2025 Rocky Mountain Economic Summit with Mary C. Daly

Michael McKee:

Okay, there we go.

Mary C. Daly:

Oh, no, you’re good.

Michael McKee:

Thank you. We’re going to do the guts of the interview coming up at 10:45, which is about two and a half minutes away because we’re going to be carrying this on Bloomberg Radio and Television worldwide. But one thing that Crystal didn’t mention is that, I think maybe you know this, but the 12th Federal Reserve District includes Victor, Idaho. So we are very happy to have Mary Daly here. This is your territory.

Mary C. Daly:

It is indeed my territory. It’s also one of my favorite parts of the country. Since we still have a few minutes, I came to Idaho for the very first time in my life when I was a junior economist at the Federal Reserve and they said, “Well, you’re a rookie, so you have to go out and do outreach with the outreach team.” And I flew into Boise, Idaho and I drove all the way because I wanted to see. I didn’t want to just do a flyover, so I saw everything. And in fact, we went to Pocatello, Twin Falls, Idaho Falls. And I said, “But it’s really close to Jackson Hole, so let’s go over the pass and go to Jackson Hole and then come back.”

So I’ve been here many, many times and it always reminded me a tiny bit of home because I grew up in Missouri. Now you’re going to say, “Missouri does not have the Grand Tetons or potatoes,” but we do have rolling hills and lots of farms and fields and ranches and they’re very close to urban areas. And so you might go from an urban area, and you drive a mile or two and suddenly you’re in an agricultural community and it kind of shows you the diversity of our economy. Maybe that’s why I became a Fed Chief.

Michael McKee:

Maybe that’s why. We want to make sure you keep coming back so you can come out and go fishing with us and lot of wonderful things.

Mary C. Daly:

Well, I love all adventure sports: skiing, fishing, mountain biking, golfing, the whole brick. I just take everything up. I’m much like Crystal.

Michael McKee:

Well, we’re thrilled to have you here and we finally got you to Victor for the district you represent and it’s-

Mary C. Daly:

My complete pleasure. It’s a double win. Beautiful, great conversation, it’s a triple win, and in-district.

Michael McKee:

And we have really nice weather today, so-

Mary C. Daly:

It’s gorgeous.

Michael McKee:

… we’ll give you credit for that as well. And you probably did that on your own, not with a 12-member committee.

Mary C. Daly:

Completely. This is all me. Just remember that when you wonder, “Are they doing anything?” Yes, the weather. They do the weather.

Michael McKee:

All right, we’d like to welcome all of our viewers and listeners on Bloomberg Television and Radio worldwide. We are here in Victor, Idaho at the Rocky Mountain Economic Summit at the Bronze Buffalo Ranch at Teton Springs. And Mary Daly is joining us, the president of the San Francisco Fed. And this is her district, so she’s very familiar with everything that’s going on around here.

Now, we have of course followed several other speakers including Paul McCully, who I think most of our viewers know as the former chief economist at PIMCO and a number of other important jobs. And he was talking earlier about the American dream of “chicken in every pot.” And he said that one thing that everybody agrees with, including at the Fed, is that we all would like to have a bigger chicken. I just want to make sure that he’s speaking for the Fed.

Mary C. Daly:

Absolutely. We would want to have a bigger chicken or a bigger vegetable, whatever it is you eat. It’s really about prosperity. There is no part of our democracy that really doesn’t want more prosperity, and the Fed is included in that. And our job is challenging, but important and good, which is we want to support prosperity, support the labor market and do so without having price stability be challenged. And that’s the role of the Fed. And if we do our job well and then stay in the background, all other things are possible from the businesses and consumers, households in our economy.

Michael McKee:

Everybody asked me, “What are you going to ask Mary?” And I said, “Well, I’ll wake up on Thursday morning and I’ll look at the president’s social media feed and that will tell me what the story of the day is.” And of course, he can’t lay off. So I have to ask you, how is all that affecting you as a policymaker and your colleagues?

Mary C. Daly:

Our work is really important. On the front lobby of the San Francisco Fed Head office, we put a sign up. I put it up the very first day I became president. It says, “Our work serves every American and countless global citizens.” But that every American is really important. And that’s the work. As Paul said, Congress gave us our responsibilities, and our responsibilities are price stability and full employment. We work to carry those out every time.

Our teams, the committee, the FOMC, we are laser focused on doing those responsibilities. And if you look at the headline numbers on inflation, we still have some work to do, but we are in a good place and we need to finish the job. So that’s where we are. And other things, there’ve been periods of political pressure before, and history serves us best as a guide there. When you stick to your work, the work that Congress gave us, the work that is for the American people, then everything else falls into place.

Michael McKee:

The president has obviously been sort of direct in his criticism of Chairman Powell. Treasury Secretary Scott Bessent said on Bloomberg Television this week that the president is just working the refs trying to create a favorable view of what should be done. Does that make any impression on you? Does it work to work the refs?

Mary C. Daly:

For me, what is really important is looking at the incoming information, how close we are. I think one of the Pauls said, we’re really close. We have an economy that’s working. We have solid growth, we have a solid labor market, the consumers are spending, but they’re making their way in their families.

Ultimately what is still bothersome is we haven’t achieved price stability. And I define price stability this way, I do think it’s sort of an ethos part, it’s when people don’t have to worry about inflation. When I go out and ask people across the 12th District, across the country, “What’s your top worry?” and they stop saying inflation, well, then that’s going to be a victory because they suffered for too long.

And remember, inflation’s like the largest tax people pay. It’s an unpredictable tax. You’re on a treadmill, you earn well, you invest in your business, and inflation erodes your well-being. So I think ultimately that’s what we have to think about and that’s really enough to think about, frankly. And that’s where my focus is. So other things are not distracting us from our core missions and our core missions, as we all know, have come from Congress.

Michael McKee:

So essentially you’re saying, “We are going to remain focused on inflation, we’re not going to consider cutting rates until we are sure inflation’s coming [inaudible 00:06:50]-“

Mary C. Daly:

I did not say that.

Michael McKee:

Okay. I’m putting words in her mouth to make it easier for the headline writers.

Mary C. Daly:

I know that. And so that’s why I said I did not say that, so that they understand the next part of that. No, seriously, I think right now when I look at the economy and policy, I see them as both in a good place. But when I look out, we really have interest rates for a significant number of years now in restrictive territory. And what we have is an underlying economy that is responding to those higher interest rates.

You have growth slowing. The frothy labor market that was pervasive after the pandemic has now moved to a more sustainable place. People are getting jobs, but firms are finding it easier to find workers and, importantly, keep workers so that they’re not constantly on that revolving door of train a worker, the worker leave. So I think those are all good positions.

Then we have inflation coming down. And if we extract or move away from just the goods price inflations, which those numbers have been showing, and certainly showed in this week’s print, the effect of tariffs, some of those being passed through. But if you look at the other areas of inflation, you just don’t see that inflation is pushing back up. You see it gradually going down. And housing services inflation, which has long been elevated, has been coming down over this year. Services inflation, without housing, has been coming down. Slowly, but coming down.

So I see these as the result of the policy that we have in place. But at some point, if you hold the economy too tight, the reins, we’re in horse country, if you hold the bridle too tight, you actually end up stopping. And if you stop, then you take the problem people did have, which was inflation, and turn it into a problem that they don’t have, which is the labor market.

So that’s why I see these two goals, the dual mandate, as so critical, because it gives you the kind of balance that ensures people have both things they need: opportunities in the labor market and price stability so that when they work and they invest, they can build careers and families and communities.

Michael McKee:

So let me ask you how you’re thinking about the economy and what you should do right now, in the sense that this was a big data week. We had consumer prices and producer prices both come in at the headline level lower than anticipated, slowing in economy, especially service prices. But we see some underlying pressures in sectors that are affected by tariffs. Retail sales today came in stronger than expected, much stronger than expected, except for a couple areas that would be affected by tariffs. So could you explain to this audience and, of course, the guy at 1600 Pennsylvania Avenue, if he’s listening, how you put all that together and decide when do interest rates come down?

Mary C. Daly:

Well, there’s always been three scenarios that were possible. So the first scenario was that we’d get the tariff effect, and it would spill over into all other sectors. So if the price of a tariffed good goes up, then your person cutting your hair, since we were talking about barbers earlier, raises his or her prices and suddenly you’ve got spillover. That would make it more persistent. We haven’t seen any evidence that that’s occurring. And I think that the house price inflation, the house services inflation, and the services inflation coming down reassures you that we’re not getting that persistent component.

So then there’s two other scenarios. One is that you get the tariff effect, but it’s relatively contained and it becomes a one-off. And the second is you just don’t see much of the effect because what happens is that as the tariffs settle into whatever level they’re going to be, firms who are importing from other countries say, “You take half, I’ll take half” to the country. Then down the supply chain or the production chain, you’re splitting it all the way. And so that by the time it hits consumers, it’s a more muted impact than what is the announced tariff.

So one of the pieces of evidence we have for that is that the effective tariff rate as of last week was calculated around 16%, but tariff revenue is only 8%. So that tells you there’s some splitting, there’s some leakages, some workarounds. Companies are very innovative. They’re figuring out other ways to do things. And this is a global shock, and so companies across the globe are figuring it out. So when I think of that, I’m really of the mind, “Well, we might end up with a more muted impact of tariffs than we thought.”

And then, this is something I’ve said publicly since January, is all administrations come in not with one policy but with a slate of policies. And Paul Ryan said this this morning, and I think it’s worth emphasizing, the slate of policies have push and pull effects. So deregulation and tax policy, tax relief, those are growth inducing policies. The tariffs and immigration policy could be growth impairing policies, but we don’t know yet. And we certainly don’t know the net effect of those. And so that’s why it’s important to take in the information and not lower rates preemptively because we just don’t have that certainty and the economy’s in a good place.

At the same time, you can’t wait forever. Because if we wait till inflation gets to 2%, well then we’ve lost, we’ve likely injured the economy in some way that was completely unnecessary. And so I’m of the mind that the summary of economic projections we put out, which had two rate cuts for this year, I think that’s a reasonable outlook to have. Of course, we are data dependent. If all of you who are business owners say, “No, Mary, the inflation’s right around the corner and is going to spill over,” well, then that’s a different thing.

It’s one of the reasons Reserve Bank presidents in particular spend so much time in their communities asking questions like I asked Crystal this morning: “What are you thinking? What are you seeing? Are you raising prices because of this, that?” And she can give me that information. And so far, I’m not hearing that that’s a pervasive outcome.

Michael McKee:

Let me dig deeper into that and ask you, I know you’re talking to CEOs and companies all across the district all the time, what’s the basic attitude? Most of the time I’m told by folks at the Fed that everybody’s just sort of sitting on their hands right now.

Mary C. Daly:

Not in the west. Maybe it’s our western spirit, but I have the nine Western states, and I don’t see sitting on hands behavior. I see cautious optimism and there’s a cautiousness. People aren’t… What I heard originally was, “We’re going to wait and see.” But now that the direction of travel on tariffs seems to be negotiation to lower rates than were announced on “Liberation Day” and the tax policy and other things have passed, people are already seeing that they can work in this system.

And so I’ve been up to a lot of places since January, and I’ve been to Alaska twice, which is at the heart of some of the changes in programs that you see, and what they are is cautiously optimistic. Come to the Intermountain West, cautiously optimistic. California, cautiously optimistic. So whether I’m in the coastal part of my district, the Alaska… I haven’t been to Hawaii, but they’re also cautiously optimistic. But the Intermountain West, I think you guys are always little poster children for optimistic, but I think it’s really optimistic at this point.

And recognizing costs may rise, other things may happen, but workers are easier to find, opportunities are out there. Maybe not taking every risk you would take if everything was certain, but certainly not stalling out and waiting to see. The growth, one of my directors put it as, “Growth does not come to the meek.” So you have to take some risks to do well.

Michael McKee:

When you do go to Hawaii, let me know and I’ll come out and cover that.

Mary C. Daly:

I go regularly. It is in the district. But I haven’t been this year, but I will let you know next time.

Michael McKee:

Another question on what you’re hearing from CEOs. The big question about whether we have an inflation impact from tariffs is whether companies are going to pass them along. What are the bosses out there, the people who raise–we should have asked Crystal–what are they telling you about that?

Mary C. Daly:

Well, firms live in an equilibrium or an ecosystem like everyone else. And so the impulse, of course, is to pass along any cost increase and protect margins, but there’s also a recognition that customers, consumers are exhausted. They’ve been paying higher price levels. And then with rising inflation and as the economy slows, and you see this in the sentiment surveys for consumers, they’re a little more worried about the job market, so they’re going to be even pickier.

And so you would expect retail spending to slow today. If you average the two months, you get something that looks kind of normal. But we see consumer spending over time slowing from where it was, but not falling off a cliff. So I think that’s just part of a solid economy, but it does discipline the idea that you don’t just simply raise prices and push them completely through. And so what we’re hearing is that companies are saying they’re trying to negotiate with the import country, the importing firms, take a little bit off and then they’re trying to push it along the supply chains. They’ll pass a little bit through, but unlikely to pass the whole thing through.

And importantly, in the goods sector this is especially apparent. Because post pandemic, there was this massive, really large, significant, you could see it in the data, rotation of consumers to goods purchases over services purchases. And people were buying many more goods than they bought, but now their coffers are probably full. They have a lot of Pelotons and other things, and so bikes and things of that sort. So it’s very easy for consumers to be price sensitive on those items and then turn themselves back to services and buy experiences over goods. And I think the goods providers are aware of that. So whatever the impulse is, the practicality has to meet the consumer.

Michael McKee:

You used the words “a solid economy.” What to you is a solid economy? And how far do you think we’ll be from that at the end of the year?

Mary C. Daly:

If we see what we’ve been seeing, which is that we’re slowed to a sustainable pace, and right now 2% growth is the estimate of trend if you simply add up productivity growth and the labor force growth. So we could get more out of productivity and get a higher number, we could absolutely grow a little faster, I wouldn’t be surprised about that, but I don’t think we need to slow precipitously to produce the last mile on inflation, if you will. I think we can actually do it with this study of growth expansion in the labor market that hovers around the current level.

I wouldn’t want to see more weakness in the labor market. I really wouldn’t want to see that. Which is why you can’t wait forever, thinking that inflation’s just around the corner so we have to wait until we know. I think clarity in central banking is overrated. We want some clarity, but we can’t wait for perfect clarity because then we’ll always be backward looking and by then it’s too late.

Michael McKee:

You mentioned potential growth, which is the sum of productivity and labor force growth. The president has also got policies on labor force growth, bringing it way down. Have you seen effects on the economy in your district yet from that?

Mary C. Daly:

You see pockets of places where firms relied on immigration, legal immigration as well, and there’s just a chilling effect on those markets. And so you hear it, but it’s in pockets. I wouldn’t say there’s a broad-based concern over that at this point. I think there was a lot of concern originally, but it just hasn’t materialized that way. And so that’s been a help.

Now, we talked about labor force growth. It is a fact that we have one of the lowest labor force participation rates in the industrialized world for men largely, but women too, between 25 and 54. So our industrialized competitors all have higher labor force participation rates than we do. So when we talk about labor force growth, I think we have to broaden it beyond immigration. And if immigration’s gone, our hands are tied. Really, what is the remedy for so many men, in particular, sitting on the sidelines?

Michael McKee:

Is there a model for what you think happens to the labor market based on the immigration policies the administration has?

Mary C. Daly:

We have a way. Immigration went way up, and it’s come way down. One of the remedies that firms use, frankly, is they increased technology so that they can use the workforce that we have and match it with technology. And you see that. We’ve all been to hotels and convenience stores and other things where self-checkout and self-check-in and all these things have technology solutions coming.

We have this EmergingTech Economic Research Network at the San Francisco Fed. We launched it in January 2024, and we do CEO round tables and other things around this topic. And it has been just astounding how many medium and small sized businesses are adopting generative AI or AI solutions that aren’t generative AI, just plain old machine learning, to augment their talent pool and actually expand their productivity with a smaller workforce that can’t grow as fast.

So I think there are solutions there. And if you could put that productivity and innovation with some increase in the domestic labor force, then I think that could be a very win-win situation for expanding our growth rate.

Michael McKee:

When personal computers came along, productivity gains were touted that didn’t show up for quite some time. I know you follow the tech world very closely, Silicon Valley is in your district, when are we going to see the productivity gains from AI and how is that offset by job losses that are going to come when the computers do what some of us do?

Mary C. Daly:

So one of the things that are really important to know… So a little known fact maybe, I remember it like it was yesterday, but one of my first jobs, I come in as an economist. I’m a microeconomist, labor economist, by training. But Chairman Greenspan, as you remember, was very thoughtful about productivity and he thought it was there even if we can’t measure it in the statistics. The statistics are always the last to find productivity. So he set me out, his team set me out, to be the collector of anecdotal information, qualitative information, on this. And you could see it everywhere. Companies were testing things, they were trying to bring it to scale, et cetera. So the productivity improvements were there long before they ever aggregated up into the aggregate statistics.

So now we’re going to talk about the job issues. Well, computerization was a technology that actually replaced workers more quickly than it augmented possibilities. Generative AI has a different component of possibility, and I think it’s useful for us to remember this. So generative AI can make people who aren’t as skilled in something, newly minted workers, people who are…

The best example I can find is physician’s assistants. Physician’s assistants can now triage people in the frontline medical places, if they allow it, with generative AI assistance. So, say, you sprain your ankle. Well, they have a protocol that gets spit out. Did you break your ankle? How would I know? When I get the X-ray, I put the X-ray into there. So they can do these things and it makes the physician assistant more productive right away. It doesn’t mean we replace doctors, but we have a shortage of doctors. And so it’s a way to give care and increased productivity in a medical profession.

And it’s a long way from being scalable. But I think those are the kinds of experiences where generative AI has the possibility to make us better overall. And then the biggest productivity gains come from things we don’t even imagine today and we certainly don’t have. So I am not evangelist for generative AI, but I’m also not a pessimist.

And I think the big fact I keep keeping in my head is that no technology in the history of technologies has ever reduced jobs on net, but it does change who is working and who’s not and what skills are demanded. And so when I speak to younger people, I say, “You have an imperative to keep up with the new technology and figure out if you’re a welder, how can generative AI help you? If you’re a computer coder and you’re worried about your job, then learn the AI so that you can do the next job that’s available.” And I think that’s the way we stay ahead of the job losses.

Michael McKee:

I want to ask you a preamble question to my next question, but the first part of this is just that the president keeps saying in his tweets, “Jay Powell should lower the interest rates today.” But it doesn’t work that way, does it?

Mary C. Daly:

It does not. Well, you first say what we’ve already talked about several times today, but the committee is tasked, the FOMC is tasked by Congress with price stability and full employment. We have a diverse set of members. There’s 19 of us. We debate and discuss vigorously what we should do for the American people against those things.

And so there’s two components of that that are important. All members of the committee are important and influential because they’re bringing different places, whether they’re Reserve Bank presidents and they have a different view from the context they talk to, whether we’re just from different perspectives, we’re looking at the same data and the same models, but we’re coming to a different judgment, and of course we’re always trying to look ahead.

I’ve been working at the Fed for a while and been a policymaker for a while, and the people who are the most valued to me on the committee are the people who don’t agree with me. I’ve got Randy Quarles here who was a colleague of mine at the Federal Reserve. Randy and I would always talk in a way that I really took away. Randy challenged my thinking. I believe I challenged Randy’s thinking, but I leave that to him to say. I know Randy challenged my thinking. I was a better policymaker because I sat with somebody who was able to challenge that thinking. And that’s how the FOMC works.

And whether you’re the chair and all the committee members are challenging your thinking or you’re a committee member and the chair is challenging your thinking, the collective is we share equal responsibility when we take that vote and we walk out of there, ultimately, we’re all answerable to the American people. That’s how it works.

Michael McKee:

And now to my question, most of your colleagues have suggested that the July 30th meeting is too soon. There’s not enough information yet, although we got this important set of data this week. Two members of the committee have already said that they could see cutting rates in July. What’s your position on the next meeting?

Mary C. Daly:

So I’m going to tell you how I really think of this and then I will give you a vague version of that, an answer to that question. But let me just say this is how we go back and forth all the time. He wants a date, I say no.

But seriously, I think we’re asking the wrong question. I don’t think the question is it going to be July or September? I think the question is what’s the direction of travel? And there, when you look out, the direction of travel, and you saw this in the summary of economic projections, is rates will be reduced consistent with the fact that inflation’s coming down and we don’t want to unnecessarily tighten the economy in a way that hurts the labor market or growth. So that’s the direction of travel. Whether it happens in July or September or some other month is really not the most relevant piece.

The second most relevant piece is where will the rates settle? And there I’m very much on the camp that it’s going to be higher than it was in the pre-pandemic era. If you thought it was two and a half in the pre-pandemic era, I think you have to look three or north for the nominal neutral going forward. And so that just gives us a lot of understanding of we’re not going back to pre-pandemic rates, but some continued ongoing normalization of policy as we finish getting through the battle of high inflation and we ensure that we’re trying to balance both full employment and price stability.

For my own view, I think that there’s a lot more information we could collect. And the thing I was looking at between should we move quicker, and should we move a little less quickly, has to do with where’s the labor market? Initial claims for unemployment insurance remain low and below expectations. Inflation actually came in right on our expectation, my expectation. And it’s not surprising there’s some inflation in the goods sector, and it’s very encouraging that there continues to be some disinflation in other sectors.

So I think we’ve got policy in a good place today and we’ll continue to learn more about how the uncertainty on tariffs and other things prove out. And one of the big jobs we all have between now and through the rest of the year is to be out among businesses, community groups, workers, asking what’s the lived experience of the economy and not, “What did you do yesterday?” which is largely what the published data tell us, but, “What are you going to do tomorrow? How are you planning? Are you building?”

I’ve been doing crane counting. That’s a really fascinating thing to do. If you’re like me, I look at the ports and I count cranes. And if you count cranes, cranes are still going up. They’re not stopped. And they’re working. You have to look at whether they’re working or they’re just sitting there. So I was in Boise, Idaho just a month ago for a commencement speech and what I saw was cranes still being constructed, going up. So there’s optimism there and there’s also continuing to work and to build. So I don’t want to be too optimistic, but I’m certainly not pessimistic.

Michael McKee:

Well, you mentioned that interest rates are going to settle at a higher rate than they were. I don’t think anybody-

Mary C. Daly:

In all likelihood.

Michael McKee:

Probably nobody expects them to go back to zero again.

Mary C. Daly:

Two and a half, though, I think is where they used to be as a nominal neutral.

Michael McKee:

I know somebody who got basically a two and a half percent mortgage, and she lets me know about that all the time. Where do you think it is? Where is neutral?

Mary C. Daly:

I think my own personal view is it’s… I penciled in a view in my head of three, but if you really are a student of any of the star variables other than the one that we named, which is 2% inflation, you know that there’s a great deal of humility that comes with the estimate. So I think a better way to think about it is three or north of three. I don’t see a lot of evidence that it’s south of three, but again, you have to have an open mind on these things.

And the place you know it is in the economy. So right now, we have interest rates much higher than three, a hundred basis points higher, and we still have growth coming out solid. And this tells me they’re modestly restrictive, maybe moderately. I don’t know how to really dice and slice moderately versus modestly, but a little restrictive. And if the neutral rate was something like two and a half, they would be potentially much more restrictive than we’re seeing them play out in the economy.

Michael McKee:

I’m just going to slide in a little technical question here that came up in the earlier discussion. Why does the Fed look at the personal consumption index and make that their target instead of the CPI, which is what everybody’s familiar with?

Mary C. Daly:

So I guess it would be useful to recognize or to say out loud so everybody knows, just because we have a target variable doesn’t mean we’re not looking at all the other indices. And when you have price stability, these indices are all moving in the same way. And so they look really tight, they’re next to each other, they all have a little bit of difference, but that difference is historical, it’s a constant, and you can figure out that they’re all moving the same way. When you don’t have price stability, you’re pouring over every single aspect, not just the headline numbers, but all the different sectors, trying to understand what are the leading indicators for inflation spilling over? What are the lagging ones that are already behind us so we shouldn’t worry about them? And that’s what we do.

I mean, I have pages of what we call the Dashboard of Inflation Indicators. And the ones that have been proven most useful are actually not those headline numbers at all. But the things that are proven most useful are there’s a survey that the Bureau of Labor Statistics has done, which asks what percentage of prices have gone up and what percentage of firms say they’re going to raise prices in the future? And then the second part of their series is how frequently are firms changing their prices? In the heat of the 7% inflation firms only had one direction, “I’m moving prices up,” and the frequency of price changes had skyrocketed relative to normal.

So we have this theory in economics called menu costs, meaning you all don’t want to change your prices very frequently because you have to change the menu. Well, if you go to the local businesses out in Oakland where I live, you would see that people just took the Sharpies and they just wrote through the price and they wrote a new one. It was all in these paper and pencil kind of things because the prices was changing so much. So we don’t see that happening now, and that’s a good sign.

So the PCE, why did we pick it? There’s people might tell you different things, but here’s ultimately why. If you look at a set of statistical analysis that say what’s the best predictor of underlying inflation going forward, the PCE is the most reliable predictor and it is one where it’s analytically important. So it gives us a good guidance for how to follow inflation that’s not moved around by idiosyncratic factors. But I will definitely offer to you if that was all we looked at, we wouldn’t have the complete picture. So we look at everything.

Michael McKee:

A couple of questions on prices. Chaos in Washington, we all have seen that for the last couple of months, and yet the stock market keeps going up and up and up. How do you think about asset prices? How does that play into your view of inflation and what you need to do in terms of policy?

Mary C. Daly:

Well, it’s one financial variable in an array of financial variables that we take in. All of this is inputs to my thinking about how loose or tight our monetary policy and conditions, financial conditions, not just monetary policy. And the stock market moves around for a variety of reasons. The Mag Seven is very hot and that continues to be. Other stocks are building as well. But if you step back now, I think of this as just another measure of optimism, or lack thereof, in the economy. And if the stock market was very much out of line with what I hear when I go and talk to businesses, then I would have more concern. But right now I hear is a reflection of the optimism people have in the economy.

I have the benefit of not living in Washington and it gives you some distance. And so I spend more time with businesses and communities, and people aren’t as… I think they don’t read the news every day. They actually work on their business every day. And so when you work on your business every day, you’re looking at, “Do I have a demand for my products? How much does it cost to get the inputs I need? What are the opportunities for expansion that I see?” And I do see that there is that cautious optimism and that’s reflected in the stock market as well.

Michael McKee:

Now, there are questions about how the bond market reacts to all this and how you affect the bond market. Some of us are old enough to remember the bond vigilantes, and that’s a very good analogy for out here in the west. Are you worried that they will affect the economy if you do something that they don’t like? We saw yesterday a big increase in market interest rates at the longer end corporate spreads when it was felt that the president was going to fire Jay Powell. How closely do you watch that and how does that figure in?

Mary C. Daly:

Certainly you watch the bond market, but what I’m seeing now is volatility as opposed to some significant change in how investors are pricing things. That volatility that you mentioned yesterday, it went down and then up again, and so it goes up and it goes down again. So I’m keeping my eye on longer periods of time than the daily bond movements and I think that’s really important. Right now we have financial conditions that are slightly restrictive to growth, and I think that’s something that I’m keeping my eye on. If they got overly loose, then we would have to take that into account, but I just don’t see that happening.

And so many factors affect the bond market, not just the Fed. It’s really, we are often seen as the center of the attention there, but that’s really not, I think, true. There’s lots of things that affect it, including issuance for the Treasury, global factors, negotiations between countries on fiscal policy, geopolitical issues. And so I don’t over-read the bond market because that actually is a perilous outcome.

Michael McKee:

Another price question that I’m sure you get wherever you go is how much do house prices weigh on you? And is it your fault that nobody’s buying houses because interest rates are too high? Which would be the follow-up question to that would be, what’s it going to take to get housing going again?

Mary C. Daly:

So I think this is a terrific question, but one that when discussions I’ve been in, people have certain aspects of the facts. And I think we all will know this, but I want to put it together in the ecosystem. So we came into, at the pre-pandemic in 2019, we had a housing significant housing shortage. Then of course the pandemic made the housing shortage worse, and we built bigger and bigger homes because people wanted bigger and bigger homes, but at the cost of smaller homes. So then interest rates rise, and rightly so, to combat high inflation. And now people have the problem of higher-priced homes and now high interest rates.

But what I have seen as interest rates have started to normalize last year is builders are coming off the sidelines, they’re getting started. So they don’t want to overbuild. Part of the reason we have a housing shortage is because there were a lot of builders scarred after the global financial crisis and they don’t want to get in that position again. So we have a lot of pent-up demand for homes, especially starter homes, the ones that most new families want to go to, and, importantly, retired people who want to live close to their grandkids but don’t want a mansion anymore, they don’t want something that could support a family of four. They want something that’s going to support a family of two. So that’s a problem we need to solve. And I’m seeing localities try to solve this.

So do interest rates matter for housing demand? Absolutely. Will lower interest rates solve the housing shortage? No. You need some more resolve locally and maybe nationally. That’s not our side of the house, fortunately. And then ultimately, do I worry about high interest rates? Yes, but that’s not because of a specific sector, but because they’re an indication that inflation rose and now we have to get it back. When price stability is restored, then we can have the rate at neutral and we can proceed on.

And ultimately what I hope for is next year we come around and nobody asked me about inflation because it’s now in the background, we have price stability and we are able to make decisions based on the other things like what’s the best growth industry? How do I do things like Crystal was talking about, grow my business, pass that legacy on so that my family can inherit it? Those are the kinds of things we want people to think about.

Michael McKee:

I’m going to ask one more question and then we’ll do a couple of audience questions. We’ve talked a lot about tariffs, but what’s your modeling showing you about the effect of the budget bill that just passed?

Mary C. Daly:

It’s really early days. And again, I’m going to put us back to something that we talked about earlier in the sessions, but also I mentioned, what’s really important is the net of all of these policies. And so you need to know what is the growth impetus? How does it stack up? What’s the timing? Bills that are tax policy, well, they give relief immediately. Bills that are investment policies, those take time to work themselves out, as Paul said this morning. So there’s a timing issue.

And then of course we have the tariffs and the uncertainty there and we have immigration. And what’s really going to be important for the economy, both for the growth and for inflation, is how does this sort itself out and does the timing support those policies together or does the timing off? And we end up with things that are growth constraining before we get growth relief. Those are the things that I have to keep looking on as a policymaker. But it’s early days on all of this.

Michael McKee:

Mary Daly is the president of the San Francisco Fed. Now let’s see if we have a couple of audience questions we can take. There’s one over there. And we’ll wait for the microphone for just a moment.

Audience Member 1:

Hi, this is more of a philosophical question. You have a 2% inflation target rate. Do you feel that inflation is necessary for a successful capitalist system or a successful economy? Why not have a zero inflation rate as opposed to debasing the currency every year?

Mary C. Daly:

It’s more about measurement. So I joined the Fed in 1996 and I had worked with Michael Boskin on the original Boskin Commission. And what comes out of this is I think every central banker across the globe is got Japan in the back of its mind, recognizing that deflation is also challenging, very challenging. We know we don’t measure things perfectly. That’s just a fact. So 2% was sort of a number, if you think about it, that you can be inattentive about because you don’t really notice it. It doesn’t happen in all the goods. And it’s enough to give us a buffer, but it’s not so much that people take account of it and notice it.

So some would advocate we should have a 3% target, some would advocate we should have a 1% target. 2% is to me almost it’s in between there. And you also know, and this is important, it’s a symmetric goal. So sometimes you’re going to run below and sometimes you might run a little bit above, but the idea is you want to have price stability so that when people go to the store or they’re trying to think about what job to take or they want to think about what output to invest in, if they’re a company, what buildings and stores and people to invest in, they don’t think of inflation, they think of the market interest rate and they think of the opportunities. And that’s what we’re trying to get to.

So it is a philosophical question. Reasonable people could choose different things, but most countries have got some version of one and a half to two and a half, something in the two range, because you can be inattentive about it if it’s two, and it still gives you that buffer that prevents you from falling into a Japan-like problem, which they’re still trying to dig completely out of.

Michael McKee:

All right, we’ve got somebody over here.

Audience Member 2:

I have a question actually about AGI. There’s not much research that will include AGI and the job loss. So for example, Goldman Sachs predicts about 300 million jobs impacted in the next few years. What’s your take on it and how AGI will impact a policy of that?

Mary C. Daly:

I think with all of these, any technology has job losses. So it’s really hard to put a job total loss on that. You can do that with a model. You can say, “Here’s a technology, what does it do?” But what I’m hearing is many companies feel they may be running short of workers again.

And I was at the Aspen Institute in the summer, and this is public, so you can see it. And I was on the panel with the CEO of Honeywell, and what he said is, “I don’t have enough people to meet the output demands I have. So bringing in AI has helped me because I can make a new brand new engineer as good as a four to five year engineer because I can combine the work that they would’ve learned over a five year point with me. I can make them better faster.”

So I think if we were in a downturn and this was happening, then it might have a different implications. And there will be job destruction. The things that you could do better with AI, you won’t do with people. But that doesn’t mean that new jobs won’t be created. And so the one that I keep referring to, and it could be getting stale, but you might get rid of coders, but you hire prompt engineers and prompt engineers are the people that prompt the models to get the right answer.

I was actually at the Reagan National Economic Forum, and some of you might’ve been there, and I was on the panel with the head of Stripe, Patrick Collison, and he said, “It is true, I’m letting go of coders in large numbers and I’m hiring more coders who just have different skill sets. So in net net, coders are expanding in terms of my portfolio of hires or employment, but I’m changing who I hire. So I’m very focused right now on what does it do to the allocation and the distributional consequences.”

If you thought you had a lifetime job because you learned how to code, and now you think, well, that’s not true, then Industrial America has gone through that, that something you think you can do for the rest of your life becomes something you can do for 10 to 15 years. And I think we’ve learned enough lessons from that that we could get our workforce focused on how do you pick up skills so that you can be better at the things that are growing. And the cliches in business training are “lifelong learning,” but I think it needs to be more intentional than that.

So I don’t know what the right number of jobs are, but for now, I don’t see it as massive with job losses that come next year as long as we continue to build new jobs as we destroy older jobs.

Michael McKee:

We have time for about one more quick question. Over here. Nope? Well, we do have one in the back there we can…

Audience Member 3:

All right. Sorry, [inaudible 00:45:28].

Michael McKee:

We’re just getting our microphone into the right place so everybody at home can hear it. Yeah?

Mary C. Daly:

The microphone runner always has the hardest job.

Michael McKee:

Yeah, absolutely.

Audience Member 3:

Thank you. Especially thank you to the runner. Mary, how are you or the Fed thinking about FX, particularly with the diminution of the dollar recently?

Mary C. Daly:

The thing that you first learn, you walk into the Fed and that you learn two things. Our independence is something we have to earn every day and that trust. And the second is don’t talk about anything that’s the Treasury’s business, and so the dollar, FX, all those types of things. We take it in. It’s an input into our assessment of the economy, but it’s not something that we are actively to play a role in, so we don’t think of it.

Where I think a lot is what’s the growing role of financing outside of the ring fence that the Federal Reserve is more familiar with? I think that is something we’ve been dealing with for a while. But if you think about where are the pockets of potential strength or growth and where are the pockets of potential concern, you have to look outside often of the ring fence that the Federal Reserve understands. So I trust Vice Chair Bowman. I know Vice Chair Bowman well. She’s working on those types of things. But that’s where we have to think about things and asking…

There’s lots of questions that come out of that. Some are regulatory and supervisory, but a lot of them are about monetary policy. If we have a model in our head that we lower and raise the interest rate and it permeates through financial markets, but now things are moving outside of us, whether that’s private equity or all kinds of other financial intermediation, crypto, whatever it is, then you have to be able to understand those things to understand the transmission of monetary policy. So I spend a lot of time thinking about that.

Michael McKee:

Moderator’s privilege, one last question. You talked about job losses from AI, this is a question that came up earlier in the Pauls’ conversation. What about replacing Fed officials with AI?

Mary C. Daly:

Well, I think I’m going to offer what I just offered about other workers. Augmenting your skill set with technology can be a helpful thing. Replacing people with AI, we are nowhere close to that, in my judgment. The models often hallucinate still, and they also only are as good as the data that are put into them.

And so, one of the challenges, I talked to the gentleman back earlier who had asked the question, and I really appreciate the question, “Why couldn’t we just have a rule? Whether it’s a monetarist rule or a Taylor rule, why couldn’t we just put a rule in?” And it is because the fundamental relationships of the economy are altering themselves all the time. It’s also because the rule would induce oftentimes, even with interest rates smoothing, quite a lot of volatility. And you look back at the pandemic, the Taylor rule would’ve had us trying to get rates down even more and then a rapid run up.

And so there’s just ways in which rules are helpful, they’re tools, they’re helpful benchmarks, but they don’t replace, so far, human judgment. We also have a lot of accountability. If we make a mistake, you can put us to the task of answering for it.

Michael McKee:

Mary Daly, the President of the San Francisco Fed, thank you very much for joining us.

Mary C. Daly:

My pleasure.

Michael McKee:

We have a million more questions, so you’re going to have to come back. But now we have to make way for the next panel.