And so all of those things together mean that we have to work collaboratively but also proactively to think forward about what could affect the economy and what could affect any of those mandates any given day. I’m doing those types of things and one of the reasons we released my schedule publicly, but one reason is to help people feel transparent about what I’m actually doing and what people notice who have looked at that schedule is I’m as likely to be meeting with a business leader as business leaders, as worker groups, like unions, as community groups, as leaders of industry, et cetera. And all of that is important to how we do our job well. So I have a three-legged stool of making policy, the data and the analytics and the empirical work, the models and the engagement we have with all the participants in the economy. So we put those three legs together and we can craft the policy that actually fits the needs of what we’re trying to accomplish.

Mark Duggan:

Well that sounds busy.

Mary C. Daly:

Oh, I’m busy. But you—

Mark Duggan:

Don’t have to do email.

Mary C. Daly:

I get over 300 and something emails a day. So if you email me and I’m slow to respond, I can’t find you in the sea of emails, so it’s best to text me.

Mark Duggan:

Okay, that’s good to know. Alright, well let’s get into something that’s a little more, even a little in the news a fair amount lately. So I just recently wrapped up teaching econ one and I talk about in the class, not a macro person, but I try to do justice to these topics like inflation and unemployment and so forth and the fact that we get monthly inflation updates and we had a recent update to monthly inflation numbers, which wasn’t kind of what people were expecting slash hoping for. So can you talk a bit about how that influenced your thinking and just it’s one data point, but maybe you can talk a little bit about how you’re thinking about 2024?

Mary C. Daly:

Sure. So the most important thing about any particular data release is to remind ourselves that any particular data release is filled with potential signal and potential noise and we have to be able to think through it. The way I characterize that is we as a Fed and any of the work that we do is not data point dependent. It’s data dependent and data is a plural word. And so we’re looking at whether you call it a dashboard or the preponderance of evidence or just the full slate of information, it is these pieces of information coming in that help us project where we’re going to be heading. And the important thing is that projection of where we’re going to be heading because if we can’t make policy for whatever’s just come in, that’s a backward looking number. We have to think about how that number influences what the most likely path is going forward.

Now for me when you said that we were surprised by the inflation data, I think it’s not as surprising to me as it might’ve been to some is that inflation was always going to be a bumpy ride. There’s no time in history where inflation just comes down without bumps along the way. So having bumps along the way is not particularly surprising. And one of the things that I really reflect back on is look at 2023, the early part of 2023, it was very sticky inflation, it was mostly flat and particularly the what we call super core, which is the core inflation absent housing or taking housing out, which was is it the service industry that was particularly flat, but then in the second half of the year, inflation fell rapidly. So we have to be thoughtful about not getting too confident that the latest sticky inflation is an indication where we’re going forward and we can’t get too confident that our projection, that inflation will gradually continue to come down is going to materialize.

And it’s one of the reasons you hear fed officials and myself talking about data dependence. It’s really, you know how you’re going to react to the economy, but then you have to see what the economy’s bringing to know what that reaction should be. And since one might think, well doesn’t that mean you’re always behind? I would answer no. It means that we meet uncertainty with a good deal of awareness that getting ahead too far ahead on either thing would end up with a policy response that either was too strong or too weak. And the worst thing we can do right now is act urgently when urgently isn’t necessary, the policy’s in a good place, we’re in the ready position, we can respond as the economy evolves, the labor market’s not and giving us any indication it’s faltering and inflation is still above our target and we need to be confident it is on path to come down to our target before we would feel the need and I would feel the need to react.

Mark Duggan:

Right. I mean, to some extent looking at the monthly jobs reports, it’s been kind of incredible to me that

Mary C. Daly:

It has been incredible.

Mark Duggan:

Like another 300,000 or two 80 or whatever. I mean it’s been really, really strong. So sometimes I see those jobs numbers and I think why is anyone talking about cutting rates anytime soon? So thoughts on that?

Mary C. Daly:

Well I think that the idea that I think of inflation as the impartial judge in all of this because one of the things that is true is that the labor market has surprised us over time. I came to work at the Fed in 1996 and one of the early tasks I had was answering questions for Chairman Greenspan’s staff about why the labor market was able to grow so fast and not spur inflation. He was talking about for those who go back as far as that, he was talking about the marginally attached workers and looking at other places where we might get workers coming in because the economy was strong. Remember we had welfare reform at that time, which put a lot of single mothers back in the labor force. He was looking for opportunities for that to be allowing us to grow faster than the speed limit was written down.

And then of course we have the productivity boom which also increased the speed limit. So that’s part of what we have to consider. But of course you can’t just be optimistic and say, well the speed limit’s higher, so let’s just go for it and three hundred’s no problem. You have to be thoughtful. And ultimately inflation is the impartial judge. And by that I mean inflation will tell us whether we are running beyond our sustainable pace. If supply and demand are out of balance, we’ll see it in prices and we can’t just look at the published information because again, that’s telling us what just happened. We have to ask businesses, are you raising prices? What’s the frequency and magnitude of your price changes? Are you passing through and do you think you have pricing power? Are workers asking for wage increases? Are they asking for them beyond what you think is their productivity gains?

All of these things are part of why we do public engagement. I get asked a lot, why do you do so much public engagement? And it’s really because that helps us be forward looking and ask where’s the economy heading? Not just where it’s been. And so yeah, I look at the jobs report and I say, wow, that is very strong. And with inflation printing as high as it is, there is no urgency to cut rates. So if you’ll notice, I spend and have spent and other Fed officials spend a lot less time talking about rate cuts than the media does. And one of the reasons is because the economy is growing at a solid clip, the labor market’s strong and inflation is still printing higher than target.

Mark Duggan:

It’s interesting because I got asked recently by a journalist about my thoughts on why it is the case that the US economic performance has been so much stronger, let’s say that in Europe or in many other industrialized countries and I was just in the UK and France last month and I can tell you three hour launches and really enjoyable times. Maybe they have the better work life balance but different, their economy is somewhat different. I dunno if you have a sense of from that perspective, looking at us in a global perspective, the US versus other industrialized countries, is it here in Silicon Valley? We heard last month from the CEO of Nvidia, which is a company that’s just sort of in your district has just exploded in terms of its opportunity and so forth. But I don’t know if your thoughts on what makes the US special.

Mary C. Daly:

It’s really hard to put a point on that right now. We did come out of the pandemic very strong. There was a lot of support offered to the economy and if you think about the support that the US economy got relative to other countries, we had all countries put in monetary policy support, lowered the interest rate, often did balance sheet policies, forward guidance to support during the pandemic. We also had a lot of fiscal support that was added, which was different than some of our industrialized counterparts and many researchers have said that was part of why we were able to recover on the demand side, although that demand recovery outstripped our available supply. And so it also contributed to some extent the inflation. But the thing that I think benchmarks that a little bit is inflation’s risen in all the countries, not just in the us.

So it’s not simply a reaction to that kind of support I was in right before the year turn last part of 2023, I was in Frankfurt at a conference and in the UK and I had meetings with policymakers and others, economists and businesses. And what I learned is they keep saying, well what is the US doing? We would like to do it because we have good growth, we have a solid labor market. We don’t have that constant fear of recession at this point. Now most people are less afraid of recession. And we’ve sort of shifted the whole conversation from is it going to be a recession or is it going to be no landing? So there’s always that soft landing in the middle, but it was recession or soft landing, now it’s soft landing or no landing. And it is that conversation that our European counterparts wondered why they aren’t having.

And there’s a real consensus there among the people. It seems that the economy’s not delivering the outcomes it wants, but I would offer that’s similar. If you look at the published data, you feel good about the US economy and our progress on inflation while we’re not there yet has been very good. It’s been significant but we’re still not there yet. But the growth has been something quite remarkable. The question is why do we have a vibe session as some like to call it? Why do consumers and survey participants feel like they’re a little more pessimistic than the data might say? And I think the same is true whether you’re in the European nations or the us, there is a difference between the inflation rate falling and the price level being high. And right now we had a big runup in prices and inflation’s coming down, but 2% on a higher base really doesn’t feel the same as 2% on a lower base.

And ultimately when I go into communities or businesses, they say I’m paying twice as much for X and now it’s rising at over almost 3%, between two and 3%. And that seems worse than when it was a lower base and rising less. And I think that ultimately explains a lot about why in the us we have a vibe session and in Europe why they’re still not completely confident that they’re going to get out of this without some upheaval in terms of labor market outcome and things. But the US is in a better place, there’s no doubt about it. I always hate to describe it to our ingenuity and fortitude, so I’ll just keep it with I think people had a really, they were hungry to get back after the pandemic and they’re spending and working like you haven’t. No one expected.

Mark Duggan:

If I had been there, I would’ve said that they need to get in and out in subway so people can get their lunch in 20 minutes and get back to work and not have to spend three hours getting lunch every day.

Mary C. Daly:

Yeah, had an efficiency.

Mark Duggan:

On the lunch but it was enjoyable. But just anyway, they—

Mary C. Daly:

Made me, you get better treatment than I do. When I was there I had to eat my lunch during the business meeting. So they keep me working. They get a high rate of return out of public service.

Mark Duggan:

There’s time is money. It is. Well maybe you can talk a little bit, I’m going to get to a question about R Star, but before getting—

Mary C. Daly:

There, oh R Star. Wow, we are going full—

Mark Duggan:

Bore. Yeah, we’re going to go get into the, I should—

Mary C. Daly:

Brought—

Mark Duggan:

My t-shirt bolt of monetary policy. But maybe you can talk a little bit, I mean one thing that is very different in the US economy now than the last time you were here is the interest rates being much higher and that is affecting consumers through vehicle loans, through credit card loans, through mortgages and so forth. So can you talk a little bit about how you’re thinking about the interest rates? Because some have said that inflation doesn’t necessarily incorporate that real cost to consumers and your thoughts on that?

Mary C. Daly:

Well, I mean ultimately, and this is just a reality of central banking and especially central banking in the United States. So we have congressionally given two mandates, full employment and price stability. And we have one tool, the interest rate. Now we have other tactical ways we can accomplish accommodative or stricter policy through the balance sheet and forward guidance. But you can really think of it as we have one tool and two goals. So it is absolutely the case that when inflation rose and was persistently high, then we have to raise the interest rate to combat high inflation. And ultimately when you raise the interest rate, it filters into car loan rates, mortgage interest rates, you see it almost immediately in mortgage interest rates. And in fact it is just a great reminder of how this all works. In November of ‘22, we started raising rates in 20, I say I lose track of the years, but right before we raised interest rates for the first time we said we were going to begin raising interest rates.

And in that November the mortgage interest rate rose and refinancing completely stopped in the next couple of weeks. And then of course that filters into home price appreciation, et cetera. So even with just the acknowledgement that interest rates were going to go up, you saw that immediate effect that of course influences borrowing costs, it raises borrowing costs and individuals say, well now it’s going to be more costly for me to buy a home. And I say it is, and I was just up in Portland, Oregon giving a talk on housing at a national conference for community development. And that was a critical issue there is how is the Fed’s raising interest rate helping the housing market? And my answer is the same. The housing market is high for two reasons. One, I mean housing costs are high for people for two reasons. One is the mortgage interest rates high and that affects of course building and purchases if you want to buy a home.

But raising interest rates to get inflation down is a temporary situation. As inflation comes down, we will be able to normalize the interest rate. But housing prices were also high because there’s a very large imbalance between the supply of housing and the demand for housing. And when we had rapidly rising inflation at the 7% level that was affecting home purchasing material, home buying, it was affecting construction materials. They were rising rapidly, you couldn’t get them, remember that people couldn’t build or finish homes, you couldn’t remodel homes. And so that was also not working for Americans. So this is a remedy to get the inflation down, but we will be left with something the fed cannot control, which is or doesn’t have a lever to pull, which is we still have a large imbalance between supply and housing and demand housing. And that’s not simply a Bay area problem.

That’s across the country. And in preparation for this housing talk I gave in Portland, I was looking at survey evidence from across the country and I found survey done by the Cato Institute and it found that 87% of Americans when asked said that they are worried about housing the cost of housing. And that was true across demographic groups, age, income, whatever state you’re in, geography, rural, urban. There was no group in the United States who they surveyed that wasn’t worried about housing and the cost of it. And that just speaks to you less and it’s been going on for a while. And that’s more about the balance between supply and demand. We will working hard to do our part, I am working hard to do my part in terms of bridling inflation and bringing it back to 2%, but it won’t solve the broader problem we have that we need more housing.

Mark Duggan:

That is especially true. Well this depends, I’m not a housing economist, but it seems like that is very true here in California.

Mary C. Daly:

I don’t think you have to be a housing economist to know that we have problems in the Bay area in California and housing.

Mark Duggan:

Okay, so one key factor for monetary policy is R STAR and the so-called neutral or natural rate of interest and some economists have argued that it changed as a result of the pandemic. And what are your reviews on R STAR and its potential implications for monetary policy going forward?

Mary C. Daly:

Well earlier today in a meeting I had with faculty, which was fantastic, John Taylor asked the question, what should we be studying? What do you think about? And I said the two things that I think we really need to study that we need more of and love the research community to help because as a fed official, what do I need to know more about? There are two things really. What is the long run neutral rate of interest? So if you came prior to the pandemic, the neutral rate of interest had been coming down and most countries were writing down a very low neutral rate around 0.5 for the US was the number. And that was combined with a sense that we were consistently across the globe going to be fighting inflation from below our target that inflation was going to fall short of 2% or whatever the target was in a particular country.

And central banks were going to need to be pushing up inflation to get to target so that we didn’t end up in the proverbial Japan situation where you had deflation. So that was prior to the pandemic. With the pandemic, there was a lot of disruption to global supply chains and productivity and other things had been thinking they might change the demographic, the aging of the population still going on, but the bulk of it that might’ve changed, the savings equation might’ve changed. Those are all factors that people are offering and saying perhaps the neutral rate of interest has risen and perhaps we’ll be fighting our inflation fighting inflation as a central bank from above our target. Coming back to something where we’re more familiar with, if you look at our whole history since 1913, that’s not a question anyone knows the answer to. So you do hear people saying, oh, it’s risen, and you do hear people say, no it hasn’t, but we actually don’t know the answer to that.

So from a policymaker perspective, how I approach it is the star variables as we call them, are very hard to measure. There’s R star and there’s ustar, the natural rate of unemployment. The only one we have any certainty about is pie star, which is the inflation target because we make it, we said it was two and we know it’s two, but we don’t know what the natural rate of unemployment is really. It’s not a truth variable, it’s an estimated idea variable and R star is the same. So I think that that’s a really open field of research. For my own sense. I completely take in the idea that it might’ve changed. We can’t put 0.5 down and assume 0.5 is right, and I’ve said this publicly before, this won’t be news, but I think it’s information is I look at all the estimates done by researchers and by the way, you can look at estimates that you can look at 15 models and you can find answers that are negative and you can find answers that are 11%.

So that’s the range of estimates that models will give because we don’t have a perfect way to estimate our star. You sort of experientially learn where it is within a range. For my own thinking, I think having something going in that’s between 0.5 and one, which is where a big number of the estimates sit is a reasonable thing to think about. But as a policymaker, and that was true at the labor market, it’s when we talk about 300,000, our estimate of the study state level of or that normal weight we should be if we’re in balance is a hundred thousand. Well, and we’re getting 300,000 that says, oh my gosh, we’re 200,000 a month over at least. Well again, we have to learn experientially and in those worlds the inflation rate is the impartial judge on our star. If you think it’s lower than it is, you’ll see it in the economy and you’ll see it persistently and then we’ll be able to adjust the policy rate to accommodate that.

Mark Duggan:

Okay, great. Alright, that’s super interesting and I wish I were taking notes, although we’re videoing it for the next time I teach econ—

Mary C. Daly:

Now with generative ai, you can transcribe, well you could have done that with other—

Mark Duggan:

Things—

Mary C. Daly:

You can do that with the transcription service—

Mark Duggan:

But I’m glad that you mentioned ai. So here we are in at Stanford and it’s hard to walk 15 feet on this campus without someone talking about ai. So many people are excited about the potential productivity increment that AI could generate, but also concerns about distributional consequences and so forth. Can you talk a little bit about your thoughts on AI and its impact on the economy?

Mary C. Daly:

Absolutely. So when I think about ai, I always go back to how we think about technologies in general. And you’ll have to look over the whole history. You can go back to any general purpose technology, which is what some offer AI is like. That would be the steam engine electrification, et cetera. Or you can go back to computerization, which is a different kind of technology, but still something that boosted productivity and led to distributional consequences as you know. So when I look at technologies over time, we know one fact for sure, technology on Nat has never reduced jobs, it’s always added to employment. But the next piece of that sentence is also critical. So it never reduced jobs on na, but the timing between when the jobs are replaced, when they’re augmented and when they’re created can be distant and the people who are affected by the replacement may be different than the people with the augmentation or the creation.

And that’s where these gaps form when you get distributional consequences. And I don’t think that we should believe without work that generative AI is different than that generative AI is especially, but AI more generally across all the AI parts, whether it’s machine learning or generative AI and all the things in between, they have the capacity to make life better for many people. And following David Otter’s thought process, and I think about it this way too, not because it’s just the theory tells us that or you can sort that out, but because we talk to businesses and what we learn from businesses is first of all they’re not doing the normal replace then down the road augment and then down the road create. They’re doing those things together because they’re really thinking about this from a skills perspective and a tasks perspective. I have round tables regularly from different groups and small, medium and large businesses. What I’m hearing a lot from small and medium businesses is this that we are testing these tools often experimenting before we go to production and we’re using lower risk activities. Ones that their back office operations. We have a lot of auditing going on, we’re trying to see if it’s going to be useful for us. But let me give you an example of one that I think is really, it kind of helped me understand. So we have a business that it is a big retail outlet and they do their own brand and then they also have other brands and they have a big retail outlet. They have over 150,000 items for which you need a skew and you need a description because they have a big online presence and even in your store you need a description.

So all the items they have aren’t fascinating to write about. Sometimes it’s a screw that replaces a previous screw for a part you bought that the screw fell out. So that’s not all that interesting to write about, but it still has to be written about. And then there’s really cool stuff that’s sold which has high margin and is more fun to write about. So they have a copy editing staff and copywriting staff that writes these descriptions, but they’re using generative AI with the copywriters to produce first drafts of all these skews and then auditing to say, okay, did the screw get the right description? If it did, fantastic, those screws can now get the gen AI product with auditors. And my copywriters copy editors can now be writing about the very high margin items that are more fun to write about. Oh, and importantly, my copywriters can now work with the sales and marketing teams to write descriptions that make our products more interesting. So we asked this person point blank, are you replacing augmenting or creating on net? Probably creating for the time being no net reduction in headcount, but definitely a change in tasks and the kinds of people hiring. So replacing some of the skills. So probably not going to hire as many copywriters down the road. We don’t need to get the 150,000 done by just that human team. But definitely expanding the interesting tasks that the copywritings teams get to do and having to hire prompt engineers to try to train the models for the instances used. And then wanting to hire, not having to, but wanting to hire strategists who know how to use gen AI can look at all the other products that are product areas where they could have business process improvement. And I think of that as different than the past. And so then you ask, my main talking point with generative AI is how it looks down five years down the road, 10 years down the road in terms of has it had unwanted distributional consequences or had harming effects on privacy.

That’s completely up to us. Technologies don’t make those decisions. Technologies are just tools. People make those decisions and we have something that’s really powerful, potentially productivity enhancing, but it’s going to depend on how we use it, what the guardrails around its use are. Firms are already using it, people are already using it. If you’re a geeky tech person, a little bit like me, I would say that when chat GPT was launched in November of 2022, it natural language models generative AI had its eternal September moment. And if you don’t know what eternal September is, it was when a OL mailed out the floppy disks for all Americans to get on the internet and everybody who was on the internet said, where did all these people come from and why are they asking these questions? So before it had kind of been the lance of an academic world and why did it come in September? Because every September new students would come to universities and get on the internet, but then all of America got on the internet. So I think that chat GBT being launched and you could get it on your phone has left consumers and workers able to use things that they are bringing into the workplace and now businesses are trying to harness and leverage that as fast as they can.

Mark Duggan:

That’s great. Okay, so I’m going to have a couple more questions for Mary and then I’m going to open it up.

Mary C. Daly:

I’m going to drink out of my goblet of wine.

Mark Duggan:

I know it’s pretty nice. It is. I don’t think it’s wine.

Mary C. Daly:

It’s not wine. You’re right. Water. I’m sorry, I meant water. Yes.

Mark Duggan:

Maybe they spiked yours with something.

Mary C. Daly:

No they didn’t. It’s just water. I’m just being very clear. Plus this is like a week’s worth for me if it was wine.

Mark Duggan:

As a Syracuse alum, I really want to ask you about Stanford’s upcoming move to the ACC and the consequences, but we don’t have time for that, so we’re going to get on immigration. So we’ve gotten over the years—

Mary C. Daly:

Many, we went from football to that. You never know, I mean I’m a huge sports fan, so I—

Mark Duggan:

Never quite know what I’m going to do here. So we’ve gotten boost in labor market from immigration, but immigration is highly uncertain and it varies for many reasons, including politics and policies that get implemented. And additionally, labor force participation varies a lot for reasons that have to do with lots of factors including what government policy is, what fiscal policy is, the tax code, safety net programs and so forth. Those are highly uncertain, constantly moving variables. Can you talk a little bit about how you think about those in the context of how that influences your thinking about monetary policy?

Mary C. Daly:

Sure. So I start with the idea of back to that thing we started with the speed limit. So how fast can the economy grow? How fast can the labor market grow? How many jobs per month can we add without spurring inflation? And if you look back last year, the labor market remained robust and continued to add jobs that were outpacing the estimated number by any forecaster about how many jobs we could add each month without spurring wage inflation and ultimately price inflation. Well, when you look back at 23, you recognize pretty quickly that that was in part because the labor force grew faster than most. Everybody had projected that faster growth was related to two things increase in domestic labor force participation. So more people participated than were assumed to participate because remember we have that tsunami of the aging of the baby boom coming through and that should pull participation rates down, but they were flat and up for age workers, those between 25 and 54, which I don’t enjoy the characterization of age as much as I did when I was in that age range, but there it is hanging on.

That’s what we call, that’s what we call it. So that’s how I was trained to call it. So that’s what I call it. But if you think about that, that was a positive supply shock. That was a positive boost to labor supply. We also had a very positive boost to labor supply from immigration flows that came into the country that were not anticipated, that helped us grow the labor market, grow fast, expand quickly without spurring wage inflation. And as you remember from last year, probably wage and price inflation both slowed. The question is, is that going to continue? And there I think it’s quite uncertain if you look at the numbers on labor force participation, we have achieved our pre pandemic levels in some ways surpassed them. Now, a strong economy in addition to all the things you named a strong economy is one of the features that brings new labor markets in or re-ran in.

If there’s a strong economy, people come back. If you think back to the pandemic we were talking about, these individuals would never come back. They were going to be afraid to come back to the labor force. There was the great resignation, people were just going to live forever off doing, I don’t know what, but they were going to do this. And of course none of that materialized because the labor market kept being strong, people got through that pandemic phase, health improved, opportunities improved, and people came back. How much more do we have in there? It really depends on how much we can exceed what we have historically seen in labor force participation. It could be that retirees return, that’s possible, but I don’t think we should count on that age participation, that 24 to 54, 25 to 54, it would have to go up beyond what we’ve been seeing in the last couple of decades or more.

And that’s hard to get to. And then on the immigration, that is really affected by policies on the border, by the labor market. So it’s policies at the border, but if our economy slows and there are fewer opportunities, it isn’t as worthwhile for people to cross the border and work in the labor market from another country. So there’s just all these factors that make a big uncertainty on that. So I have taken some signal in my own projection for labor force that we have a little more room to expand the labor market, but I haven’t taken the full signal. The Congressional budget office said, well, let’s just, they had a thing where I’m sure you saw that they extrapolate it and said, here’s our projected immigration flows, and that’s a reasonable projection. But as a monetary policy maker, I can inc, I don’t feel like I can safely incorporate that into my baseline. That is a upside risk to supply, which would be welcomed to have increased supply and labor force however it comes. It could come through domestic participation, but it is not something that I can count on when I’m making policy because it would end up in that state that I talked about. We do not want where inflation gets stuck at a high level and given the toxicity on the economy that has, it’s something I’m unwilling to take in fully until I see it materialize.

Mark Duggan:

Great. Okay. Thank you for that. So let’s turn a little bit, I know this is a session about monetary policy, but I’d love to hear.

Mary C. Daly:

It can be a session about anything. You’re the boss.

Mark Duggan:

I don’t know. Not sure. I don’t have 2000 people working for me. I don’t know how I’ve got 30 working for me and I’m tired. So you’ve got a lot of energy. It’s impressive.

Mary C. Daly:

I’ve got a lot of help too. I mean you don’t run an institution like the Fed without a lot of people working on behalf of the same thing. We have all those things I named, there are people working in those groups, but there’s also people leading those groups. And I benefit from all of the people who work with me side by side.

Mark Duggan:

You’ve been there 28 years—

Mary C. Daly:

Why do we do this? I mean why—

Sorry. It’s okay. You’re younger than me. So you feel like that’s still okay, but it’s not. You’re going to get to an age. You’re going to say, why are we counting? And I told you I’m a sports fan. So when Peyton Manning was told how many, he used to be the Indianapolis cult quarterback for most of his career, he said, wow, you’ve played X number of games. And he looked at the commentator and he said, why do you do that every day? I tell myself I’m not old. And then you pop out with I am. I mean why, okay. But I have worked at the Fed for considerable number of years, all of them. Wonderful.

Mark Duggan:

Yes. Okay, wonderful. So I’m just curious what you think of the United States current fiscal trajectory.

Mary C. Daly:

I’ve worked there long enough to, I should start before I give you the answer I was going to give you. Let me remind everyone here that monetary policy and fiscal policy are completely different things. And fiscal policy is made by our elected officials. We elect them as citizens and they are the people making those allocated decisions. So the Fed plays no role in those types of things and we have no tools. So I want to make sure that I’m stating that clearly. But what we do know, and I can say this as an economist, and we have a long history of the Federal Reserve saying when it thinks we’re on an unsustainable path, and I just think this isn’t coming from the Fed. Anyone looking at our budget and our debt can say that this is probably an unsustainable path for our economy. And then at some point there will be a rebalancing.

And the thing that I feel concerned about is not about being a Fed official, it’s really about being a person who met with those young people today, those students. And I’m asking myself, how are we, if we don’t manage our budget, we give the debt accumulated debt to the next generation and they have less to work with. And so that hasn’t changed in a long time. Chairman Greenspan said that Chairman Bernanke, chair Yellen and just recently Chair Powell when he was in San Francisco said that to Kai OL’s question, I don’t know if you ask him that same question here at Stanford, but it is a normal question. Has nothing to do with being at the Fed, has everything to do with looking at the economy and asking how do we sustain the spending we have against the population we have and the productivity we have and the growth we have.

Mark Duggan:

Okay, one more question for me. We are, I want to just ask you about California’s economy because California is the biggest state in Europe portfolio. And we are here in California and we have launched recently at SIEPR, the California Policy Research Initiative. So we’re trying to be helpful to state and local policymakers here in California right now. If you look though at economic indicators, California is doing spectacularly well in some respects, but also is struggling in some other respects. So if you look as of last month, we have, for example, the nation’s highest unemployment rate. And we’ve had some troubling numbers on various measures of inequality depending on how you look at them. But at the same time, we also have some of the world’s leading technology companies here. And so in certain respects, I think the state is in a really enviable position to have these fantastic companies located here. But what do you think explains this apparent discrepancy in our state?

Mary C. Daly:

Well, as you said, I’ve been in California since 1996, and one of the first tasks I had was to, as an economist working at the Fed, was to try to explain why when California had all the tech companies, all the ones supporting the computer revolution and computerization and ultimately the dotcoms, why there was growing inequality, why there were people who weren’t able to take advantage of that and why, if you can go back in that time, you remember housing prices. I couldn’t even live in San Francisco. I couldn’t afford it. I was in, I moved first to Oakland, California. I’ve been there ever since. But the reason I did is because San Francisco was completely unaffordable because people with larger salaries and more rapid growth were getting in their salaries, were getting those places. And it hasn’t really, the levels, the challenges really haven’t changed.

Does the levels fluctuate over the business cycle and now we have the same challenges you’re seeing and the pandemic didn’t make that better. It made it worse. I mean, the pandemic showed us, it was always there, but it showed us an economy of haves and have nots. The haves were defined as anyone who could work from home and still make their money and make a living because companies weren’t going out of business. They were employing you just were doing it at home. And then all the people who either lost their opportunities in the labor market were laid off or let go, businesses closed, or those who had to come in and find that they were taking at the time seemed like very large health risks and were large health risks while they were trying to do these things. That has persisted. And so now we find ourselves with the high inflation really being a challenging thing because if you’re able to generate income and you’re able to continue to earn and you’re making a high wage working for some of the really robust companies in the state, well then you’re able to, you’re not happy about inflation, but you have a way to insulate yourself from the worst effects.

Inflation is the thing that affects those least able to bear at most. And for that group of individuals, they have, of course a robust labor market, but not always in a way that translates into a robust growth in their wellbeing because inflation’s chewing it away. So I think these are the same challenges we have. And what explains the discrepancy is often what explains the discrepancy in my judgment, the jobs we have that are being created are not always matching the skills of the individuals who could take part in them. And then of course, the more rapid growth in the economy we have isn’t being matched with increased housing. And if you make housing very expensive and you don’t have the skills to partake in the more valuable jobs in terms of wages, then you’re going to end up with a recipe where good growth brings inequality.

And California has been dealing with those issues for a while. What’s different now than I’ve seen before is that California and the coastal states are not the only ones dealing with this. Now I see that in Idaho, in Utah, in Arizona, even in Nevada, that there are these divides that are forming that look very much like what California looked like when they first came in 1996, that Boise, Idaho is one of the fastest growing cities in the country. And house prices are now so high that the people who grew up in Boise, Idaho can’t afford them. And it is a booming economy. If you go there everywhere, they have opportunities. But the people who had lived there the whole time don’t really feel like they’re partaking in those opportunities. And so it’s a more general question than just in California. On the unemployment rate, I mean, one thing that I also learned is that the unemployment rate is high in different states.

Nevada has a similarly high one. Utah is one of the lowest ones in the nation, and ultimately it has a lot to do with the age of the population and the amount of churn in the labor market. A very active and dynamic labor market has more churn. And the more churn you have, the higher the unemployment rate is. So it doesn’t mean that we shouldn’t use the metric, it just means that the way I’ve learned to look at it is you take the unemployment rate in any given period in any given state and compare it to the average unemployment rate in that state over time. And there California looks very similar to other states in the nation, which is the unemployment gap is falling as the economy is strengthening, but it doesn’t leave people necessarily with the same level of returns.

Mark Duggan:

So let’s take at least a few questions from the audience. I feel bad because I so enjoy asking you questions. I took way more time than I should have. But in any case, lemme start right here, David and then Ken David, right here on the front roof.

Mary C. Daly:

You did pretty well for a cold.

Mark Duggan:

I don’t know. You energized me, Mary. It was great. Yeah.

Audience 1:

First of all, thank you for being here, Mary. So I want to know if you or any specific group at the Fed or any of the Fed banks do some scenario planning for potential shocks to the economy, which could be very, very difficult to deal with. For example, it’s not hard to imagine today that the US could be involved in a major war and what that might mean both there might be some significant defense increase spending, but also the markets probably aren’t going to react well to that. And kind of how you’re seeing, what do you think monetary policy might look like to deal with that short term?

Mary C. Daly:

So one of the things that we do on a regular basis is we have these large research teams. They’re often not as big as they are valuable. But we have valuable research teams both at the Board of Governors and in every Reserve bank and those research teams. And you have the research being done, whether it’s in supervision, in financial markets or the payment system or for economic research related to monetary policy. And these research teams are tasked with studying the economy we have, but doing scenario planning for the economy. We could have what if a shock occurs? But one of the things we, there’s so many possible things that could occur and you don’t want to spend your time doing everything. So when you’re thinking about scenarios, you’re really focused on what are the ones that have some likelihood of occurring and have the biggest risk to the US economy.

And so definitely the pandemic was not one we had modeled, but it’s one we could throw our whole energy behind and say, okay, what happens if it continues to go? What happens if it resolves quickly? And so that work was done. We regularly model ones with what if there’s a global declining in growth, global growth slows try to slows et a way that’s outside of what we want with geopolitical tensions, which is how I would define them. We’ve had a series of geopolitical tensions. We first had the war in Ukraine that still persist, and then we had the war in Gaza in Israel, and now it’s been escalated to some extent by the recent involvement of other countries or Iran in particular. So all of that creates geopolitical tension. And then we ask ourselves two questions regularly, which is what is the impact directly on the US economy and what’s the impact on how people think about the economy, right?

Because you can have a direct impact or an indirect impact on the numbers, but you can also have an uncertainty impact. And we already have a lot of uncertainty in the economy about how it’s going to go. And so if people become worried about geopolitical tension to spill over, that can increase uncertainty. So we absolutely do these things. I mean, I’ll tell you the models, as any economist in the room will tell you, the models are not very sophisticated at imagining the shocks of these things. And so you have to basically say your model’s working, but what if it stops? And then you say, what can we do? So most of the work that I think about is talking through and evaluating what the past impacts have been. Why do we think the impacts could be greater or smaller than the past would tell us? And what are the things that we would need to do if that should materialize so far on the geopolitical tensions, I’ll just say that the first and foremost thing is for the people, the first and foremost, our heart. My heart goes out to the people who are suffering because of these conflicts and these wars. This is hard on this, but so far I don’t see direct impacts on the US economy at this level of escalation.

Mark Duggan:

Okay. Ken is next. I think Ken had a question. Okay.

Mary C. Daly:

We got five minutes.

Mark Duggan:

Go. Super. Maybe we can get a couple of questions. Tom, question, do the speed dating version Tom, and then we’re going to try to up—

Audience 2:

Two quick questions. One is a lot of businesses create targets as ranges. Why not create an inflation range of two to 3%? And the second question very quickly is, I listened to Jamie Diamond, they have gobs and gobs of data. Do you ever look at how your data compares to some of these major banks with all the data they create?

Mark Duggan:

Okay, great. And can we try and get Tom’s question here, and then I’m going to try to get over here too, but we’ll see. You’re going to have to help you remember, and we’ve got, yeah. Okay. Tom, here.

Audience 3:

Mine’s on the state of commercial banking in the country and getting your sense of how concerned you are. We’ve all watched Silicon Valley Bank get started, excel here and then fall apart, but the number of small banks that are closing as interest rates as they loaned a lot of money at low interest rates and now interest rates relatively going through the roof, a lot of closing. How worried are you about that state of affairs and where we’re going from here?

Mark Duggan:

So let’s take a couple minutes on those and then we’re going to try to get a couple more questions.

Mary C. Daly:

Okay. On the inflation, changing the inflation target, not now. I mean, really, we had a discussion about these things in the framework review, and 2% is the target we’ve chosen. There’s no way in which I would support changing the goalposts while we haven’t achieved them. That is the most important tool we have is our credibility with the public, and if we change the goalpost when we haven’t achieved the goal, that will damage credibility, which is not worth it at this point on the, I’m sorry, I forgot the second. Sharing data. Yes. We have a lot. So all the information that you see, we have access to information similar. I mean, it is a really information rich time period that we live in. There’s lots and lots of information, but information alone is not the answer. You have to have the information, you have to have the analysis, and you have to look forward by hearing what people are actually doing as they go through that.

So yes, we have information that’s similar to what the large banks have and many other entities that collect it. Commercial banking on commercial banking, the strength of our economy, as many before me have said and yell, I mean Treasury Secretary Yellen, vice Chair, BARR, chair Powell, all of the actors, the strength of our system is built on the fact that we have banks of various sizes throughout the communities doing different things for different groups. So absolutely there’s a commitment to continue to support those institutions and ensure that they are, we have over 4,500 banks in the country and only three failed. The thing I take away from that is that it is a strong and sound banking system. There will be consolidation, there will be banks that say it’d be better if we were larger, but I haven’t seen the full scale result of that fear, which I do think is out there actually materializing. We still have banks of various sizes, and in fact this morning in the OR this afternoon, it was in the Latino Action Business Network. I heard that some of their partnerships are with community banks and they see the strength of community banks because community banks form relationships and are more willing to lend to groups that aren’t as well established. So I still think that sector has a future.

Mark Duggan:

Great. Okay. Question from pitch and then I’m going to try to get in another—

Audience 4:

I heard you use the phrase neutral interest rates. What’s the neutral interest rate?

Mary C. Daly:

Okay, it’s an interest rate at which it’s neither restraining nor stimulating the economy. So what is the interest rate when there are no shocks in the economy and everything is just in its equilibrium. So if everything is where it should be, everything’s back to normal. Inflation’s not too high. The labor market has got full employment, and the interest rate is just where it would be from the foundational factors in the economy, our labor force, our productivity, the things that we’re capable of. Then that would be the neutral interest rate, and it rises and falls with the demand and supply of funds. If you’ve got a lot of funds, a lot of savings available and not much demand for those savings because nobody’s innovating, nobody’s borrowing, then the neutral interest rate falls. If you’ve got a lot of demand for funds and not as many funds to be had, then the neutral interest rate rises.

Mark Duggan:

Great. Okay. So—

Audience 4:

Must define neutral interest rate. You must be able to state what that is at some important time.

Mary C. Daly:

Oh, what is the number?

Audience 4:

Nothing. I use the number right now, but how would you define it?

Mary C. Daly:

Unfortunately, just the way I said, which means that, yeah, we’ll come back, pitch. Let’s come back after, after. We’ll come back afterwards. I’ll talk to you more about it, but unfortunately I have no better answer than that because it’s hard.

Mark Duggan:

Okay. One more from, and are you a student? You’re a student. Okay, good. I think so, yeah. Okay. So Kevin and then the student. We got to get a student in here, Kevin.

Audience 5:

Well, thanks a lot. As we’ve calmed down the overall economy, healthcare stood out as one areas of high inflation, and because of insurance, it seems like it wouldn’t be sensitive at all to interest rates. How are you looking at healthcare as a driver and thinking about whether we are going to collapse the economy just so the healthcare costs come down.

Mark Duggan:

Great. Thanks for that. And then the student questions we have for you.

Audience 6:

Hello, president Mary. Thank you so much for being here today and for sharing your thoughts. I’ve read that you focus a lot of your work on the gap between employment and wages, between the different demographic groups, and that brings me to my question in the future, how will you keep addressing those income inequalities and economy inclusivity, especially with the technological displacement from ai?

Mary C. Daly:

Okay, great, thank you. Okay, so healthcare. So healthcare is an interest rate in sensitive sector generally, and so it’s a sector that is not going to respond that much to our movement of interest rates. One of the things we see is that a good portion of the jobs is a disproportionate portion of the jobs being created right now are being created in healthcare because we have a lot of needs for healthcare as the population ages. How we solve that financing problem is something that our fiscal agents have to think about because it is not something that the Fed can do. It doesn’t even respond to our interest rate policies, but it’s definitely something Mark asked me about the big problems that fiscal agents like the debt and the deficit. I think another one, and we’ve both studied over our career, the entitlement programs and the government programs and healthcare is one of those things that we will ultimately have to wrestle with.

But again, that will be the fiscal agents, not the Fed on that. On the question of the gaps, you referenced my research, and I have done research on this with many co-authors in my profession, but essentially what we’ve found over time, and this is how I’ll end it, is that again, I work at the Fed and so I have one lever, the interest rate to create the conditions of a sustainable economic growth path with full employment and price stability. The good aspect of that that I keep coming back to is that a long and a durable expansion is the thing that you see closing those gaps. So if you looked at any gaps in the economy, they often and almost always close as the economy’s expansion continues because more people get opportunities. And so it’s one of the reasons that I’ve repeated so many times. Our goal right now is to restore price stability as gently as we can because the number one problem with the gaps is they rise in recessions. And so the fact that we can avoid a recession, if we work to do that and we bring inflation down, that would be the best way that the Fed and my judgment can contribute to those long-term goals.

Mark Duggan:

Amazing. Thank you so much. Give it up for President Mary Daly. Thank you, and we’ll hope to see you in a few weeks for our next event with the first deputy managing director of the.