A Conversation with Mary C. Daly at the Silicon Valley Directors Exchange

Simone Lagomarsino:

Thank you, Nancy, and thank all of you for joining us here in the room. We are here in the epicenter of technology innovation in Silicon Valley, so it’s exciting to be here, and I know we have some people who are live-streaming with us, so welcome to you as well. We want to thank you first, President Daly for joining us. It means so much to us that you’re here, and I know we all want to hear from you. So maybe let’s get started with your thoughts on the economy.

Mary C. Daly:

Well, thank you. And let me say before I talk about the economy, which I will definitely talk about, that I just appreciate being here with directors and people interested in corporate governances. One of the ways that we met Simone is because she was on our head office board of directors. And unlike what Dan said, when she comes to a company, people get a little nervous about the company. We were very delighted, and there was no nervousness on us, but I think this is a really important area of how our country works, and I just want to appreciate your service in whatever roles you’re playing. So, I’m delighted to be here.

Now, on the economy, I think to talk about how I see the economy today, it’s really good to start earlier in the year. So when we came into the year, the economy was in a really good place. As you remember, optimism was pretty strong. If you look at sentiment surveys of businesses and consumers, people were pretty bullish on growth, and we saw inflation. In the Federal Reserve’s role, we saw inflation coming down pretty steadily and the labor market really solid, so things were really in good shape.

And then, we had a lot of policy announcements, and some of those policy announcements that came in the administration were, like Liberation Day with the tariff announcements, they created some uncertainty about how’s going to work? What will happen? Will the deregulation and tax policy be such a positive growth effect that it’ll overwhelm some of the negatives that people were concerned about with tariffs and immigration or just how would it net out? So uncertainty shot up, and as you remember, there were many projections about how we get a lot of inflation, and we would have much less growth, and we might even get a recession. That was not the Federal Reserve or my view, but it was definitely concerning out there.

So now, let’s roll to where we are today. Well, so far, inflation’s come in much less worrisomely than many had predicted. The tariffs were negotiated, of course, but also, producers found ways to spread them out along the supply chain, so the consumers didn’t get the brunt of it like many had feared. And importantly, what’s happened is the labor market has rebalanced and is now to a point where the demand slowdown that we saw, for a variety of reasons, the economy is slowing a little bit. Consumers are running out of all the excess savings they might’ve had, and they’ve been dealing with a higher price level. And then, we have the restricted monetary policy, so this is all slowing the economy, and we’re to a point now where the softening in the labor market looks like it could be more worrisome if we don’t risk manage it.

So in the September FOMC meeting, we took a 25-basis point interest rate cut, which leaves policy modestly restrictive, so it’ll continue to put downward pressure on inflation, but also gives a little less bridle to the economy, which is the support to the labor market. So we balanced those two goals. We have two goals, price stability, full employment, and that interest rate cut we took and we projected we might take more, those were cuts designed to risk manage as we move both our inflation goal and our employment goal to our perfect balance.

Simone Lagomarsino:

Thank you, President Daly. I will say, I have had the opportunity to hear her speak multiple times and every time I hear her speak about the economy, I just feel like she can take very complex matters, economic matters, and break it down to where we can all understand it. So thank you for that.

Mary C. Daly:

You’re very kind. Thank you.

Simone Lagomarsino:

So let’s maybe ask a little bit more about the Federal Reserve. I actually had a friend of mine recently who I had dinner with and he said, “You’re a banker. I’m confused on what the Federal Reserve Bank does. Can you maybe share with me a little bit more about the Federal Reserve? We know that they set interest rates through the FOMC, but why are there 12 banks? What is it that they do?” So could you maybe share with us a little bit. I know you’ve been involved actually for many years at the Federal Reserve.

Mary C. Daly:

For many years, and I won’t do all of the history since 1913, so do not worry, but let’s start when the Federal Reserve was founded, it was really founded in a way to create an independent agency or independent group that could reflect the whole country. That’s why there’s a board of governors in D.C. and 12 reserve banks across the United States. If you go back and read some of the original papers from the founding, it was really meant to ensure that monetary policy and the management of banks are independent from changes in administration, and it was meant to ensure that we didn’t have a single voice in D.C. that wasn’t representing the larger and very heterogeneous world of 1913. So we have 12 reserve banks. Our reserve banks are independent private public sector. We’re not part of the federal government. We are chosen. Presidents are chosen by a private sector board that is the board of directors, which Simone was on for the head offices.

And those 12 reserve banks do something that people don’t know much about really, where we do three things. We have three core responsibilities, the payment system, think of cash and working on all the things like ACH, Fedwire, all the underlying aspects of this. In all of our offices, you’ll see people who process cash. The cash comes in, we make sure it’s fit for use and recirculation. We take it in from banks, we re-bundle it, send it out to banks. That’s a big manufacturing part of the operation, and it makes sure that wherever you are in the United States, your bank or your financial institution can have cash in the ATM or to give you. You can do it at a retail outlet, et cetera. So that’s one of our responsibilities.

Another responsibility is supervision. While regulation and supervision is done at the Board of Governors, in terms of Vice Chair Bowman, right now, Vice Chair Miki Bowman is the head of that, the reserve banks have many of the supervisors that actually go and visit banks sitting in their offices and along with the OCC and the FDIC, make sure we have a safe and sound banking system. And then, of course, we have the monetary policy part. It’s a small fraction of our overall employment in the Federal Reserve, but it’s a big responsibility as you know because it prepares me to go along with all my colleagues to the FOMC and decide on what interest rate path would be best for the United States to accomplish our two congressionally mandated goals.

One of the things I always remind people of, which is really important is that our goals are given to us by Congress. We have a narrow remit. We have very protracted goals, not wide. They’re small, and we are meant to do them by Congress, so when we’re balancing off these trade-offs, it’s to accomplish these goals that Congress set for us. But at the front of our building in San Francisco, we have a touch point. It’s a poster, but it looks nicer than a poster. But it says, “Our work serves every American and countless global citizens,” and that’s why we work each day is because we’re serving people, doing the things of payment systems, supervision, and also monetary policy. That was the quick version. If you want a deeper version, please stay over.

Simone Lagomarsino:

I will say, President Daly’s always very, very accommodating in terms of answering questions, and we will be taking questions later here for those in the room. If you have questions about the economy or anything else we talk about, you’ll be very welcome to ask those questions later on. So let’s maybe delve a little bit deeper into the Federal Reserve. I think it’s interesting hearing a little bit more about it, and maybe now, it would be helpful to hear about what your job is. What does the president of the 12 different Federal Reserve Banks actually do?

Mary C. Daly:

Well, we were talking a little bit about it at the table. The reason that these jobs are so interesting, and I take this responsibility very seriously is because there’s so many things we are involved in. So first of all, we have to make sure that operationally, our banks are running in a way that delivers on the services we’ve committed to provide. So the cash operations, make sure we have the right number of supervision teams to do the work that Vice Chair Bowman, in this case, wants to do, Vice Chair Barr before that, Vice Chair Quarles before that, on those tasks and make sure that we are doing that, being good fiduciary stewards of public funds and good fiduciary stewards of public trust. Those are our two things we have to hold up to because ultimately, one of my team when I first became president said, “Well, talk to us a little bit about how we do this well over time because we don’t have shareholders.”

I said, “Oh, you’ve misread the situation. Our shareholders are the American people.” So every day, our work is we have to think of those individuals as our shareholders. They demand answers, they demand accountability and transparency, so a big part of my job is to lead my teams of people and ensure that working with my COO, we’re delivering on the things that we’ve committed to do. So that can vary from meeting with community banks, which we have all these boards and councils we meet with. We do CEO roundtables. I am traveling quite a lot as we talked about at my dinner table because I have nine states in the Western United States, and that includes all the coastal states, the Intermountain states, Alaska, and Hawaii.

So you have to go to your communities because a big job of mine is I go to the FOMC eight times a year, but I’m studying the economy all of the days of every year, 365 days. You do that by sourcing information, not just from the national surveys and all the nationally available data, not the history, the analysis, not the models. Those are important, but they’re not everything. And so, I have to go and visit the people in the district and learn how they’re thinking about the world. What are they thinking about investment in their business? Do they think they can grow? How do they feel about tariffs or immigration or deregulation? I was in Alaska right after… Well, I’ve been to Alaska three times this year to think about how does tariffs and other things in trade and deregulation affect the oil sector and other things.

So you do these things because they’re important for learning about how the economy will go forward. So my colleagues and I, we’re on the road a lot engaging. We are in the banks a lot, working with our teams. And ultimately, we go to Washington eight times a year to make monetary policy, and we have the same mantra each time. We go there, we discuss, we debate, we decide, and we do those three things each and every time, and we think of that as it’s the most important part of our job, to discuss, debate, and decide.

Simone Lagomarsino:

I’ll mention for those of you that are interested in economic information, what’s really interesting, President Daly just discussed about what she does, all 12 of the presidents of the Federal Reserve Banks do that. And then, information is summarized on an ongoing basis with every six weeks in the Beige Book. So if you have an interest, you can look up the Federal Reserve Beige Book, and it’s summarized for each individual bank, so you can hear what’s going on in each of the regions, which is really interesting to see, and that comes from those meetings that she just talked about.

Mary C. Daly:

And it used to be beige, and it used to be a book. Now, it’s digital, and you don’t have to get anything in hard copy, but it was really beige.

Simone Lagomarsino:

But they still call it the Beige Book, right?

Mary C. Daly:

But we still call it the Beige Book. Yeah. When I came to the bank in 1996, it was definitely beige. They put it in a little spiral binder, sent it out.

Simone Lagomarsino:

Okay, so let’s change direction a little bit. Historically, technology revolutions took decades to really show up in productivity statistics. Interestingly, you’ve studied, and that was your main focus of research was around the labor and economics. And so, I think it’d be interesting for us to hear your thoughts in this room about AI and how we should be thinking about the impacts to business from AI. As directors, should we be thinking in terms of being cautious about it, being cautious or underestimating or overestimating? So interested in hearing your thoughts.

Mary C. Daly:

So I think in general, the way that history has told us to think is not at the extreme. So if you’re overly doomsaying about AI, I think you’re probably going to be wrong, and if you’re overly enthusiastic, you might be disappointed early on. But that’s how people are often polarized in the AI discussion is doomsayers thinking, “This is just a bubble. It’s going to collapse,” or “It’s going to take all our jobs, and nobody will work anymore. It’ll increase inequality and various terrible things will happen.” And we have to listen to what we should study, but I think we don’t want to get stuck over on one side or the other. And on the enthusiast side, you think it’s going to change everything. Everything’s going to be great. The pie will be large. Everybody will get lots of it. I think all of those, either one of those extremes, is not usually what history delivers. Usually, history delivers something that’s in between.

Then, there’s two types of technologies that people are trying to figure out what AI is. And so, is it a business as usual technology? So if you think about productivity growth in the United States, historically, it’s 1.5% per year. There’s a little variation over different periods, but history tells you it’s 1.5% per year. Okay, so it’s 1.5% per year. How does it do that? It’s because we have everyday business as usual technologies evolving. So computers are an example of business as usual technology that started with a big bump. IT-producing companies made some big productivity gains than IT-using companies did, but it lasted a decade, and then it’s 1.5 again. So I think that’s the example that business as usual, so many people are voting on AI as business as usual technology.

But then, there’s a whole other group thinking, “No, AI is the steam engine. AI is electricity.” Those are transformational technologies. They change everything, the way we live in our homes, the way we interact in our universe, all of the ways we do business. And so, those can take 20, 30, 50 years to diffuse across any location. So what’s different about AI and where do I sit on this continuum I guess might be a question, but the way I sit is I think there’s good reasons to think it could be transformational, and I don’t think we can use the early evidence of where it’s being used as an indication of what it could be. But we can’t just jump to the conclusion it’s transformational. We have to interrogate whether it’s going to be transformational.

So right now, in January of 2024, we thought we didn’t have 20 years to investigate this. We had 20 months, so we put together what we call the EmergingTech Economic Research Network. We work with our system CIO or our chief innovation officer for the Federal Reserve System, and the San Francisco Fed has built this thing so that we can bring in leading researchers. You can go to our website. You’ll see videos of leading researchers talking about this, technologists, chief economists for big companies talking about where they’re using and how they think about it, what the technology is, and what the use cases are.

But then we started doing CEO roundtables, and in the CEO roundtable, small, medium, large-sized businesses, all industries, we learned the following. In January, in most of last year, they were looking at AI as a way to understand what their employees might be using, so they put guardrails up. And then, second half of last year, they started saying, “Well, I can experiment with it for back office operations.” The curve on this has been so fast, the learning curve, now people are using it to do back office operations, and they’re also using it to think about where they can change front-of-the-house operations and product.

And I think that’s in part because you’re getting a collision of a slowing economy and you don’t really want to get overstocked on workers, and so if you lose workers from attrition, you combine them with AI, and you don’t experience the loss as much, and technology’s easier to turn off than if you hire workers, which is both expensive to do, but painful to let go. So I think we’re now in a forcing function where we might see the gains come faster, not just because of the AI itself and what the technology can do, but also because of where we are in the economy and how firms might be able to use it. So that’s where I think we are cautious. I think don’t get over your skis on enthusiasm, but don’t underappreciate the consequences.

Simone Lagomarsino:

I think there’s a lot of people in this room that probably appreciate that comment, and I’m sure there’ll be more questions after we conclude our formal comments. So thank you for that. That was fascinating.

Mary C. Daly:

It might have been long, but I wanted to be thorough.

Simone Lagomarsino:

No, it was perfect. I thought it was very, very good. So we’re going to change the subject a little bit again and-

Mary C. Daly:

I like your shifting. We’ve shifted. It’s good.

Simone Lagomarsino:

A couple of times.

Mary C. Daly:

It’s good. It keeps me on my toes.

Simone Lagomarsino:

I’ve heard you speak many times, and you talk about being resolute and mindful about inflation, and it would be interesting, I think, for those of us in this room really kind of in these uncertain times that we’re in to hear how you think we can adopt that mindset, especially when we’re facing, do we keep a stable steady state or do we focus on growth?

Mary C. Daly:

Sure. So one of the things that I talked about last… I said I went to the NACD chapter in Salt Lake, and it was a combined event with a convocation for new business school students or even returning business school students at the University of Utah. So it was a really interesting group, and they wanted me to focus on how to manage in these current times. And so, I chose the topic of being studied through change, and I think it does start with being resolute and mindful, but I put it into three words that I try to use in what we’re doing now as we manage change. I think about this because we have a lot of change coming in the economy and the Federal Reserve, and me, as a policymaker, I have to think about that, not only for how we manage our businesses, but also how we think about the interest rate setting.

So the first thing to do, I think, to be steady is to anchor. You anchor on your mission, your values, what your company’s trying to do, what you believe in, what you want to accomplish, and that’s the resolute part. And then, the second part is assess. Then, you have to assess the change. Is it affecting everybody or just my company? Is it going to last, or is it short-lived? And importantly then, back up. I think this is the part that often gets missed because people often fear change and hide from it or react to change quickly only to regret the decision. So before deciding, if you’re resolute, you want to be mindful. The mindful part is really making the thorough assessment of what is going to be needed before deciding.

And so, then, the third part, of course, is the deciding, and I think it all sums up in a fourth part, which is the humility to do that whole thing again. So I think right now, the resolute and mindful can feel slow or passive, but in actuality, it’s continuous, and it’s active. You’re always looking again and again to what can we do to ensure that we are living through that change.

Simone Lagomarsino:

That’s not on. Did you turn it on?

Mary C. Daly:

Oh, no, I didn’t.

Simone Lagomarsino:

I had it turned off.

Mary C. Daly:

I didn’t know I was supposed to. Okay, now, I have it.

Simone Lagomarsino:

Okay.

Mary C. Daly:

This is when they don’t tell me that they haven’t heard anything up until now, but at least the people in the room have heard it, so we’re good.

Simone Lagomarsino:

So we’re going to switch topics again. I actually-

Mary C. Daly:

Did that make sense though?

Simone Lagomarsino:

Oh, absolutely.

Mary C. Daly:

You have to be steady. You have to anchor, assess, and then decide, and then keep doing it.

Simone Lagomarsino:

Right. And I think it is very reflective in having watched you over a couple of years just how you do approach things. I will say, President Daly is a very inquisitive person.

Mary C. Daly:

You can call me Mary, Simone.

Simone Lagomarsino:

I do.

Mary C. Daly:

I mean, you do call me Mary. I appreciate how this is, but you can call me Mary.

Simone Lagomarsino:

Thank you. So I’ve seen you. She’s so inquisitive. It is just amazing to watch her inquisitive mind, and that plays into what she just talked about, this being resolute and being mindful. She’s always asking questions and the next question and the next question, so thank you for that. And so, let’s move on. I had the opportunity recently of participating in the Western Bankers Forum and President Daly, Mary, shared her personal story, and I thought it was just so inspiring. I have to say, I’ve been involved with the board, as she mentioned. I’ve watched her for many, many years being in banking, and I’d never heard her personal story until just a couple of weeks ago. She talked about a mentor. The reason I thought it would be good for her to talk about this tonight, and especially since Dan’s comments earlier about the mentorship of Christine, who according to Dan, mentored like 85 people, mentors can do a good thing for a lot of people. And so, Mary, would you mind talking to us about your personal story?

Mary C. Daly:

Not at all. It was a surprise to me that you didn’t know it, but I guess we never talked about it, but it’s not the leading thing when you’re talking about monetary policy. But my personal story is this, that when I was 15, I dropped out of high school. I dropped out because my parents had fallen on hard times. Our household had fallen on hard times, and I needed to work. So I put together a series of part-time jobs, and I cobbled them all together and growing up in Missouri. One of them was a delivery truck when I was 16, delivery truck delivering donuts. In the delivery truck, I would look at a sign every time I made the route, and it would say, “Be a bus driver. Good pay, good people, good benefits.” So I wanted that job because it would be one job, and I’d have all those three things.

So I wanted to apply. It just happened around that same time that I had had kept touch with my guidance counselor. She just would check in on me like every six, eight months. And so, she called me, and she said, “Would you be willing to meet my friend Betsy?” Now, I’m 16, Betsy’s 32, and I said, “Sure. Yeah, okay.” I mean, I just wanted to be a bus driver. So I thought, “Well, that could be useful.” I was pretty shy because I’m a kid. I’m from the wrong side of the tracks, and now, I’m out of school. So I go and meet her friend, and we sit in her car. She buys coffee at McDonald’s, and we sit in the front seat of her car, her on one side, mine in the other, and we start talking. She just asked me what I want to do, and I tell her I want to be a bus driver, and she knows my back story.

She says, “You can’t be a bus driver without a GED. You can’t do it without a high school degree,” and I remember being crushed. But this is the beauty of mentors, and this is the beauty of Betsy because she didn’t stop with what you can’t do. She kept going, and she told me what I can do. She said, “Well, let’s just find out where you can get a GED, and you can take the test, and you can get the GED.” And so, I did. And then, when I took the score to her, she said, “Maybe you can take a semester of college.” Now, I didn’t have a family where anybody had gone to college. I didn’t know of anyone who had gone to college. I’m sure my teachers had, but we never talked about it. This is not the kind of thing we talked about at my school, but Betsy said she had been, and I was like, “Okay,” but I didn’t know what it was.

So then, I applied, University of Missouri-St. Louis, I got in, and then I couldn’t afford it. It cost $213. I had no money for that, so she wrote the check to the bursar’s office. She still wrote checks, of course, and she wrote to the bursar’s office of University of Missouri-St. Louis. I took it, and I took a semester of college while I worked, and I got pretty decent grades. And she said, “You should go to a four-year school,” and I went to a four-year school, and then I got a master’s, and then I got a PhD, and here I am. And what’s the story about this? What’s the moral of this story? It’s the thing that I keep saying every time is that Betsy was 32, and it reminds me that everybody can be a mentor.

So I was saying this the other day or two weeks ago at University of Utah and then at the Western Bankers Association, and a man, full-grown teacher, a professor at the University of Utah at the reception comes up to me after I told the story, and he says, “I loved your talk. I have a GED. You weren’t embarrassed to tell anybody. I’ve never told anybody, and I’m going to start doing that.” And at that moment, it makes you remember that the littlest thing, even when you have no idea if it’s going to affect anybody, can affect someone, and then they start changing something. And so, it really is this power of mentorship, which Dan mentioned right at the beginning with Christine, but each of us in the room have the power to do it, whether we just lift somebody up because we see the world differently about them than they can. A lot of it is just the vision of what people can be when they themselves can’t see it.

I remember when I got the job of president. They gave me the offer. I called my wife. I called my executive assistant who had been really lighting a candle for me every day, which is very sweet. And then, I called Betsy. This is the kind of thing that you can remember, and I will end with this. Early on, I learned a saying that the things we do in our lives, we might not remember, but someone out there will never forget. And it is that way in mentorship, and so it’s just little things, even if you’re not full-blown. Tiny little things can matter a lot. Betsy did lots of tiny little things together, and it changed my life. Thank you.

Simone Lagomarsino:

Thank you. Thank you for sharing that. And I still, I get teary-eyed. This is the second time I’ve heard it, and I just think one person who took an interest made a difference, so we have a president of the San Francisco Federal Reserve instead of a truck driver. I mean, isn’t that an amazing story?

Audience Member 1:

A bus driver. A bus driver.

Simone Lagomarsino:

Bus driver, sorry. Yeah, bus driver.

Mary C. Daly:

I could have driven a truck too though.

Simone Lagomarsino:

Yeah. Sorry.

Mary C. Daly:

But bus driver.

Simone Lagomarsino:

But I mean, people were really listening. Thank you.

Mary C. Daly:

I think they’re trying to imagine me driving in the Muni system.

Simone Lagomarsino:

Yeah. So I want to just mention, again, I had not heard that story, but having been around the Federal Reserve Bank many times because I was on the board, I always watched Mary interact with the interns at the bank, and I always kind of made a mental note of just how genuinely she engaged with them and really talked to each of them, knew their names, introduced them to the board members, really kind of worked to lift them up.

The other thing I learned at that same Western Bankers Forum was that the person who is now at the Federal Reserve Bank of San Francisco who has been there 25 years, Mongkha, started as an intern. Now, Mary wasn’t the president at that point, but it just speaks to… And I will say, one of the other things, having been watching the Federal Reserve and under Mary’s leadership, there are so many people who have been there so long in the San Francisco Federal Reserve, and it really speaks to culture. And that’s something that all of us as board members should be very focused on. What is the culture of the organization? Are we inspiring interns and bringing them in? Are we encouraging people to be mentors within the organization? Because there are people out there with talent that may be untapped because no one’s taken the time to just lift them up. So just very encouraging story, so thank you for sharing.

Mary C. Daly:

Thank you for that.

Simone Lagomarsino:

So we’ll pivot again to 10 years from now. We’re in a very interesting economic era. So 10 years from now, what would you hope that we, here in this room in Silicon Valley, and the Federal Reserve would be getting right?

Mary C. Daly:

So I’ve thought about that a lot because people have said to me, “This is one of the most unprecedented times we’ve ever come through,” and then I remind them of history because we’ve lived through a lot of times that are equally uncertain and directional changes and lots of things happening in the global economy and the global world. I come back to where we started when we talked about being steady through change. I hope that what we’ve been able to do, whether we’re the businesses in Silicon Valley or the Federal Reserve or everyone really in the country and around the world, that we’ve taken a moment to step back and make the kinds of decisions that are durable. So when we look back, we don’t have the regret of quick action or reactivity. We have the pride of having done investments in things that pay dividends 10, 20, 30, 40 years from now.

So when you think about things like technological change or global trade change or geopolitical changes, you have to go back to, what do we want to accomplish? And I think ultimately, if we start with that question and make those good decisions, 10 years from now, we’ll look back. We won’t really be able to predict perfectly what it’ll look like, but we’ll look back on it and say, “We did a decent job.” And that’s ultimately what you want, not to cut yourself off from opportunities or plan so carefully, you can easily break, or run so quickly, you’ve not made anything at all. I think that’s the balance that’s hard to strike when things feel uncertain, and you feel like you could either get behind or miss an opportunity.

But the steady in the boat way that I think companies have to live is often the way that is the most durable. That’s what we’re trying to do at the Federal Reserve. And ultimately, I think of past is an institution, a public servant in an institution, I think of passing the baton to the next generation of people who can lead the Federal Reserve and ultimately still tap the same poster at the front of the house, which says, “Our work serves every American and countless global citizens.”

Simone Lagomarsino:

Thank you very much. So I think it’s time to open the floor for some questions. If we have any questions, if you want to just raise your hand, and Nancy will be coming around with the microphone, and I think there’s a question back there.

Mary C. Daly:

Oh, do you have to take this microphone?

Simone Lagomarsino:

Oh, sorry.

Mary C. Daly:

Okay, we’ll share.

Mary C. Daly:

Because Simone may answer a few.

Audience Member 2:

Thank you for a very interesting talk. I have a question about cryptocurrencies and their increasing role in the economy. Currently, you have tools for measuring fluidity, M1, M2, M3, and with crypto, you really don’t control. You don’t have a good handle. It’s hard for you to set policy. If crypto were to take a significant role in the economy, how would your tools to address monetary policy change? And then, what do you see in the future that you need to do to do your task?

Mary C. Daly:

So when you think about the monetary aggregates, these things would all be involved in that. They’re just quick exchange. Let me start here. I think of crypto, which is a big word. It can be, depending on who you’re talking to, it can mean stablecoin. It can mean Bitcoin. I think of let’s start with the basics. What are the use cases? What’s the technology, right? Bitcoin’s very different than a stablecoin. It’s just a totally different thing. One’s a digital asset that goes up and down in value like the stock market. The other one is a medium of exchange that’s backed with reserves in GENIUS Act, but with things that will be dollar for dollar exchanges. When you need your money, you can get it, but it solves a lot of use cases. So I think at this point, with the passage of the GENIUS Act, there’s a lot of people interrogating or examining.

I got taught by a technologist the word interrogating, and now, I never use examining anymore. Economists use examining. Technologists use interrogating. So now, I’m all mixed up, but basically, you have to really think through what are the use cases because technologies are good, but use cases define how they’re used. And so, you can think of things like tokenized collateral, tokenized deposits, cross-border exchanges. What will be the use cases? I think that’s what defines it. When I think about monetary policy in that space, I think less about the monetary aggregates and more about we have two goals, price stability, full employment. We set the interest rate by setting the funds rate, and it transmits through the economy. If crypto becomes or the payment systems I just described, that just becomes another medium of exchange, another way that people transact, but likely, even though it can transact outside of the fiat system, a lot of what’s being worked on now is the interoperability to come with, they call it the sandwich, but it’s from stablecoin to fiat to stablecoin.

And so, I think at this point, it’s appropriate to know about those things, study them. We actually do at the Fed. We think hard about this. Governor Waller’s given a couple of speeches about this at the board, and that’s the responsibility. But thinking about how it directly affects monetary policy right now in our ample reserves’ regime, I don’t think it has a direct effect. In part, and this is something really useful to remember, things can grow quickly and still be a small share of overall activity, and it has a rapid growth rate, and it’s still a very small share of overall activity. In that way, it’s like data centers. If you ever look at a picture, you could see data center growth is so rapid, and it’s a small fraction of overall industrial investment. And so, I think crypto is the same way, small fraction of overall exchange and a rapid, rapid growth rate. So certainly, something worth studying, but I guess not directly affecting how we conduct monetary policy today.

Audience Member 3:

Thank you. Appreciate you here today. I feel like I won the lottery sitting at your table. All right.

Mary C. Daly:

That’s so kind. Thank you.

Audience Member 3:

Two hard-hitting questions, one, do you ever go down and look at the gold that’s in the basement and kind of rub it-

Mary C. Daly:

That’s in New York now. We don’t have it in San Francisco.

Audience Member 3:

Right? And then, second is you got nine states, Hawaii being the smallest economy. Do you ever make any extra trips to Hawaii to make sure that things are going the right way?

Mary C. Daly:

No, all of my states are equal, and California is big, so I’ve got to go, and it’s also one of the very first things. So I moved to California in ’96 when I started this job, I lived in Missouri, and then I’d gone to school at Syracuse and things. So I had been to California, but I hadn’t lived here. I got here, and one of my very first assignments was to write about the three economies of California. So I had to write about northern California, southern California, and the Central Valley. And you realize it’s three economies in one state and micro economies all around those three economies. But those three economies couldn’t be more different than each other, and when I came, remember we were just coming out of the aerospace bust out of LA, and the Central Valley was trying to start booming by diversifying and not just being in ag.

And then, northern California, one of my earliest jobs working on tech was to monitor how computerization was changing businesses because Chairman Greenspan asked me to do it. And so, it’s just this is the world where, what I’ll answer your question, you can’t travel anywhere more than a few times because you got to travel everywhere. And so, all my states are equal. The gold is in New York. That’s my colleague, John Williams. And ultimately, I love being in the 12th district. I felt I won the lottery when I got a job in the Federal Reserve Bank of San Francisco as a junior economist because it had nine beautiful states, and I’ve been to all of them many times.

Audience Member 4:

Hi, I am Priya Huskins. First of all, thank you for telling your GED story. That is the greatest part of this country is that kind of social mobility. That was amazing. My question for you is I am curious about your thoughts today and if you think in the future about the US dollar as the world’s reserve currency.

Mary C. Daly:

So that’s a hot topic right now. Everybody’s asking that question, and I’ll remind everyone here just to start that the Fed doesn’t have dollar policy. That’s the Treasury, so we don’t comment on the dollar’s movements or things, but I will back up and talk about what are the features that have made the US dollar a reserve currency? They’re not just the value. It’s the private property, the idea that if you have a dollar, you can exchange it, that if you have a treasury security, you can get dollars for it. And so, it becomes an exchange mechanism for people, so I think that is still there because there isn’t a next thing that’s ready to take its place. I don’t think it’s useful to be so concerned it’s going to happen next week because we have to go through all the fundamental features of what makes something a reserve currency.

About further than that, it’s hard to go because ultimately, so many things can determine that all the things in the list, and other countries have currencies that they would like to be more of a reserve currency for the globe. And all of this comes back to what is the medium of exchange? Who is going to be growing faster than another? Who is going to be a place where you can trust that when you get a security from that place, you’ll get money back if you demand, if you ask for it? And the US has been able to do that over all the time we’ve been in existence, and I think that will be a strength. But again, I don’t make dollar policy past that, so I won’t comment more than that. I’ll leave that to the Treasury secretary who’s quite capable.

Audience Member 5:

Thank you so much for telling your GED story. As a first-generation college bound person, I’m really proud that someone else has achieved so much with an early start. That was really hard. I think if you asked us in the room what keeps us up at night, there’s a lot of things that are keeping us up at night about the economy, and I wonder what keeps you up at night about the economy?

Mary C. Daly:

So what keeps me up at night, that I was giving a talk at Brigham Young University outside of Salt Lake, maybe about three months, I mean, earlier this year in the spring. After I was done with my talk, a group of young people came up, and they said, “We want to go into public service. Do you still think public service was the right choice? If you could do it over again, would you still go into public service?” So I said, “Let’s go in the other room and let’s talk,” and I would. I said, “Yes I would,” and I gave him all the reasons why I think it is one of the best things that you can do if it’s your calling. There’s lots of ways you can serve, and I did tell them that, too. I said, “And don’t confuse public service with having to work in an institution of public service. You can be a public servant if you work in a private sector company because you can give back to others. You can devote your business or your career or outside of your work to those types of things.”

But that was not really their question. Their question was, “Is it still worthwhile to put your community and your society and your nation in your objective function?” I am an economist after all, in your objective function. And so, that’s the thing that keeps me up at night is that this is our nation and our globe and our city and our state. We live on the idea that we build the next generation of leaders who want to serve and have a mission greater than just themselves, and they actually want that. And so, part of this mentoring I think we have to do is hold up that torch for them and say, “Yes, this is a great thing. Sometimes you’re just holding the rope, but sometimes you’re pulling it forward, and both are noble things to do.” And so, in this time of uncertainty, when they may feel unsure, it’s really about giving them that sense that we’re proud of all the work we’ve done for our nation, our globe, our community. We’re proud of the service, and we want to continue to participate in that.

So there’s so many things we could be worried about, but the thing that I worry the most about is in all of our worry, we’ve forgotten the fundamental, not all of us personally, but there’s a fundamental forgetting of how important it is to younger generations to know that we think we’re going to be okay.

Audience Member 6:

Thank you for spending time with us. It’s very inspirational. I’m wondering if you think about US history and how it became the world’s largest economy, what are the major contribution from monetary policy point of view?

Mary C. Daly:

How did monetary policy contribute to this?

Audience Member 6:

That’s right.

Mary C. Daly:

That’s a great question. I don’t think I’ve ever been asked that question, but I have an answer.

Audience Member 6:

Thank you. I tried.

Mary C. Daly:

No, it’s a very good question. It’s a good question because it gives me an opportunity to talk. As Simone, you asked me at the beginning, “Why was the Fed founded, and what is the mission of the Fed?” And the Fed was founded because before the Fed, you had different currencies that if you went from Indiana to New York, you had to change money and things of that sort, and we also had a lot of mini financial crises. And so, there was all this financial instability that was creating a restraint on growth. And so, what the founding people realized is having something that is independent from political movements and is just focused on getting the financial stability there so that you can have the movement of growth, a sustainable economy, a focus on the price stability, full employment, which was an evolution of our goals from Congress, but that gives you the fundamental platform.

So the way I think about the contribution of the Fed is we’re thinking about the conditions in which businesses and households can make decisions without having to attend to whether they’re going to keep their job or have a price level that continues to rise so they can’t manage it and making sure our banks are safe and sound and people can get the money when they need it or go to their banking at a digital exchange, whatever it is, that the payment system and the banking system are sound and that the monetary policy is being taken to ensure that those you have… My goal right now is let Americans get up in the morning not thinking about inflation. Let them go to bed at night not thinking about inflation. They’ll put it in their own terms, the price of eggs, the price of transportation, et cetera.

If they aren’t thinking about that, think of all the bandwidth that’s used to think of something else. So I think it creates this ability to buffer out the shocks so that you can get through crises and you can tamp down exuberance to the point where it’s causing inflation, but you can also just create that underlying stability that lets other things be possible. We are best as an institution, I think, when we’re in the background doing our work, and you all don’t have to think about price stability or full employment. You can just make decisions that are good for your company’s growth, good for your family, good for the community, and that’s where I think our contributions are.

Simone Lagomarsino:

Can I borrow for just a minute?

Mary C. Daly:

Oh, yes, please.

Simone Lagomarsino:

Sorry, we’re sharing one microphone now. So I just wanted to follow on-

Simone Lagomarsino:

Yeah.

Mary C. Daly:

You like that as a banker.

Simone Lagomarsino:

I do like that as a banker.

I just wanted to kind of double down on what Mary just said because she talked about being in the background, and I think that’s why we asked the question earlier, tell us what the Fed really does because there’s a lot of confusion out there, and a lot of people don’t really have a full understanding because they are in the background keeping things steady and helping make sure that the economy is working and the monetary policy, in particular, our monetary system is working. So anyway, I just wanted to double down on that. That’s why we asked it to begin with because people aren’t aware of.

Audience Member 7:

Hi, Mary. Thank you very much for your insight. I really appreciate being here tonight, hearing you speak. So it’s not unusual for a president to criticize monetary policy, but it seems that the assault on the independence of the Fed Board is much greater than we’ve seen in the past, particularly in light of Stephen Marin keeping his day job at the White House. Are these concerns that you share about Fed independence moving forward?

Mary C. Daly:

You know what? I am a student of history, and when I was in Salt Lake, that’s where Marriner Eccles has… Spencer Eccles was another great mentor of mine, and he’s his nephew. But then, Marriner Eccles was the chair of the Fed, and he was part of the group that shuttled in or chauffeured in or whatever it is, helped get the modern Fed we have today. But our independence was at stake in the Great Depression, right? There was a ton of political pressure on the Fed, so it’s not unusual. It just doesn’t come in back to back, and so because you don’t have the conditions, either the economy isn’t doing poorly like in the Great Depression or we didn’t come out of high inflation, so you just don’t have those conditions all the time, but it’s not new if you look at the history of the Fed. The way I think of the best thing we can do to preserve our independence, which I do think is important as I’ve described, is do our work well.

So it has components to that, right? You can’t just do it and not talk about it. You have to be transparent, you have to be accountable, and you have to continue to do that, transparent, accountable, communicative. It’s one of the reasons Reserve Bank presidents and governors, the Reserve Bank, I mean, I’m sorry, the Board of Governors at the board, they go out. We go out and talk to people. It’s a part of our accountability, our transparency, our taking a hearty look at ourselves. As you might not have followed, but we did a framework review where we asked what happened in the last five years, how can we change the framework, what did we learn from the last five years. When J went to Jack… Sorry. When Chair Powell went to Jackson Hole, that’s what I call him usually, but this was how we got to Mary, then he announced our new framework. And our new framework was in this study of what happened in the old framework and how we can make it better. So I think that’s part of the accountability as well.

So if you do those things, if you’re transparent and accountable and you continue to do your work well and we show up for the American people, I think ultimately, good work shows through, so I’m not spending time worrying about it as much as others are spending time worrying about it. I’m spending time worrying about the work, thinking about the work.

Audience Member 8:

Thank you. Thank you, President, for being here, Mary. Question for you, ChatGPT told me that you’ve written and spoken on income inequality and equality of all types, and I’m just curious, I know it is maybe partially related to your role, but just interested in your thoughts on where we stand on that today as a country and what kind of potential solutions you see for it and what impact you see if we don’t solve it.

Mary C. Daly:

Absolutely. And ChatGPT was right. ChatGPT was right. I did. So I’m a labor economist by training, and my early studies were on wage year cycles and unemployment and what that does to the wage distribution and to the household income distribution. I wanted to understand how both that structurally has changed, but also what the cyclicality of those changes were. You learn from doing this work that inequality usually rises when the economy is stressed, and those gaps can close when you have long and durable expansions, sustained growth. So that was some of the findings that came out of that. So part of it is the cyclical aspect of it, and then part of it is the structural, and what affects the structural is usually technology and education and experience and demand for jobs.

So if you think, “What can we do to compress some of the inequality that is formed?” It’s really the economy has to be functioning well and have a long and durable expansion. But the other part of it is that the job creation we have, we have the skill sets that match it. And so, education’s very important. Knowing what those skills are going to be is very important, and the demand for those skills is going to be and thinking… One of my particular interest is education as bi-modal as we think it is where you either get a college degree or you don’t. I think that is something. I gave a commencement speech at the College of Western Idaho, which started as a school that gives… It gives certificates. You can get a two-year degree and go on and get a four-year degree, but many of these students come, and they get a credential, either a car mechanic, a welder. There are a lot of cyber experts getting trained there where they do computer technology, and they go in and work for companies doing cyberwork.

So these are things that I think are really important for us. If we’re going to stem the rise of inequality, we’re going to have to divide our education into things that people want to do and divide it into bites of education that people can afford to the time or have the interest to take and not have it just be something that’s one and done. If you don’t go to a four-year school, here’s your trajectory. If you do go to a four-year school, here’s your trajectory. I think that’s a place where we can really lean in. And then, the other thing I’ll say about inequality is that I think there’s a lot of interest right now in what does AI do to inequality, and there’s two camps. I’m going to be very simplistic here, but you can put them into two camps, and both of the scholarship work is really good on both sides.

But one side is AI is going to be like computers, and it creates more of a winner-take-all. If you use the technology, you can get higher returns. If you get displaced by the technology now, you have very little future. I think another way to do it that it could work is the way I kind of tilt towards. David Autor has done a lot of this work. You can see him on our own website if you ever want to see a talk. It’s an excellent talk, as are all the talks. But the other way is that it could be somewhat of an equalizer. So how could it be an equalizer? I’ll stop here after that, but it can be an equalizer.

Think of healthcare. So there are healthcare agencies using AI, and one of the ways that I experienced it early on last year was that you go in, you sign a waiver because they can’t use it unless you sign the waiver, and I saw a medical assistant or a physician’s assistant, whichever one is the right title for this, but she had all the right training to do that, and she had an AI assist. So in goes my X-ray. It comes out with, “It’s not broken. Ask these questions.” I was so curious. I went around to the terminal and I said, because I asked her first, but I went around to the terminal and said, “What are they asking you to ask me?” And it was like, “Can you move this? Can you do this? How do you feel,” et cetera. And so, she did a bunch of investigations, and then she gave me a script for PT and a doctor’s appointment six weeks later if it didn’t get better.

And so, I had called to see if I could see a doctor, and they said it’ll be six weeks. I saw a PA or an MA the next day, and I was on my way to PT, and I never had to take the doctor’s appointment. She said, “Just call if you don’t need it.” I called. I didn’t need it. And that is a way where this person had productivity increase. So I got better care earlier than I would’ve gotten if I had to wait, and it competes away the returns that the doctor who’s queued up is getting, and it gives some of those returns to the PA who now has a productivity assist. So that is a way in which it can equalize the distribution because it makes the skill less scarce.

And so, I just think that we have to, as a society, ask ourselves what would we like it to do, and if we would like it to be more equalizing, then we have to relax some of our maybe hesitation about having this type of experience. We have to relax some of our regulation that prevents people from doing it, and we have to be more open to how we can help people who might not have gone to all the training we’re used to, but still can have a very good ability to assess and treat our concerns. So it’s almost like if we want inequality to be different, we have to be different.

Audience Member 8:

Thank you. Thank you, Mary, and it’s great to have you here. My name is Christopher Lee. I’m a former investment banker, and at my former, bank we had the pleasure of hosting former Fed Chairman Dr. Alan Greenspan at one of our speaking events. Dr. Greenspan famously had coined the term irrational exuberance, and he was referring to the stock market. So I would be curious to have your view on any market that is exhibiting any form of irrational exuberance.

Mary C. Daly:

So Chairman Greenspan coined that term but then didn’t call out which markets were having a rational exuberance, so I learned from the best on that front. You know, I think one thing that is certainly been in the news lately is when people see things go up and they don’t quite understand whether they’re going to continue to go up, they get nervous about, “Is it a bubble?” I talked about that right at the beginning on AI. So that’s where it’s really useful. I think I’ll answer your question slightly differently. I’ll say it’s really useful to ask yourself, “When something goes up, runs up, is that a bubble, and what do we mean by bubble?” So one kind of bubble and the one people fear is a financial bubble, right? A financial bubble, they think GFC, Great Depression, et cetera. Those are terrible, right? They go way up, and then everything comes down.

But the dotcom was also a bit of a run-up and a big steep decline, and we were left with productive things that came out of that. That’s important to distinguish is that even when you might be… Say that AI isn’t the transformative technology that some are betting on, you might see some valuations come down at some point, but the productivity wouldn’t be extinguished. The productivity that comes out of what we learn, even if it doesn’t become the steam engine, is still going to be in existence. It’s obviously… I mean, we had someone just use ChatGPT to ask about me, so we’re using that.

So I think it’s important to distinguish when you think about run-ups in irrational exuberance. So I guess I’m adding on to Chairman Greenspan’s verbiage. I’m saying unpacking irrational exuberance to see if the exuberance is like we’re all… I’m trying to think of an example where everybody would fit in, but remember the Beanie Baby craze? So think of Beanie Babies. If everybody’s investing in Beanie Babies, that’s probably irrational. If people are just overly exuberant about something, that’s not really totally irrational. It’s just you can’t estimate exactly what the impact’s going to be, and I think those are very different things that it’s important to keep in mind as you evaluate what’s going on in this world or 10 years from now.

Audience Member 9:

Sure. I’m hoping you have a great answer because otherwise, the question’s a bit of a downer. One of the-

Mary C. Daly:

That’s quite a lead-in, Dan.

Audience Member 9:

Well, you know. One of the current concerns in cybersecurity and in national security is the ability to create deep fakes and otherwise to create concern, panic, anger, whatever the case may be. Having lived through the 2023 bump in the road as concerns of banking at Silicon Valley Bank, First Republic, I observed that a part of that phenomenon was clearly something that we don’t even really have a name for, right? A run on a bank is a run on a bank, but a run on a bank that happens in 12 to 18 hours is something else. I don’t even know what to call it. And a part of that was fueled by social media and the feedback loop.

And so, it seems a small step to then imagine you could create a similar scenario through a deep fake that it’s just so easy to say and it’s not irrational to hear something and be a little concerned and say, “You know, I have three banks. Why don’t I move my money? I’ll just move it.” You can do it in about 45 seconds if you’re banking online. My question is do you think about this? I know you do. I mean, you think about this issue. What is the modern response to mitigate that risk, and how should we think about that risk on an ongoing basis? I hope you have a great answer because I want to end on high note.

Mary C. Daly:

I’ll do my best. So let’s think about what happens in an average bank run. So on an average bank run, you can just go back to this, It’s a Wonderful Life. The average bank run is people lose confidence in a bank, and they take their money out. And because it’s fractional deposits, you don’t keep them all. We have fractional banking. So fractional banking works by lending out what you have. You can tell them all about that afterwards. But because of that, then confidence in the organization is important because at some point, if you don’t have confidence in the organization, everybody comes for their money at the same time, and it’s over. Game’s over. So what was different about Silicon Valley Bank and Signature Bank and ultimately happened to First Republic Bank is it was a perfect storm of variety of things.

So first thing is Silicon Valley Bank. There’s social media. People lose confidence in the bank. They start looking under the hood. They say, “Oh, that bank has a lot of uninsured deposits. Uninsured deposits can move easily from place to place because they’re not hooked in as much, and people feel nervous about, “If I don’t take my money out, I won’t get my money.” So that’s one thing. Second thing is they had a lot of hold the maturity assets on their balance sheet, which anybody looking at a balance sheet can now look at and say, “Oh, they’re invested in long-dated securities. They’re not going to get all their money back for what they bought them for. So now, they’re going to be underwater. That’s going to be hard on their balance sheet.” So that causes people to just pull their money more. And then, we had what I would think of as a frenzy of activity at Signature, First Republic, and Silicon Valley Bank, although that happened really quickly, and that’s why all the other regionals were feeling stressed is remember what happened then?

Investor newsletters were coming out with the percentages of uninsured deposits in all the banks, the percentages of hold to maturity assets. I was shocked at this professional organizations where often, especially if they’re all located in a building like doctors or lawyers, they will all use the same bank for their… The professional organizations were sending out notes saying, “Maybe you should get out of this bank.” So that’s an email version of social media. So then, the question is how do you stop that? And I think the deep fake is a harder thing to stop. What’s an easier thing to think about, especially from a… I’m not a regulator. I just want to point this out, but an easier thing to stop is to think about how do banks protect themselves on the ground from that happening? So the confidence piece, being open about how they manage their interest rate risk, being open about where they’re getting their liquidity funding, right?

All banks have to have contingency liquidity. How are you getting your contingency liquidity so that the confidence people have in you supersedes that thing. And instead of saying, “I’m going to run because of the deep fake,” they call or they ask. And so, I will leave you with this, which is the optimistic thing I think you were hoping for. We have over 4,500 banks in the United States, and three failed, and that’s a pretty remarkable thing given the size of the stress. It’s a useful thing to remember that people still went to the bank, they still got their money, and they were still able to function. It didn’t cause a massive crisis, and that’s because almost all the other banks, three failed.

The other banks had managed their interest rate risk, were communicating with their customers, were calling on their contingency funding lines, and were prepared to manage the stresses because banks are risk-takers. It’s a risky business. It’s a risk-taking business. It doesn’t mean it’s risky,. It just means that they’re good at managing risks. So that’s why we do that. So that’s the optimistic note. I will thank you very much for all your kind words and attention.