Keynote Remarks by Mary C. Daly at the Institute of International and European Affairs

Dan O’Brien:

Thank you so much, president. I think we’ll come back to questions specifically on the topic of the balance sheet, of central banks, but maybe to kick off, I know a lot of people will be interested to get views on the state of the US economy. It’s a very confusing time. Tariffs, immigration policy changes affecting the labor market and of course the buzzword these days, AI, everyone’s talking about, it’s hard to see where the US economy is. Would you like to share your thoughts on the state of the US economy right now?

Mary C. Daly:

Absolutely. So I’m going to start by saying that at the beginning of the year, the US economy came into 2025 in a good place. I thought policy was in a good place and the economy was in a good place, and we had inflation coming down, the labor market looking fairly solid, and growth being near or a little bit below trend. So that’s a good place to start.

And then we had of course a series of announcements was, we often do with an administration comes in and makes a series of announcements that are consistent with the agenda and those announcements were as you listed, trade and immigration policy. But also tax policy, extending tax relief, and finally deregulation, doing things to take some of the regulation down to incent businesses to invest and spend more.

So that had been happened, that created some uncertainty, a big rise in uncertainty in the US measures around the times that those policy changes were announced.

Since that time, the uncertainty has come down quite a bit. The uncertainty measures show that it’s coming back to, perhaps not quite normal levels, but reasonable levels that I’ve seen in my career in the past. In fact, I’ve seen many more uncertain times than the one we face today. So I have changed to calling these times “interesting” and sometimes complicated. Because, and how do I measure that? Well, when you ask businesses, how do you feel? They say, “uncertain”. When you ask businesses in the United States, what are you doing? They say, “I’m investing. I’m just making sure I don’t take tremendous risks. I’m taking smart risks, and I’m making sure that I expand and grow my business, so I don’t get left out, but I’m not doing it. I’m not taking growth risks where it had to be price to perfection for this to work.” And that to me looks like an economy that has cautious optimism and that’s what we see.

Of course, on the backdrop of that, the labor market has slowed quite a bit in the United States and we still have inflation printing above our target. If you include goods prices, which would include direct effects of tariffs, inflation is closer to three. If you take out tariffs, it’s on its way down to two, but it’s still stubborn and it’s coming back down.

So, if you think about that, we still have work to do on keeping inflation moving down to our target of 2%, but we can’t be so aggressive in doing that that we end up injuring the labor market in an unnecessary fashion, where we end up taking inflation down, but we take jobs from people. And that ultimately is not the dual mandate that we have. We have a dual mandate: price stability, full employment, and so our policy decisions to take 50 basis points off the rate this year are really about balancing those two objectives and ensuring we can bring both to a place where we’ve met our goals.

Dan O’Brien:

Great. Good. Questions, we’ll go to questions. We’ve got a question. If I could go to the former governor of the Central Bank first, Patrick Holman is a former governor of our Central Bank. Patrick, and please, online questions are welcome as well. You can put them on the Q&A function and on Zoom, Patrick.

Audience Member 1:

Thank you. The balance sheet, the moment at the largest and most rapid increase was at the beginning of the pandemic, as you said. A recent paper by Anil Kashyap and his colleagues, they came out in the Brookings Papers, suggested that there was a smarter way to deal with this disruption in the market, that it had to do with the basis trade that was going on. And if the Fed had understood more precisely what was going on, they could have intervened more surgically with, maybe intervening in some derivatives, which would not have left this huge volume of liquidity sloshing around in the system. Where do you stand on that?

Mary C. Daly:

So let me say that there are academic studies and critics on both sides that say we should have done things faster and not waited so long. We should have done things not at all and been more surgical. What I think is that we really have to take a deep look at how much we did, how we did it, when we did it. But we also have to recognize that we didn’t know. As he admits, right? It’s really hard to know in real time what’s happening.

And so you’ve got a market that is faltering and could completely dislocate. And if you remember the financial crisis, dislocations that spread over into counterparty risk and nobody wants to lend to each other, they’re just very challenging to get over and then we end up doing a lot more. So I think we need to take that information in, and then start building and preparing for, what do we do in a variety of types of crises. So our most learning with the balance sheet came in the financial crisis, so we learned what we knew there.

Then the pandemic came and we had those tools. So we’re also using them, because no one also knows that that pandemic hadn’t happened for a hundred years. So no one really knows how bad this is going to be. In retrospect, and this is why we do postmortems. I think you go back in and you say, could other policy interventions have worked? Anil Kashyap has one idea, other people have other ideas, and what would we need to know? And this is the really important thing, what would we need to know to identify one type of shock from another type?

So one of the things that comes through in his paper is it’s hard they didn’t know in real time, well, in real time, what do we need to know to understand what would be the best package of things to do?

And insurer says that we don’t have just a playbook, we pull it off the shelf and we say, “Okay, here we go’. But we have a book of ideas, and the tools that we’ve thought about to identify what type of shock or situation this is.

The other thing though that’s really true, and this has little to do with market functioning and more to do with the economy, is that a lot of the growth in the balance sheet comes from trying to support monetary policy at the zero lower bound. So it’s not just liquidity. In fact, I think the Bank of England’s intervention just a few years ago really kind of tells you that if it’s just market functioning, you could go in, you can get out. But if you’re talking about supporting monetary policy at the zero lower bound, which here you might say, well, we’re never going to hit that again, but it is a risk we could achieve. It’s just probably not the predominant risk it was prior to the pandemic.

And so we do have to be prepared for ZLB risk, but I think it’s very important to distinguish. And this is the part that I tried to pull out in my remarks. We’ve got many reasons we would use the balance sheet, and distinguishing which ones are which, will help us because then we could ascertain what part of this balance sheet run up came from QE versus came from the market functioning intervention, and should we be more communicative about when market functioning is healed? And we can pull out of that and then more communicative that what’s left is QE.

And then of course you can debate, and I think this is a fair point that maybe we let QE go on for a little bit longer than necessary. And there I think, again, I’m just going to come back to the humility of the pandemic that many policymakers across the board, fiscal and monetary. And since it’s not an excuse, it’s just a reminder that many missed what the pandemic dynamic was going to look like, right? The pandemic dynamic, the forecast was huge hit to the economy, supply will come back faster than demand. The exact opposite occurred. Supply took almost two years to be fully repaired, and demand came back right away.

As soon as people were let out of lockdown, they started buying things and even from their homes, they were buying things. So we had a lot of excess demand hitting a very constrained supply. And you’d know what happens. Global inflation rose and then you add the war in Ukraine, and it rose even more.

So that’s my answer. But the bottom line for your remark I completely take, which is we do have to have a more, I’d say, filled out set of ideas where you can make the policy response appropriate to the condition.

Dan O’Brien:

If you include Japan on your chart there, it would’ve looked very different. I think Japan has gone started using its balance sheet bank in Japan earlier than other countries, and the scale of asset purchases is much, much higher. Are there any lessons from the Japanese experience?

Mary C. Daly:

The Japanese experience still stands as a unique experience that, I won’t speak for other policymakers, central bank policymakers, but that was something that we took very seriously at the FOMC, that we don’t want to become Japan where it’s very challenging to get inflation up. We were working extremely hard prior to the pandemic to just get inflation up to target.

And it seems to people, that’s an absurd way to think about it now that inflation is printing above target and has been, but everyone looked to Japan, and you see the enormous interventions they have to do just to try to get their economy moving and getting inflation back up to target. So I think that’s what’s the lesson from Japan, is that if you let things go too far, they’re very hard to change.

And we learned that lesson on the high side of inflation in the United States in the seventies, right? Inflation expectations rose, inflation rose, and you have to have the Volcker disinflation, which was very harsh, to get inflation back down to target and to keep the economy, sort of get inflation in the back of people’s minds.

On the other side of it, Japan had inflation that’s too low and has a very challenging time getting it back up. And so that’s why their balance sheet is much larger. They’ve had to all types of interventions and frameworks and tools, and they’re changed recently again to just ensure that they can get their economy stabilized on that dynamic.

And if you’re wondering why deflation matters, which I’m sure many of you are not, but if you always think that tomorrow it’ll be cheaper, you don’t buy things, and your investments and livelihoods start to go the other way. So it’s challenging on both sides, which is why most central banks have an inflation target of around two, 1.5 to 2.5, et cetera.

Dan O’Brien:

I once asked a Japanese central banker how they would bring the balance sheet down, and there was just a silence, Japanese way and, don’t ask that question.

If you could, wait for the mics so people online can…

Mary C. Daly:

Even though you do have a booming voice, but the online people.

Audience Member 2:

Don’t really need a mic, but it forces me to lower the volume. So maybe that’s not a bad thing. But first of all, thank you for a fascinating presentation. I’ve been looking at AI a lot lately, and normally when you embrace the subject, I find you research it, you go into it and you become much more relaxed. But I must admit the alarm has grown the more I work at it, because I would be firmly convinced there is a bubble.

And I just wanted to ask you about how a central bank prepares for such an eventuality, particularly in the United States where AI is contributing to growth in a big way. Data centers are at the core, and already we see that data centers could indeed be undermined by innovation. And we may not need the capacity they’re actually building, because if they’re a local server type solution, there’s so many things that can, and the chips which are hugely expensive, become redundant so quickly.

So the whole thing frankly seems insane. Now to me, to be honest, it is almost like the tulip bubble. Now, I admit that’s a radical perspective perhaps, and I’m well aware what the chairman of the Fed has said about that, but as I’ve reminded a lot of people, a lot of rich people went bust during the tulip bubble as well. So I mean, that’s perhaps no defense. I’m really curious if you have anything to say about, I don’t realize you’re in a difficult position to comment openly, but obviously central banks are going to have to deal with that. But thanks very much.

Mary C. Daly:

I’m happy to comment. I ultimately think a lot about this. I mean, you wouldn’t be surprised because I have the nine states in the Western United States, A lot of the growth in those sectors is coming in the west, and so I remedy worry with activity, studying. And so I think you, I study a subject to try to understand it, but then I spend a lot of time with businesses understanding what they’re doing, are they using it?

And that’s been important because as you talk to businesses, not the people who create the large language models and the data centers, but the people who might use those things, what you’re seeing is there’s something there. So the question is, what’s there? Is it a business-as-usual technology? Think the computer and the internet where we get a temporary boom in productivity growth, but it goes back to 1.5%, which it usually is? Or are we going to get something transformational like electricity or the steam engine?

On that point, you can think of valuations such as betting on electricity and the steam engine. You can think of more ordinary technologies as being things we need just to continue to grow our economies, especially when labor forces are shrinking because of the aging of the population.

Then the next level of inquiry is, is there any “there” there? Is this a tulip bubble, or is this a production activity that might have financial investments that are really enthusiastic, and we’ll have to wait and see what really plays out?

I tend to lean on not a tulip bubble, but in fact an activity where you’re seeing real things. So let me offer you why I see real things.

So we started something called the Emerging Tech Economic Research Network back in January of 2024 in the San Francisco Fed. When we started the… So it was about research, having researchers come competing ideas, know Darren Asamoglu who thinks this is going to eat jobs for middle income people, and David Auchter who thinks this is going to be labor additive and really help reduce inequality.

So we had competing speakers out talking about these things. But we also did CEO roundtables, and we used small, medium, and large companies in all the industries one can think of, don’t stay in tech, go outside of tech, and here’s what we’ve learned. In the beginning, we were hearing that they were using AI because they didn’t want their employees to have AI and then not understand it. Then they started using AI because they were worried you were going to use AI and you would get ahead of me. And they were right, another business might do it.

Then, and now, in the last, I’d say since January of this year, they’re using AI because they see value. They see how it can take a labor force that’s shrinking, and importantly, or expected to shrink, but importantly, they just came off a very frothy job market in the US where workers were hard to keep. Unemployment was low, workers would start, you would train them, they’d move. And they just are somewhat scarred by this, right? And now they also face some uncertainty about just how quickly the US economy will grow. So usually firms substitute technology for people and hiring when they are thinking about that.

So we have those things going on, but they’re really getting more productive. And it’s not productivity that looks like electricity, because these are early days. But it is productivity that looks like, “Oh, I can change some of my business practices because I now have an AI assist that can help a junior person come in and be as effective as a three-year, ten-year person. I can have,” one of the first encounters I had is copywriting. “I can have three copywriters do the job of 15 copywriters because AI can check all the things and write up small things and I can leave my actual copywriters to do the things that help our business grow.”

And you’re seeing this in medicine, you’re seeing this in marketing, you’re seeing this in technology and discovery and idea generation. As the economic researcher, my team and myself, you can do a lot more faster by solving your models in AI and then checking them, than you can do if you have to solve them on the whiteboard for a week or on your pad of paper and then have your RA check them, your research assistant check them.

So I think these are productivity enhancing. It’s just, I don’t know yet whether they’re going to be transformational, but there’s a lot of people betting on it being transformational, and the necessary first step to transformation is actual just ordinary productivity gains.

So, what I don’t know, and this is the final thing I’ll say, is how patient the investors will be to wait the decade it’ll likely take to see if this is electricity. And so, that’s where I think the valuation question comes in, but if it’s still productive, if there’s still real people doing real things and getting real output from it, it doesn’t look like tulips.

Dan O’Brien:

And Mary, can I ask a follow-up in terms of what you’re hearing, feedback you’re getting, those people who are losing their jobs because of AI, are they re-skilling? Are they moving elsewhere? What sort of impact is it having on those? Are you hearing anything?

Mary C. Daly:

So what’s interesting is we haven’t heard a lot about job losses. There are job losses from AI. In fact, Patrick Collison, who I know you are all familiar with, because he is the co-CEO of Stripe. I was on a panel with him at the Oregon National Economic Forum, national Library Economic Forum, and he said, “I’m net hiring coders, but I’m laying off a lot of coders too. So I am letting go of coders who have old skills and I’m hiring coders with new skills. And so my net coding employment’s gone up, but it’s just different people.”

And for those individuals, I think it really is going to be important to retrain and refocus. But if you’ve looked at, I’ve been studying economics long enough, if you look at the history of doing this both nationally in the US and globally, it is hard to just have people retrain themselves.

It’s really something that I think, typically governments also help with and think about, is if we’re going to have a massive technology shock that changes the location of people, what do we do? And it doesn’t have to be governments do it, they just can think about it, and we recognize that retraining is important.

Certainly we’re doing it at the Federal Reserve system is making sure our people are getting the opportunity to train. I’d say even more than retrain it’s train up, right? If you came in and you’re not native AI users, how do you do it? We’ve had quite a bit of success with getting people at least to move off their phone and into our ring-fenced platforms to just interrogate AI and see what it can do. But you have to practice to be good at this, and you have to think and be innovative to actually think about how you can make an ROI out of it. It’s one thing to know how to use it. It’s another thing to have a rate of return generated from it, and I think that’s the open question.

Dan O’Brien:

At the back there.

Audience Member 3:

Hi, an excellent presentation. Thank you very much.

Dan O’Brien:

You might introduce yourself.

Audience Member 3:

Well, sorry, Dermot Murphy, IOB, so we train those working in financial services and central banks as well. So maybe just two questions if I can. How do you see the central banks, or sorry, the Fed’s dual mandate in the context of the climate agenda. And then relating more to your presentation in terms of the balance sheet, ensuring the system’s ability to access the balance sheet. Have you any reflections on operational readiness and the topic of stigma?

Mary C. Daly:

Sure, absolutely. Did you say, can you repeat the first one? I couldn’t hear if you said current or climate.

Audience Member 3:

Climate.

Mary C. Daly:

Climate. Okay, so on the first one then let me say that in terms of our dual mandate, it was always about full employment and price stability, separate from any other objectives that we might have socially or fiscally, which the Fed, we’re agnostic to those things because we have a very narrow mandate set by Congress in the US, that says you will focus on price stability and full employment. For us, that means 2% inflation and it means we’ve released this in our latest framework review, that employment is consistent with stable inflation.

So those are our mandates. We’re in a very narrow remit and we use our tools to accomplish that very narrow remit. So when we’re thinking about external forces, like people being worried about, really we don’t think of it as climate as much as weather. If people are worried about weather, and weather is affecting allocation of activity, insurance, et cetera, we’re taking those as just inputs to economic activity, not something that we would participate in, in terms of an agenda of our interest rate setting. Those are always about full employment price stability.

Then on the balance sheet, I’m going to separate the readiness of the banking system to partake in any liquidity provision we have, and our policies that create liquidity in the system. I’d say the thing that we’ve really moved towards, ample reserves regime, which if, I didn’t dig you into this, because every jurisdiction does it a little bit different, and this is a very US specific idea. And that is that we want to make sure that liquidity is amply provided so that you don’t have the fragilities rise up that I talked about early in the remarks, where banks are just trading among themselves for liquidity and there’s not much of a buffer because you’re not incentivizing them to do it, to keep a buffer.

At this point, we have ample reserves, which means that, and we just announced that we’re going to stop running our balance sheet off, and that will start in December. We just announced that at the last meeting, because we think we’re near ample, and in fact, if we get below ample, we would start purchasing assets again to make sure we stay at ample. That ample helps us with interest rate control, making sure that our rates don’t trade outside of our administered rate range, but it also gives us a backstopper, a buffer on liquidity. So you don’t have institutions running and trying to catch liquidity. It’s already provided. And we have a standing repo facility that allows them to use that as well.

So I think at this point, the standing repo facility, to my mind people will call it different things, is a second line of defense. I see the first line of defense is our judgment about what ample is, and so I think of it that way. So anytime you have a penalty or a haircut on a rate, then you will, it will be slightly less desirable. Is that stigma or is that just less desire? But we’ve chosen those things because we want to make sure we don’t induce us to be the first line of defense. You still want markets to trade within themselves and create that stability from those interactions.

Dan O’Brien:

As a follow-up, I’m just wondering, is there a right, correct size for the balance sheet as a percent?

Mary C. Daly:

There is not.

Dan O’Brien:

Okay.

Mary C. Daly:

There is not, and that’s the thing that is so challenging when we have to explain to the public, and so we end up, I would say this is similar, bear with me because it’s not the same, but similar to when we get asked what is the level of full employment? We don’t have a specific level because it changes as the economy changes and the changes that are going on to it, we don’t control. We say it’s the level consistent with price stability. That’s the, I’m not quoting the language exactly, but that’s the concept.

The same is true of the balance sheet. Ample reserves is a number of reserves that helps us with the rate control. And we know they’re amply provided because they’re available to financial institutions, but it keeps our interest rate in the administrative rate range, which of course is the central bank’s number, like a first priority, right? Make sure that your tool of policy setting, the interest rate, stays in the range that you want it to, that you can execute on the stance you’ve selected.

Audience Member 4:

Hi. Welcome to Dublin and thanks for this presentation. I’m Olivia from Bloomberg, Dublin Bureau here. A question, you say inflation excluding tariffs is closer to 2% now, but the headline number in reality is what businesses and households are experiencing, and that’s about 3%. So in your mind, what are the risks of entrenched inflation expectations as tariffs getting rolled out?

Mary C. Daly:

That’s a terrific question. I actually posed this question this way. So if I may. So we really have to think about as at this point in our history in the United States, are we in the 1970s? Are we in the 1990s?

So I know this is a simplified version but let me walk you through why I think this is a really good question for us to ask. If we’re in the 1970s, then the lowering of the policy rate when inflation is printing above target, as you noted, will spur inflation expectations, will create another run up in inflation. And we’ll end up in a situation where inflation expectations drift off and we have a much harder problem to solve.

Now in the seventies, just to be factual, the policymakers at the time missed that productivity growth was slowing at that moment. They missed a structural slowdown in productivity growth that amplified the inflation dynamic. But then it got ahead of itself, and we ended up with rapidly growing inflation and high and we ended up, to do the Volcker disinflation to get it back down.

So that’s one way to think about that. The data I would look to for whether that’s happening is really three things: inflation expectations at the short, medium and long run and what they have looked like, not just in a moment in time, but over time. So consumer expectations, inflation expectations, rose pretty significantly after the tariff announcements, and then came back down as it was realized that tariffs weren’t going to have the pull through really onto like electronics and other things that many feared.

The second thing that I look at though is the medium and longer run, and those have been relatively stable at levels that are consistent with our 2% target on inflation. So I think that’s where you would look, and when you look at that, you can say, is that spiral starting and is it beginning? Is it picking up any steam? So obviously keep looking at that.

On the nineties… Why do I ask, is it the nineties? Because if we’re in the midst of a productivity acceleration, even if it’s not transformational, even if it’s just ordinary productivity, business as usual, but we get a bit of a boost like we did in the computer and internet period, revolution, people called it back then. But it moved productivity growth from 1.5 to 3.5, and if you remember the nineties, or even if you don’t, I can explain a little bit of them.

In the nineties, I started at the Fed in ’96, and one of my key jobs early on in my career, I’m a PhD economist, I’m studying all kinds of things, but one of the things I needed to do was for Chairman Greenspan ask, “We don’t see productivity in the statistics, is there any signs that’s going on there?” So I set out to talk to businesses and others, and you could see elements of this all over.

And so what it allowed policymakers to do at the time, there were vigorous debates about whether they should raise rates in the nineties, because the unemployment rate was fairly low and they weren’t sure about productivity growth, and inflation was above target. It was 3%, roughly. They were afraid that the and we see some signs of productivity growth, and they held the rate constant and we ended up with the booming nineties and near at-target inflation. So that’s not to push that this is the nineties, it’s to push the idea that we have to interrogate both sides of that risk, and if we only focus on one risk, inflation, we risk the other side of things, which is cutting off growth and the labor market in a way that I think history and all of us would regret. So both sides are important. Always bring two ideas to the table and see, or more, and see which one you find evidence for.

So I’ll be looking at productivity growth, having more discussions on AI, seeing what businesses are really doing, and I think seeing if they pass any of the additional tariff costs onto consumers or if they continue to do what they’ve been doing, which is only taking a fraction of the cost increase and finding other ways to distribute the rest.

Dan O’Brien:

There’s a lot of boom around generally, I suppose, in the world these days. But it is possible that AI could be really transformative and have an electricity type effect.

Mary C. Daly:

It is.

Dan O’Brien:

What probability, would you be able some probability on that? Is it … percent?

Mary C. Daly:

My gosh. So this is the benefit of being a central banker for a lot of my career. I don’t make predictions about things that we don’t know about. But I will say, I guess, can I ask you to, answer it in a different way. I think we shouldn’t discount the possibility, nor should we assume it’s going to be true. And I think a lot of what will determine it is to the extent to which we embrace the possibility of it and try it out. And not be impatient if it hasn’t worked yet, it will never work. And not be so convinced it’s going to work that we over-invest, and we think about this and we say this is definitely going to work.

Because both sides, if again, I’m trained as an economist, if you go to the corner solutions of anything where you say it’s all going to work or it’s never going to work, you find yourself really boxed in for most of reality.

And so I’m more positive perhaps than many people about not many people, perhaps, half the people, but I’m not an enthusiast because I think there you’re saying it’s going to be this way and nothing’s going to stop us. That’s for the innovators and the startups to talk about. I’m really, as a central banker thinking, what can we get? Will we get a near-term productivity boost from it, and does it have the potential to really change things? And that would be welcome, when you think about the aging of the population.

And so more and more if countries are going to grow at rates we’re used to from before, potential output growth, and labor force is shrinking over time because of aging of the population and lower birth rates, then productivity is going to be the thing that squares that equation and expands the pie at a rate that we’re accustomed to. So I’m hopeful that we’ll get something out of it, but I’m not, I don’t have a view that that happens next year, but it could happen in the decade.

Dan O’Brien:

Okay. Maybe following up on the last question from our online audience, but Ryan has a question about the 2% target.

Mary C. Daly:

Yes.

Dan O’Brien:

Pretty arbitrary. He wonders if inflation runs ahead of 2%, would you consider raising the target?

Mary C. Daly:

No, absolutely no. Unequivocally no. How many people like sports? Hopefully somebody likes sports here. I like sports. So you never change the goalposts, the goal while you’re in the midst of trying to accomplish it. So that would just, honestly, credibility is our most important tool in central banking. Certainly, the Fed, we work hard on our credibility.

If we say, “Oh, we can’t reach it, so let’s just raise it,” I think that would be challenges to the credibility that passes on through many decades of central banking, and I’m completely unwilling to do that. That doesn’t mean I don’t have an open mind to investigate things, but I think that’s better done in the five-year framework review than in the current period when we’re still trying to get inflation down.

And I don’t think just because inflation’s been higher means that’s a reason to change the target. Because we look at the inflation expectations, they’ve been relatively well anchored at two, and two isn’t completely arbitrary. I will just offer this. You’re looking for, I don’t know if this is an American book or not. I really don’t know, Goldilocks. So Goldilocks, you’ve got the little chair, the big chair, the middle chair, the bears.

So basically, you want something that doesn’t make you so at risk of being in Japan’s situation and you want something that people can rationally be inattentive about. They can simply forget about. When we had 2% inflation, most people didn’t ask me about inflation. Now, people ask me about inflation. But now they increasingly ask me about the labor market, because ultimately a big lesson I’ve had over my career, and my life is that people want both. They want price stability, and they want full employment.

Dan O’Brien:

A central banker here has a question.

Mary C. Daly:

I am so glad I made that disclaimer about central bankers. Everybody else has to take my views.

Ray Leiden:

So Ray Leiden, Central Bank of Ireland. You talked a lot about AI tech, labor market, but there’s a segment of the labor market that isn’t tech intensive, which is migration, predominantly. Been a big reversal in migration policy in the US. What’s your thought on where that might go medium term, but also how is it filtering into your thinking about current policy as well?

Mary C. Daly:

Sure. I actually really appreciate you asking that question because this is a critical issue right now in terms of how we think about something that’s happening in the United States. So we’ve had a tremendous slowdown in job growth. If you looked at our revision numbers, and this is a very large change in employment growth per month, both what we’ve had and what we can expect.

At the same time, the unemployment rate has stayed relatively constant, just up a teeny bit, but relatively flat. So that what’s causing this? Well demand, demand is going down at the same time to match the change in supply. And that’s caused the unemployment rate to remain relatively steady.

So then the question is: why has demand gone down? Has it gone down as a reaction to changes in supply so that if you had a business where you used immigrant labor and now you can’t get immigrants to work for you, then you simply, your jobs don’t get filled because you don’t have possibilities of people to fill them.

Now, I’m going to say that’s not my read of the information, but here’s why. The arbitrator in that question of whether it’s supply-driven or simply a slowdown in the economy, so demand-driven, the decline in demand, a negative demand shock, is prices. And the price of workers is wages and wages are slowing. So almost in lockstep with job growth, falling, wages have been falling and slowing, so they’re not declining, but the growth is slowing. And so now they’re in a stone’s throw, really, they’re close to productivity plus inflation, 2% inflation.

So, when you think about that, that tells you that it was a coincidence that demand was slowing. And so far, it’s been met by a coincident decline in supply. But going forward, I’m a little less sure this coincidence will continue, because we’re hearing that firms continue to be in this low hiring, low-firing modality, which means slow job growth.

But we’ve taken a lot of the labor supply down already, so that if we increasingly start to see job weakness, you might see it coming out of the domestic population, which either has to come through labor force participation, people queuing up outside of the unemployment rate, or it has to go into the unemployment rate.

And so, if you look at the summary of economic projections, of the SEP that came out in September, you’ll see that the median of the summary of economic projections from participants is to have the unemployment rate start to drift up as this coincidence starts to diminish.

Dan O’Brien:

We have one from Reuters there.

Audience Member 5:

Thank you very much. Padraic Halpin from Reuters. Can I just ask about the balance of risks in the US economy, the balance between the risk to inflation and the risk to the labor market? Is it right to think of this as being on a knife’s edge at the moment?

Mary C. Daly:

On a knife’s edge? I don’t tend to use “knife’s edge,” so let me just put out, but I think, let me see if we are using different language to describe the same thing.

So here’s how I think about the balance of risks. The balance of risks had been highly on inflation up until about the middle of this year. In the middle of this year, around July, you started to see softening in the labor market that was completely confirmed by the revisions of the data. And the balance of risk started to shift. And in my mind, I’m speaking here for myself, of course, balancing out. So the risk to the employment side of our mandate was equal to the risk to the inflation side of our mandate. And there was some concern, it might even be higher on the employment side, others would disagree. They’d say it’s all in inflation and not so much in employment.

But now I see the 50 basis points of cuts we’ve taken as helping stabilize the risk to the labor market. So I think they are in balance at this point, and maybe even still slightly higher on employment because the evidence has come in over the course of this year that says inflation’s been increased less than we had projected, and employment has deteriorated more than we projected. So just that equation alone means that there’s a little more concern that the labor demand will continue to slow.

And if you think of tariffs as being a one-time price level change, then we have the tariffs go through, and then the inflation comes back. But I would be fine with balance at this point. And the reason is that services inflation has not been declining at a study clip. It’s a very slow, sometimes services-ex housing aren’t really going down from month to month and we’ve even seen a modest acceleration in the last three months in that category.

So I’d say that balances the risk of inflation. And we took the 50 basis points off, which gave the labor market more support. Which is another reason I answered the first question by saying we need to collect more information before we make a decision about December in my judgment, because we have two goals and both of them have risks attached to them. I don’t wait the risks of a spiral of inflation high enough to think we’re in the seventies, but we can’t look away either, because we’re still printing above target and we need to get it back down to two.

Dan O’Brien:

Good. A final question here, Elena, before we wrap up.

Audience Member 6:

Thank you. So I know the dollar is not your remit, but still a seven and a half percent drop, it does affect that balance of risk. So we’ve seen a major drop this year. Have you seen the effects of that in either inflation or risk in a significant way that could affect policy? And how much more of a drop until it could be an inflationary worry for you?

Mary C. Daly:

Well, let me just for the good of the audience online and in the room that the Fed has no role in dollar policy. That’s the Treasury Secretary and the Treasury’s responsibility. So I can’t comment on dollar policy and even the dollar’s fluctuations other than to say this. Traditionally the dollar’s movements up or down would affect the inflation pass-through to our country from imports and make exports harder if the dollar’s high, exports easier if the dollar’s less valuable, and those things. But it is very hard, even in long histories of research to pinpoint that in some real-time movements, right? It’s much easier, take a decade of a dollar when it’s high and say the pass-through has been this. And then the pass-through is completely dominated by other factors that are going on in the domestic economy, like policy changes or how tough the Fed is on interest rates, or other things going on.

So I think it’s not a risk, you just totally move away, but it’s not the predominant one that I’m thinking about now. I think outside of the US dollar fluctuations are much more important than inside of the US, because there are always people who appreciate a stronger dollar and people who don’t appreciate a stronger dollar, even in our country. Because they’re selling or they’re buying, and that really matters for how you… Where you sit matters for how you feel on this particular issue.

So that’s why we leave it to the Treasury and to the fiscal side of the house. And we just make, since this is the last question, I’ll leave with this. As central bankers, we work with the economy we have, and that is what we do.

Dan O’Brien:

President Daly, thank you so much. I really would’ve loved to get your views on the European economy.

Mary C. Daly:

We’ve got many more qualified experts in the room on the European economy.

Dan O’Brien:

But it’s always great to get an outside perspective because there’s certainly a lot of gloom in Europe at the moment about the state of the economy. But despite that, I think we covered a huge amount of ground. Thank you so much for coming in and giving us the time, and for answering all those questions as frankly as you did. So thank you so much.

Mary C. Daly:

My complete pleasure. Thank you.