A Conversation with Mary C. Daly at Forum Club of the Palm Beaches

Neil Irwin:

All right. What an amazing crowd.

Mary C. Daly:

It is an amazing crowd.

Neil Irwin:

So, President Daly, what I have in mind for this next little while is I’ll start with the urgent news of the day on the Fed policy, interest rates, the economy. Then we’ll back up and talk a little bit about you, about the Federal Reserve system, what you do for a living. And then we’ll talk about some of this bigger picture, themes that are, I’m sure, top of mind for people in this room around AI, what’s going on with the evolving US economy. So, first thing, last week, the Fed decided to cut interest rates. You were in the room, you were part of that decision. Why did the Fed do that? And did you agree with that decision?

Mary C. Daly:

Let me start with, I did agree with the decision. I thought it was appropriate to take another bit off the policy rate. We have an economy that has been remarkably resilient. Really weathered so many different things and still consumers continue to spend. Businesses continue to invest. We continue to have good growth. But we still have inflation printing above our 2% target and we need to get that down. It’s gradually coming down, but it’s still too high. And importantly, we have a labor market that relative to last year has softened quite a bit.

And you don’t need to look at job growth to see that. You can look at the number of people looking for work and taking longer to find it. You can look at wage growth, which is moderated. And so, we need to do two things at once. We’re in what we call tradeoff space. We need to continue to put downward pressure on inflation and keep our policy modestly restrictive, but not hold the range so tight that we injure the labor market unnecessarily and give people lower inflation, but fewer jobs. So, that was a balanced decision, which I completely would support. It’s balancing the risks, which is really appropriate at this point in time.

Neil Irwin:

So, that leaves the big question. You meet again in six weeks in mid-December. What do you think would make sense to do next month?

Mary C. Daly:

Keep an open mind. And here’s why I say that. So, you take 50 basis points, which is the totality of what we’ve done this year. You take that off the policy rate, leaves policy rate in modestly restrictive territory in my judgment. And we also have now what better positioned. We’ve done the risk management. So, the question is, do we need to do further adjustments to further risk manage or is it a good time to take a breather and actually collect more information?

Because remember, it’s not a world where we’re not in tradeoffs. We have inflation still above target. And when you ask Americans in surveys, “What are you really worried about?” They’re worried about inflation. We’ve committed. This is our job to restore price stability, return inflation to 2%, give Americans the relief they need. But in order for people to catch up from all that was lost, we also have to support the labor market. So, I think this really means assessing the incoming information, keep an open mind and make the decision that balances those risks and ensures that the economy can go on and achieve this soft landing I think all of us have been working towards.

Neil Irwin:

Now it sounds like from what Chair Powell said and his press comments the other day, there were some strongly disagreeing views in this meeting. There was a dissent to leave rates unchanged. There was a dissent to cut rates more. Is this a more divided Federal Reserve than usual? Put us in the room.

Mary C. Daly:

Yeah. It’s not a more divided Fed than we’ve had. And I wouldn’t even use the word “divided” at all. I would say these are people doing the right thing for public service. So, let me explain what I mean. Now, in recent periods, we’ve felt like there’s a lot of agreement, but that’s because we had a pandemic and the obvious choice of what to do with rates was lower them. Then you have a period of high inflation and the obvious choice of what to do with rates is raise them as quickly as you can without dislocating financial markets in the economy.

So, of course you’re going to see quite a bit of agreement. But if you go back to 2019, you don’t have to go back very far. That was actually the last time that the Federal Reserve, the FOMC had dissents on both sides of the decision. So, in 2019, we had two people say no change. That policy decision was 25 basis points and we had one person say should be 50 basis points.

So, again, it’s in our history and that level of conversation is the disagreement is usually what you see when the world is uncertain. And you’re trading off between making sure you support your inflation goal and bring it down and making sure you support the labor market and keep it at or near full employment. So, not unusual, just not in the recent memory.

And I think importantly, and if you leave with nothing else today, I would hope you leave with this. Everyone should want, in my opinion, the FOMC to disagree and debate and really interrogate the issues that are before us and then come together and make the best decision we can and then turn around six weeks later and do it all over again. I think that’s what good public policy looks like. And so, I’m proud that we aren’t all agreeing. I think it means that the questions are hard and we’re doing hard work to get the right answers.

Neil Irwin:

So, you used the word “uncertainty,” there’s always uncertainty. Right now, we don’t even have government economic data to help resolve some of that uncertainty. How are you trying to make decisions on the economy when you don’t have the usual gauges to rely on?

Mary C. Daly:

So, it is a longstanding practice. And I think many of you must know this because you host forums like these, but it is a longstanding practice of the Federal Reserve to have three very important pillars of data collection. And so, one of those pillars is the government collected data. And right now, that’s not coming until the government reopens. So, that pillar is something that we absolutely want and rely on, but it’s not the only pillar of information collection.

The other pillar of information collection, another one is private sector surveys, indices, the sentiment, investment. Many of you, I’m sure, look at those indices in your own companies. And we have long assembled those data and they grew massively, very quickly in the pandemic when you needed more information than we could get from the government data.

So, we have that and we’ve had a long history of correlating those pieces of information with the government provided data so that we know when they depart, when they come together, and which ones are good leading indicators versus lagging indicators.

And then we have the third pillar, which in points of inflection in the economy are actually the most important data we collect, and that is all of you. So, especially at the reserve banks, there’s 12 reserve banks. One of the key roles of reserve bank presidents in the regional Fed, I’m from the San Francisco Fed, so I have nine states in the west, but all of us have districts. One of our key roles is to talk to CEOs of small, medium and large businesses, talk to worker groups, communities, civic leaders, and ask not what did you see last month or the last six months, but what are you going to do and why in the next three, six, 12 months?

And so, that piece of information is still there. And we’ve been relying on that quite a bit in this inflection point because we can look at the employment report and know that job growth is lower when we have that government collected data. And that’s important, but even more important is what are you going to do in your hiring? What are you going to pay in your wages? What are you planning for your own sales and profits? And are you investing? Are you not investing? And those are the types of information we have.

So, I think it is a misnomer to think that the government data are the only data we get. It’s important. I don’t want to understate its importance, but I don’t want to overstate it either. Looking ahead requires talking to people, being on the ground, and then using all of the pieces of information to project forward. And that’s how we make our decisions. This is why oftentimes before a meeting of the FOMC, the views are widely different, but then by the time you get to the meeting, so much more information has been given that it’s easier to see a convergence around at least a couple of ways to go.

Neil Irwin:

So, let me hear your take. There’s an interesting disagreement, I would say, between some of your colleagues on whether this data fog, this absence of data we have right now argues for inertia and leaving rates steady until you have better data, better information, or stick with what had been your plan, which was probably doing an additional rate cut in December. How does the fog cut in deciding the December move?

Mary C. Daly:

So, I think of it slightly differently. I think of it as we’ve always had these three pillars of data collection. Only one pillar is being challenged right now. Hopefully, it will open up and we’ll get that information as well. But right now, you can learn a lot and I’m being really serious here. You can learn a lot by looking around.

So, the most very common thing I like to do, and if you do it in places in the west and here you’ll see the same thing, is I like to count cranes and not the birds, the construction cranes. If businesses don’t put a crane up if they’re not sure about the future in some capacity, they might be a little more uncertain than they want to be, but they certainly don’t put it up. They don’t even operate it. It’s expensive to operate the crane and continue. You might take a pause. In the global financial crisis and even in the pandemic, you saw a lot of cranes just standing there, but not working. Now you see more cranes working, more cranes going up. So, that’s a good indicator of the economy.

On the other side, you can just ask businesses, and I have done so. I just came yesterday, the airport is teeming with people. You can ask the servers in the airport, “Has it been busy? Has it not been busy?” And they’ll tell you, “It’s been a little slower than usual, but it’s not dead. That’s why there’s a line, you’ll have to get into it if you want to get dinner or coffee.”

So, I think that’s the way you collect information. So, for me, I don’t see us as having so little information that we can’t make a good decision. I don’t see that at all. What I see is we have less information than we’re accustomed to and we have to work harder to get the information we need, but that’s okay because that’s the job of central banking.

Neil Irwin:

It doesn’t create a systematic, yes, you got to move or no, you got to-

Mary C. Daly:

It doesn’t for me. I mean, the reason to move additionally or wait and see is more to do with the answer I gave at the beginning. If we think that we’ve bought enough insurance essentially to support the labor market and we’ve bought some time, then we can go ahead and watch the economy evolve. If we feel that more is needed, because we’re getting more signs that the labor market is in a state of precipice of concern, I don’t see that right now.

Look at the initial claims for unemployment insurance, which we still get. The states collect those pieces of information and they haven’t really risen lately. So, we do see some softness in the labor market, but so far not weakness and it’s that weakness we want to prevent. So, we’ll balance those risks. And always remember that inflation’s still printing around three and that’s not two.

Neil Irwin:

One last question on the news of the day before we go to bigger picture things. The elephant in the room right now with the Federal Reserve, the president is in the middle of a selection process for the next chairman. Chair Powell’s term is up in May. Two of the finalists are in the room there at the Fed right now. At the same time, the president’s trying to fire Lisa Cook, a governor whose term goes till 2038. That’s going to go into Supreme Court in January. Does all of this change the complexion of the decision making? How does it affect your day-to-day the way you guys operate?

Mary C. Daly:

So, I want to look straight at you all and tell you this, not at all. No, seriously. And you might think that’s crazy. Mary, how could you say that? But let me tell you why. So, Federal Reserve independence is extremely important, I think. History tells us that central banks that are independent are better at assisting the economy by achieving the goals that in this case Congress gave us.

The best way for us to contribute to our independence is to do a good job, to do our work. Our work is payment system, the banking system, and monetary policy, full employment price stability. So, I see any distraction as a tax on the American people, and it conflicts with the oath we take to serve the American people in all that we do. So, I mean it when I say, “I don’t pay attention to this. This is not what we talk about in the room when we go there without divulging any details.” You cross this threshold, which is the meeting room, and that all that’s on anyone’s mind, even when they disagree, is serving the American people by achieving our dual mandate goals.

And people may have different views about how to do that best and what the facts are that they bring to the table or what the interpretation of the data are or what their projections are. But those are discussions about projections, not about the mission. And the discussion about the mission is always the same. So, I can say with all great certainty and all great confidence that I have a banner, the first thing I did when I became president of the San Francisco Fed is we put up a banner at the front of the offices and it said, “Our work serves every American.”

And that is the mantra that we have. And so, ultimately, it’s a question and I think it is reasonable to think that maybe we are distracted, but not at the table of the FOMC and not in the day-to-day work. We have a duty to serve and a duty to serve is usually what creates the continued independence of any central bank. And I think ours will be the same. Thank you.

Neil Irwin:

So, I hope we’ve gotten a couple of headlines out for the financial press who are watching this, so let’s move on to some bigger things. Tell me about yourself. I assume president-

Mary C. Daly:

I don’t think this is a bigger thing, but it’s a thing.

Neil Irwin:

An economist, president, I assume you came from elite economic research circles or Wall Street. How’d you end up in this role?

Mary C. Daly:

So, I do have an unusual background and I grew up in Missouri outside of St. Louis, pretty rural, just becoming something different than rural. And my family fell on hard times, largely because of the economy. They were in the Volcker disinflation that first not able to pay for the things that they wanted to pay for even though they were working. And then when the Volcker disinflation came, which ultimately proved an important and necessary policy adjustment, but both my parents lost jobs.

And so, my family fell on hard times. I dropped out of high school to help support the family. And I found myself thinking that the best role for me would be to be a bus driver. But luckily, and I think this is a power that all of us have, luckily, I met someone who was at the point 32, I’m 16, she’s 32 years old and she becomes my high school guidance counselor who I kept in touch with even though I dropped out. She said, “Would you like to meet a friend of mine?” I met a friend of hers and that friend Betsy became a mentor and nudged me, “Maybe you should get a GED. You can’t really be a bus driver without one. And maybe you should take a semester of college because you did pretty well in the GED. And maybe you should go to a four-year program and get a degree.” And that journey started this.

And so, I ended up getting a PhD in economics, studying labor economics and microeconomics. And then I took my first job after a postdoc at a Fed, which did macroeconomics and monetary policy. But what I learned from all of that is that the labor market and all the things that I studied, the economy is about people. So, all the things I studied were a perfect fit for thinking about macroeconomics and monetary policy. And ultimately, I worked at the Fed and when the job came open to be the president of the San Francisco Fed, I felt so devoted to the work that I applied. And here I am.

Neil Irwin:

So, let’s go even more basic. What does the president of a Federal Reserve regional bank do all day?

Mary C. Daly:

Now that’s the coolest thing. Okay. So, now I’m sitting up. Now seriously, why I applied for the job is because it has three elements that I feel deeply committed to. So, the first element is you’re a CEO of a company. We have employees who work in cash. They make sure that cash is processed, cash is recirculated in the economy, and that importantly, you have cash whenever you need it. You go to your bank, your bank has cash. They get it even if there’s a disaster, a hurricane, a flood, an ice storm, an earthquake. We find ways to distribute that inventory so that wherever you are in your community, you have access to your resources so you can work with your community, your family.

So, that’s one part of my job. But I also have supervision teams that are managed currently by Vice Chair Bowman at the Board of Governor, but they sit in our regional feds. And so, we manage those individuals. And then we have many, many people who work on the payment system that’s not cash. All the wireless transactions, all the digital transactions all get processed on the Fed’s payment rails and we have people doing that.

So, I’m a CEO of roughly that our Fed has something up north of 1800 employees. I have branches across the west and we manage those individuals and making sure that they’re always doing their work with two things in mind, being good fiduciary stewards of public trust, good fiduciary stewards of public funds. So, that’s piece one.

Piece two is the engagement we make with the community. So, we have to talk to businesses, communities, civic leaders, workers, to understand the lived experiences in the economy so that we can bring that information to the FOMC, the Federal Open Market Committee, and help us all make good decisions. And importantly, constantly get feedback that tells us what’s happening in the future, not just what happened in the past.

And then again, we have the monetary policy function, which is the one that I think is most commonly known. But I think the architects of the Federal Reserve back in 1913 had it right, for a variety of reasons if you go back and read the transcripts, which I have of their debates, but they had it right. You need a Fed with some DC focus, and that’s why we have seven governors, but you also need a Fed that is distributed across the United States so that we recognize that wherever you’re living, you have a little bit different set of issues, problems, places you’re experiencing the economy. And all of that information importantly comes back in and informs the FOMC and our policy decisions.

So, my day-to-day looks like this. It looks like engagement like I’m doing here today. It looks like thinking about monetary policy with my research team. It looks like leading our employees along with my executive team to ensure that we’re always showing up and we’re modernizing ourselves, we’re thinking about the future, and we are studying what we need to study to make sure we’re prepared for whatever the economy brings.

Neil Irwin:

So, you were in the Bay Area, you were in this hotbed of innovation, and we’re in the middle of this AI boom. It’s an odd situation. We have stock market keeps hitting new highs. There’s also a lot of apprehension about what’s the future for human workers. Sitting where you sit, how does it net out to you?

Mary C. Daly:

So, the first thing I’ll say about AI is there’s a lot we don’t know and you’ll end up confronting, I’m going to use casual terms, the doomsayers and the enthusiasts. And so, the first thing I want everybody to know is we don’t know enough to see if any of those extreme positions are true, but what we do know, we do know some things. So, the first thing we know is that there’s a lot of investor enthusiasm for AI. And you can see that in the stock market.

What we also know is that many, many, many companies across the United States, ones you might expect and ones that are quite surprising are investing in technologies like artificial intelligence. And when we say artificial intelligence, the first thing that comes to everybody’s mind is something like ChatGPT, generative artificial intelligence. But a lot of what’s being invested in is ordinary things like machine learning and robotic processing automation, just things that have been available for a decade or more, but are just now being utilized because the labor market has been extremely tight.

And whenever this is the benefit of being a labor economist by training, whenever the labor market, we come off a period when the labor market is extremely tight and firms have trouble finding workers, the thing they start focusing on is technology because they don’t want to be caught in that position again. And so, we see that enthusiasm.

We also see that all the investment that’s been going on in the country, by and large, most of the investment going on right now is in technology like AI or data centers that support AI. Otherwise, it’s very unusual to see investment be so strong when you have so much uncertainty. So, I think this is a positive we do know.

What we don’t know. What we don’t know is if the valuations that are very high right now in those companies are being based on it becoming electricity or the steam engine. And if that’s the case and the steam engine or electricity isn’t delivered in the next few years, investors might say, “Well, the valuations are higher than we’d like them to be,” but that doesn’t mean there won’t be productivity out of it. Firms are already using it in a way.

We have this network we started in January of ’24 called the Emerging Tech Economic Research Network, EERN. And when we started, companies were saying, “Yes, we’re looking at it because we’re worried our employees know more than we do.” Now they’re saying, “We’re looking at it, we’re using it.” And this is the really important thing about jobs. And we haven’t laid any workers off. We might be hiring more slowly because we can do more with fewer people, but our employees are happier because they are not doing tedious work because they have more interesting work they can do now.

So, what does that mean for the future? I think workers who are worried about their jobs, I talked to a lot of universities and say the same thing again and again, scaling up is just something that our lives demand it anymore. Technology is changing so rapidly, you have to be aware. A lot of our younger people are native to AI, and so they’re not nearly as afraid as others, but I think transformation from this technology is possible. And we already know the productivity gains are there. It’s already influencing productivity. I just don’t know if it’s going to be business as usual productivity or if it’s going to be extraordinary like electricity.

Even sitting in the Bay Area, I’m aware that there are enthusiasts and right now the country’s usually built on taking some of the enthusiasm and putting it into practice. And we’re in this transformation now where we’re trying to put it into practice. I see companies doing it and I still don’t think they know whether this is going to be electricity or computers.

Neil Irwin:

So, one thing we learned 25 years ago with the China shock when a lot of manufacturing jobs were displaced is that rapid change, even if it makes society richer as a whole, can be very costly and challenging. Could we be hitting the white-collar version of that for more professional workers?

Mary C. Daly:

What is interesting, so if you break out occupations that will be disrupted, so computers did something really interesting, and I think almost everybody knows this at this point, but I’ll say it anyway, is that computers hollowed out that middle group because you could automate their work away. And so, that left, if you had a computer and you were a very skilled worker, you just got way more productive. And if you didn’t use computers in your jobs or you’re in more manual things, your job stayed. But in the middle, those jobs were competed away by automation.

So, what this is possible to do is go up the skill distribution. So, let me give you an example that I think it can help explain what I mean. So, two years ago, this is early on, so this is early in January of ’24, I injured my wrist. I get an x-ray and I end up seeing a physician’s assistant. She puts my x-ray into the computer and I asked her if I could see this and I signed a waiver and she has a script now of things to ask me that are AI generated.

The first thing it says is it’s not broken. Second thing is, can you do this movement, that movement? She does an exam following this script. And then she says, “You can wait to see a doctor, but I can generate an RX for PT and then follow this protocol and I’ll make you a doctor’s appointment six weeks later.” So, that transformed this physician’s assistant into somebody who could deliver care that got me started on this. I did not have to go back to the doctor. It was all healed by the time the six weeks came. So, consumers could have just queued and waited for six weeks, but I got earlier treatment because of that.

And so, I think that’s a place where you don’t need as many doctors as you would if you get everyone served. So, what does that mean? Well, we have a scarcity of doctors. I mean, that’s a scarce resource right now. So, AI has the capacity to help in that way, which goes up the skill distribution, but I’ll remind us all, I think that the skill distribution has a lot of scarcity in it. So, if we could have AI assist, then we can produce more output without having to solve that scarcity position. So, I think that’s the open question. Are we really talking about it replacing people who we have a surplus of or are we talking about it helping where we have a scarcity? And I think that’s the open question. And I bet firms start with the scarcity.

Neil Irwin:

So, I think this will be the last question from me before we go to the room. But there’s been some discussion of the idea that there’s a K-shaped economy right now. We have this stock market boom, we have AI data center construction, things like that going on, but for people without stock market wealth who are not beneficiaries of that. Spending is weak, there’s some real softness in the labor market. What do you make of that? Is there a divide happening right now and is that relevant to your setting policy?

Mary C. Daly:

So, I mean, it always has a low-level component to it where, just let’s divide for simplicity. This is not the actual data, but let me just divide for simplicity, the upper half and the lower half of the economy. And so, in the pandemic, as you recall, the lower half of the economy was really struggling and the upper half was better off. The lower half of the economy in terms of income. They were given government subsidies, which carried them forward, but absent those, they were oftentimes out of work, their businesses closed down. So, without those benefits, they were without. They had struggles getting basic needs met. So, then on the other side, although there was a lot of support for them, so they ended up okay.

On the upper side, most of us stayed home and we still got paid and we still worked. And we didn’t have anything to spend, so our savings grew enormously. So, that should cause one of these K-shaped components coming out of it. But because of the support, the lower half was supported. Then we had a strong economy. But if you look at inflation, the toll is born much more sharply on the bottom 50th of the income distribution because more of the income in that group is paid to basic necessities.

And so, now it’s just a continuation of that. And what you’ve seen is that for the lower 50 percentile of the income distribution, you see that savings is drained off and that the economy is slowing, hours are going down, wages are moderating, but inflation is still at 3%. So, that equation’s just not penciling out. And so, when you think about how do you best support an economy that has two groups going in opposite directions, you really support it through a strong labor market.

The last thing I’ll say though is if you look at layoffs, this is not people at the lower part of the skill distribution. I mean, think of Amazon and other things, these are corporate workers, and that’s a different kind of pattern in the labor market. It’s more balanced than it has historically been when we’ve talked about a K-shape economy. So, I think there’s just more nuance. I’m not saying this time is different, but I think every time has its own nuances and it’s important to think about.

But with the Fed, we can’t make policy for distributional issues. We have to make policy at the aggregate. We can’t make it for regions. We can’t make it for the distribution, but I do look at these pockets of softness and as a leading indicator of where we might be heading. And there I think it’s really important.

Neil Irwin:

Great. And I will turn it over. Thanks, Mary.

Mary C. Daly:

It’s not common that I have two different grillers, but it’s good. I like it.

Harvey E. Oyer:

Wait till we get to the students.

Mary C. Daly:

I know. That’s what everybody’s told me. Those are the toughest questions.

Harvey E. Oyer:

They are. Neil, thank you, and thank you, Mary. And before we go any further, I want to thank one of our former Forum Club board members, Richard Rampell, who most of you know that is the reason that President Daly is with us today. So, thank you, Richard. We appreciate it.

So, as a reminder to our audience, if you have questions that you would like to ask President Daly, please hold your hand up in the air. A volunteer will pick them up. We will try to get through as many questions as we can. But the first two questions come from our students, which are often the most difficult ones, I will warn you in advance. So, would the student from Lake Worth Community High School, please stand and ask your question.

Yezenia Reyes Rivero:

Good afternoon. I am Cadet Colonel Yezenia Reyes Rivero from Lake Worth Community High School. And my question is, what is the most important tool that the Federal Reserve uses to better understand the labor market and what may or may not impact it?

Mary C. Daly:

That’s a terrific question and very timely because we are right now trying to understand the labor market. And here I will say, remember when I spoke about the three pillars of our data collection? Really, to use an old-fashioned expression, it’s shoe leather, but we don’t walk around all the time now, we actually do other things, but it’s visiting our communities and our firms and our workers and asking not what happened last week, but what’s happening going forward. Because the labor market, when it starts to decelerate, can do so sharply.

And sometimes it doesn’t happen until it occurs. You can’t see a lot of things in the data before the labor market starts to weaken and then stumble. So, what we spend a lot of time doing to really look at it is looking at these series about when firms say, “How many people do you think you’re going to hire? Do you think about layoffs?” I often ask my firms, “How close are your layoff plans to your desk?” If they’re just in a cabinet and someone in the strategy section is thinking about what you would do, if you had to break the glass, well, that’s not very close. But if they’re front and center on your desk and you’re looking at them every morning, well, then that’s getting closer. So, that’s a really good indicator.

You could also look at all the classic indicators that you’re trained to look at in school, like the initial jobs claims, quick rates, wages, et cetera. But I think getting out and looking around, if you don’t see help wanted signs, actually ask firms, do you have no help wanted signs because you’re fully staffed, or because you’re getting ready to lay off because you’re not interested in hiring? Looking at technology trends like Neil and I just talked about. Will AI or technology replace the need for workers? Those are all really important things to look at. And the most important thing I could leave you with here is if you wait for the employment to report to come out to tell you if the labor market is weak, you’re already behind.

Harvey E. Oyer:

Thank you very much. Would our second student from Dreyfoos School of the Arts, and incidentally, Mary, they didn’t have to travel very far. It’s 200 feet behind the back door of this building.

Mary C. Daly:

Okay. Very good.

Harvey E. Oyer:

Please introduce yourself and ask your question.

Summer Irwin:

Good afternoon. I’m Summer Irwin. I’m a music student at Dreyfoos School of the Arts, and I’m on the officer board for our National Honor Society. And my question for you today is, from working part-time jobs as a teenager to now heading one of the largest reserve banks in the Federal Reserve system, what pieces of advice would you give to your high school self?

Mary C. Daly:

Oh, great question. So, the best thing I can offer you is this, and it’s really been the durable thing in my life that changed the trajectory and allowed me to be where I am today, is that oftentimes as young people, we cannot see what our future could hold because we end up looking like this when the world is like this. So, you must source information from others who have vision beyond your years of experience.

So, literally the best thing, and for all of us in the room, I think being a mentor to people, even if it’s for 15 minutes can sometimes change the trajectory of people. But also as a young person, I got there reluctantly and by reluctantly, I mean, I was a little bit shy. I thought, well, I should know all this. So, I was almost embarrassed to ask for help, but once I got that in my head that asking for help is okay, that’s the listening part that changed everything for me. Listening, trying.

When I was at a high school dropout, that’s how I thought about myself. And only when Betsy says, “You could maybe go to college.” I’m like, “I don’t think they’re going to take me. I don’t think they’re going to want me. I don’t think I’ll be successful.” She says, “Just give it a try.” And I gave it a try and sure enough it worked.

And so, I think that a willingness to try something you yourself can’t see, just take an experiment, just give it a whirl, so to speak, I think that really pays off in the end and source information from lots of people and ultimately you decide and you’re responsible for that decision, but you don’t have to know everything before you start. Great questions, by the way, from the students.

Harvey E. Oyer:

Thank you, students. We appreciate that.

Mary C. Daly:

Absolutely. You’re our future, so anytime I can invest in young people, sign me up.

Harvey E. Oyer:

That goes for all of us. So, we did, Mary, have a number of questions about K-shaped economy, AI, and so I’ve removed those. I think you answered those through Neil’s questioning. So, other questions, what do you make of the, and it may be too soon for you to have an opinion on the China trade deal that President Trump just struck over the weekend?

Mary C. Daly:

So, let me be very specific here because I want to make sure that I’m not stepping up over the line. And we talked about independence earlier. One of the clear ways that we do our work well is to stay in our proverbial lanes. We have a narrow remit and we hold to that. So, I won’t comment on the trade deal itself, but I will comment on the following, which is what’s really interesting is that the firms who are involved who directly affect it by the trade relationships, we ask them, “How are you responding to the trade negotiations and other things?”

And here’s what we’re hearing, and I’d be interested to hear if other people are hearing it here, but here’s what we’re hearing all throughout the west where there’s a lot of trade with China on many of these things, is that it’s useful to go through these negotiations, that the negotiations themselves are lending to better outcomes that level the playing field and make it possible for the next 10 to 15 to 20 years.

And so, they’re not being pushed aside by the fact that these trade negotiations are taking place. They’re just being thoughtful as they do take place. And I’d say when we source information, businesses are less worried about tariffs than economists are, which is really interesting to me, is that if you’ve talked to economists, and this is true generally, is economists get very worried because they put the deals into the models. I’m an economist, so I can talk about us, but you put the deals into the models and the models spit out really hard things. But if you talk to businesses, they’re like, “Okay, we can learn to live with things. We can change how we source things. We can move around as long as we know what the rules are. “

And at this point, I think we’re getting closer to knowing the rules. We’re not there yet. So, I think anytime you say that there’s a negotiation and a deal, I think businesses, which are really important to the economy, get a little more optimistic that this time will be getting closer to the end point. So, let me not comment on the specifics of it. It’s still ongoing and I don’t want to get in the way of the administration as they do this important work, so I’ll leave it at that.

Harvey E. Oyer:

Have you been surprised by the resiliency of the markets since January?

Mary C. Daly:

In order for the markets to be resilient, the economy has to be resilient. They’re looking to taking forward bets. If market participants looked out and saw that they didn’t look like there was much going on in the economy, I don’t think markets would be so resilient. So, what I’m really surprised about and pleased about is the resilience of the economy. If you ask me what’s the biggest surprise we’ve had since the pandemic? It’s the ongoing resiliency of the US economy. Even through high inflation, people stayed in the game.

Then we had all the uncertainty of it’s not just one thing, it’s four things at the same time, deregulation, tax relief, immigration policy and tariffs. That’s a lot of things that have a capacity to change arrangements in the economy and businesses are still in the game after a spike in uncertainty around April, it’s come back down quite a bit. And so, still there’s uncertainty, but businesses are investing. You can see that.

There’s also the AI technology shock. Shocks are the things that happen when they just hit the economy. This is all affecting the economy around us, and yet businesses are investing. And if the Fort Lauderdale Airport is any indication, people are still spending. It’s so busy.

And then I walk around and I do this in a way that doesn’t make me seem unusual. Trust me, I do. My team would bring me in, but I asked, “Are you on vacation or are you on business?” And by and large, people say they’re on vacation. And so, this is an indication that people are still in the game, so to speak, and that’s the fundamentals of the US economy, which give the fundamentals of the marketplace.

I think also the markets, and you can see this because it’s the Mag 7 really that have been driving the stock market activity. There’s a lot of enthusiasm about AI. Whether that enthusiasm will be met over a five-year horizon or whether like most transformative technologies that we’ve seen, it takes longer, that still remains to be seen.

Harvey E. Oyer:

So, when you visit us next time, I encourage you to use Palm Beach International Airport. It is a much better airport.

Mary C. Daly:

Wow. Okay. Sorry. But there aren’t that many direct flights from San Francisco to Bay Area.

Harvey E. Oyer:

We’re working on that.

Mary C. Daly:

If you get me a direct flight, I’m totally there.

Harvey E. Oyer:

So, piggybacking on your last answer, all of the indicators show a resilient, strong US economy. Why are gold prices so high if we’re that confident in our economy?

Mary C. Daly:

That’s a great question. And I think ultimately when people get nervous, they buy gold and some are nervous. Other people are not nervous and they’re probably not the same people who are investing in the stock market and investing in gold, but that’s just something that comes with the territory of there’s a lot of uncertainty. I mean, if you go back, and we can say this, I think everybody in the room would agree with it, if you go back and ask, what are transformational policies even at their early stages? I mean, deregulation on the order that the administration’s proposed, the immigration change and the tariffs, those are large changes in the economy and they are influencing things.

So, I think some people are going to find that very anxiety provoking and nervous about what comes forward. They buy gold. And there’s also a lot of geopolitical risk. We shouldn’t just put it all on policies. There’s a lot of geopolitical tensions. A lot of things happening out there and people tend to want to buy gold during that period.

So, I can’t tell you why the gold price is so high. That’s not in the Fed’s mandate actually, but it is something that I see when anxiety goes up. But I’d say on the flip side of that, if the anxiety is really as high as that would suggest for everyone, you wouldn’t see the stock market valuations go up. You also wouldn’t see, sorry, the Fort Lauderdale Airport be so busy. I think that is a real indication that people are still doing things at least today.

Harvey E. Oyer:

So, we’ve talked about the resiliency. What are the risks to our economy? What should we be looking for that if it were to occur at a negative sign?

Mary C. Daly:

That’s the question I think a lot about. So, let me start with where we ended when I was speaking with Neil on the K-shaped recovery. So, one thing that you see right now is that the spending, if you looked at the distribution of spenders by income, you would see consumer spending for higher income households staying right where it was. And you would see spending for lower income households starting to slow and soften. You also see credit card delinquencies rising. They’re still not very high, but they’re rising. And you see the number of people who in survey say that their funds for rainy days, the number who say they don’t have any rainy-day funds, that’s rising.

So, those are pockets of vulnerability and they would be very, very sensitive to any slowing in the labor market that turned into weakness in the labor market because then if you’re in that group, you’re really relying on your labor income to support your spending. So, spending is still solid, like I said, but there’s more vulnerability in the spending data than there was a year ago because the cushion’s gone for many families, and importantly, the labor market softening now. If you look at job security measures, so we have surveys that New York Fed does one that asks how sure are you that you could get a job if you lost yours? And that level of certainty is very low right now.

So, people don’t feel like if they lost their job, they could get another one. And that level of insecurity just means that people are feeling it when they go out into the labor market that they’ve got a job now, but I would offer that if the labor market slows, they’ll get less secure rather, more insecure, and that could be a vulnerability on spending. So, that’s a risk to the economy because the economy’s really been built on consumer spending, businesses feeling positive about demand that could go.

The second thing that I think could shake the economy is we’ve been expanding for a while. Businesses are remaining optimistic, but if we got some external shock, so to speak, where things didn’t go as well externally, there’s global growth headwinds. If the global economy starts to slow, export markets aren’t what they used to be, those types of things can make it more challenge.

So, I just think the economy is in a good place right now, but it’s in a more vulnerable place. So, that’s why it’s really important not to just look at the level of activity, but to look at the forecast for activity. And it’s why I was so supportive of taking a 50-basis point total policy rate reduction to just make sure we’re getting some insurance, so we don’t leave that vulnerability unsupported and we can continue to move inflation down, but do so in a careful way.

Harvey E. Oyer:

So, speaking of your 50-basis point reduction, that has not translated into a commensurate reduction in mortgage rates much to the consternation of our local real estate economy. Why is that?

Mary C. Daly:

Well, there’s not always a one for one on this. This isn’t just something that gets priced in completely. It just gets priced in somewhat. But really what’s happening now, and we see more people coming off the sidelines as mortgage rates have gone down, just not as much as our interest rate cut. But that’s not unusual really. But the unusual part about housing right now is where we are in our country.

So, there’s this really nice survey done by the Cato Institute. And I’m not endorsing the Cato. They just did a great survey. It’s a couple years old by now, maybe a year and a half old. But they asked Americans, “What’s one of your top concerns?” And it’s housing. And then they asked by, “Where you live? What your income is? What’s your political affiliation, your age?” Everything. And across the board, 85% of Americans in total felt that housing was a primary concern.

So, you dig into that and you can see that since the global financial crisis, housing supply has been coming like this relative to housing demand going like this. And so, we just now end up with a big gap between the supply of available housing and the demand for available housing. And so, even when interest rates come down, it’s still going to be hard. And I think this is where everybody’s first priority is. Where’s the affordability? And by affordability, we don’t mean just for lower income households. We mean across the board. Parents who want to live next to their grandkids. I mean, I’m sorry, grandparents who want to live by their grandkids, but their grandkids can’t live next to them because it’s too expensive. These are all things that are going to have to be challenged.

The Fed doesn’t play a role in this. All we can do is set the conditions for this happening. And we have to set those conditions, thinking of both sides of this housing equation. This is one of the hardest questions I get asked, but if we lower the interest rate too much and it spurs inflation, well, then the inflation in housing will eat up any of the benefits of the interest rate reduction. So, we are trying to balance the interest rate so that it continues to bring inflation down so that the only thing left over in the housing market is this imbalance between supply and demand, which is going to be solved by local policy, zoning policy and builders.

Harvey E. Oyer:

So, we have time for one more question, but I’m actually going to ask you two-

Mary C. Daly:

This goes fast.

Harvey E. Oyer:

… if you’ll indulge us and squeeze two in.

Mary C. Daly:

Absolutely.

Harvey E. Oyer:

So, you spoke about labor markets. In your industry, what is an acceptable or unacceptable level of unemployment if there is such a thing as a standard in your industry?

Mary C. Daly:

So, the way that labor economists think of unemployment and certainly monetary policy, and this was something that I learned as I worked at the Fed is that it’s the level of, so here’s how I think about it, it’s the level of labor market tightness. Let’s think about labor market tightness because some people queue up wanting a job, but they don’t do it in the unemployment rate.

So, remember, if you recall, Greenspan had this famous measure of the marginally attached workers, maybe that was not in your parlance back then. But I’m having a student of the Fed, you could be unemployed or you could be what we call marginally attached, meaning you’re not saying you’re unemployed, but you really, really want a job.

So, that group of people are the people who we think of as labor market slack. How much extra capacity do we have? And I want that to be as low as it possibly can be without spurring inflation. So, a lot of times what we do as monetary policy makers is we find that level by continuing to try it out, letting the economy tell us. So, back in 2019, the Federal Reserve took two rate cuts in 2019, and that was the subject of a lot of debate. But one of the things that was happening is the labor market was just continuing to able to push that unemployment rate down without spurring inflation. And it supported so many families who were now able to either get a job or move up the job ladder.

So, I think of that unemployment rate as the lowest we can get it without spurring inflation. And so, we can look earlier and say, “What’s full employment? Do I worry we’re not at full employment?” Right now, unemployment’s pretty low, but the place where I get a little focused is that labor market slack is rising. And we don’t want it to rise so quickly that we again, I’ll end this answer this way, I think it would be an unfortunate outcome, one we want to absolutely avoid if we get inflation at 2% at the cost of millions of jobs. We are almost there without that. And I think it’s on us to work hard to make sure we don’t do that.

Harvey E. Oyer:

Thank you. Our last question is a less serious question.

Mary C. Daly:

Okay.

Harvey E. Oyer:

So, the hard part’s over with. Do you trust the self-driving taxis in San Francisco?

Mary C. Daly:

Okay. I do, but let me tell you why. And second of all, I’ll tell you about this. So, first of all, I didn’t know in the beginning, but then I don’t know if you’ve noticed, driving is not a perfect skill in our population.

Harvey E. Oyer:

Especially here.

Mary C. Daly:

Yeah. And you should come to San Francisco. I’d say driving skills have deteriorated in my judgment. And you got cellphone, you’re putting on makeup, you’re smoking, whatever you’re doing. And so, what’s good about the self-driving car? It’s paying attention. So, I went on a demo for Waymo and I’m on the demo and way far away, almost outside of my visual range, and I have 20/20 vision with these glasses. The person giving me the demo says the Waymo sees that. It can see the length of a football field with perfect clarity. And it sees that there’s an unsheltered gentleman pushing a cart across the roadway. So, it starts to slow. It starts to assess how quickly he’s moving, et cetera.

And long before, like 20 feet before we ever get to him, it stops. Lets him cross and then it keeps going. And then a bike swerves out in front of us and it sees the bike before I do and it stops and the bike clears. So, I think there’s a place where technology, is it perfect? Absolutely not, I wouldn’t think, but it’s really interesting to see the safety that I experienced.

And so, yes, I take it, I do like it, I enjoy it, but you’re not comparing it to perfection in my judgment. You’re comparing it to people. And I do think, at least not me, I’m earnest, I grew up in the Midwest. I’m earnest, I’m looking, I got two hands on the wheel, but I’m not as attentive as a computer because a computer doesn’t get distracted. I’ll leave you with that. Take a Waymo.

Harvey E. Oyer:

Neil and President Daly, thank you both very much.

Mary C. Daly:

Thank you.

Harvey E. Oyer:

Super informative. We appreciate you traveling so far to be with us today, only to turn around and go back later this afternoon. So, thank you.

Mary C. Daly:

Well, for this audience, I would never have missed it. And the students, of course, that really made my day. Okay. Well, thank you so much. I appreciate it.

Harvey E. Oyer:

It was our pleasure.