Media Q&A Transcript with Federal Reserve Bank of San Francisco President Mary C. Daly

Jonelle Marte, Bloomberg:

One of your colleagues has talked about being comfortable pausing the rate cuts in November, given the stronger than expected job support and the inflation reading. So my question is, if you would also be open to that, or what would you need to see to justify that kind of approach?

Mary C. Daly:

So, you know, I don’t myself like to talk about pausing or other words like that, because it implies something decisional about how we’ll do things. I think it’s better to just think about, what’s the pace of rate cuts, and what’s the right number of rate cuts for the economy we have. And you know, ultimately, that gradualism, which I mentioned in the speech that Bernanke had given. You know that idea that when you’re uncertain about how the economy is evolving, you want to take, you want to be thoughtful as you go. Ultimately, for me, what I’m going to be doing is looking at the totality of the information. So there’s a lot of information that comes in between now and November and now in December, and we can make the adjustment, but I’ll always be looking at our dual mandate goals and recognizing that we’re trying to balance both of them, and we’re trying to set the conditions that we can get to 2% inflation and we can continue to support a strong labor market. That’s how I think about it.

Matt Grossman, The Wall Street Journal:

I’ve been wondering, when you think about credit conditions compared with previous tightening cycles, it seems to me that private credit has a much bigger role in the economy, and it might be challenging for you, potentially to have a clear view as to what the health of that sector is and the effects it might have. So I’m just wondering, is that challenging, or are there certain ways you approach that to kind of get a view of what that more opaque type of lending is doing?

Mary C. Daly:

So private credit isn’t new, and it’s just playing a larger role. For a long time now, many of us, and I would be one of those have been reaching out to private equity firms and just learning, and even businesses that use private credit and asking, what’s the role of their playing? Are you still able to get funding? Here’s what I’ve learned. Certainly it’s not in our regulatory perimeter, so you’re quite right about that, and there isn’t as much publicly collected information about it that we can monitor, like we can for banks, but you can converse. And what I’ve learned in doing that is private credits funds are very much like banks. They want to lend into good credits, and they want to do it in good times. And when there’s uncertainty in the economy, they definitely feel it, and when there is more certainty, they’re definitely in those markets. So we certainly have to watch that. And there’s been a concern that maybe they’re in places where we’ll get a false sense of security in those places, and then they’ll withdraw. But you know, again, when you investigate private credit in commercial real estate markets. So for a long time, people have been worried about commercial real estate office buildings, in particular in San Francisco and other coastal cities. And if you look at the vacancy rate, you can see why. But one of the things that I hear again and again is that private credit funds are waiting until the price is right, and the current investors are ready to sell, and then they’re going to swoop in because they see the upside potential in San Francisco, Seattle, other places where these same issues are occurring. So I think of that as putting a floor underneath some of the deterioration that people feel. I think we need to look at both sides of that private credit market and understand it, but there are ways for us to gain intelligence about it and an understanding of how it’s affecting things, even if we don’t have it in the regulatory perimeter. So yes, I think about it. Yes, I think we should be doing more to understand that sector. But right now, I don’t think it’s lost on us, right? We’re out there understanding it the best we can.

Michael Derby, Reuters:

I just wanted to ask you about the balance sheet. There was some unusual turbulence around quarter end that has gotten some people thinking about maybe liquidity is tighter in money markets than was expected, and it might bring in an earlier end to QT. I’m curious how you’re taking that information in, and if you haven’t, you know if it’s settling with you in any way in terms of when you want QT to end?

Mary C. Daly:

Certainly. We look at a broad set of indicators and one of the things that I know, you know, the New York markets desk does, it looks like at a very large range of indicators you can measure, and then also does a lot of market intelligence work, talking with folks. And there are multiple reasons why things can look a little bit squeaky or disrupted in a particular quarter, and what they do is unpack that and come back and say, is that something that suggests we’re closer to the ample cut off, the kink or not? Right now, I’m not seeing because we don’t have evidence to see that we’re closer to that kink, but it’s certainly something we continue to evaluate. And you know, the lesson I took from this 2019 September episode is that you have to constantly evaluate it, and one of the reasons we slowed the pace of purchases is to ensure that we don’t run into that kink inadvertently, while we’re going speedily down in reducing our balance sheet. So these are just additional things we’ll continue to investigate. But I have no particular information about that one that would have lent me to say something needs to change right away.

Michael Derby, Reuters:

So, but bottom line, you’re still okay with the process running forward? You don’t see anything?

Mary C. Daly:

I’m still okay, but I think this is something we should constantly be considering. So still okay, would be the day you write that sentence. I have a healthy dose of caution when it comes to balance sheet runoff because I was there in 2019.

Michael Derby, Reuters:

I was going to say changing on a dime, that could definitely happen in QT so.

Mary C. Daly:

No economist likes discontinuities, and no policymaker likes discontinuities. So definitely, this is why we went from a rapid pace of runoff to a smaller pace of runoff, a slower pace of runoff. And I think that was appropriate, and we will continue to monitor this. That’s the most important thing. We will continue to monitor this – looking under every rock and seeing is this a sign that we’re getting closer? But right now, today, you know, I don’t have any signs that this is something that needs to change right away. But again, we will continue to monitor it and unpack it and continue. We consider this all the time, not just at each of the meetings.

Jeanna Smialek, The New York Times:

Following up on Mike’s question, like why keep it running off, given the risk of discontinuities, like what are you gaining at this point?

Mary C. Daly:

Just to get it to something that is considered normal. I mean, running a larger balance sheet, as some have argued in the academic literature and in the financial literature, is that, you know, it’s not costless and we want to get it back down to something we consider ample. That’s the regime we’re trying to run, now a little bit of ample plus the buffer, I think, is a comfort zone for me, and it’s, it’s why I’m very comfortable with the pace of runoff slowing as we get near, you know, I guess again, I definitely took in the September 2019 September right? September 2019 event. And that has affected my thinking that ample and a buffer is better than ample with no buffer. And so I’m very comfortable running down the pace of the balance sheet slowing the pace of the balance sheet runoff. But also, I think, you know, as more of these circumstances occur, it just changes the dynamic of all the things you’re looking at. I mean, really, the way you want to look at it is sort of a composite. There’s many things that give you indications, or no indication, that you’re getting closer to the kink. And we have to look at all of those things. None of them stood out to me from the last episode as a leading indicator on that so but I guess the point I’ll make to both of you is the time to really start digging in and looking at these things is now.

Josh Schafer, Yahoo Finance:

I wanted to ask a question about, I’ve been thinking about growth data that we’re seeing right now and potential risk to inflation or re acceleration of inflation. It’s a little bit of a conversation, at least from the Wall Street commentator space after that hot September job report. How close are we to a point where continuously accelerating economic data like we saw potentially from that jobs report would be an issue in terms of inflation?  Are we still really close, or have we cooled off enough?

Mary C. Daly:

I think we have to actually start talking to firms, and that’s what we do. I think it’s useful, and I don’t think we can compare this right now, but I’m just going to use an example, since I talked about it in my speech. If you go back to the pre-pandemic expansion, we had hot job reports all the time, and hot growth reports and there was a concern that it was going to accelerate inflation and it didn’t. And that was evidence not that the Phillips Curve was dead or any of those things, but the productivity growth was proceeding, that labor force growth was proceeding, and that the actual potential of the U.S. economy was higher than what we had estimated. So you can’t, in my judgment, reflexively say, ‘Oh, I got stronger than expected growth. I have stronger than expected employment. Inflation must be around the corner.’ So then, how do you find out, right? If you can’t reflexively go there, how do you find out? Well, then you have to go talk to firms, and what we’re hearing from firms, and what you can see in some of the data that are collected about this. The BLS collects an episodic series on this, on the frequency and magnitude of price changes. You have to dig for it, but you can find it, and it’s episodic so I don’t know when the last time they collected it is but the last time they had collected it, what you notice is it’s been really trending down since the high inflation watermark. And you hear this in firms. I mean firms, we ask them this every two weeks, what are you doing? What are you doing? What are you doing? And we get that collected eight times a year in the Beige Book, and they’re telling us, across the country,  it’s harder to raise prices, customers are looking for value, customers are trading down. Interestingly, yesterday in the San Francisco Chronicle, which is my hometown newspaper, the big front page, I mean, on the front page is, is it cheaper to eat at a grocery store, buy it in one of the delivery services or go out? And they were cost comparing different meals for different things, because everybody’s feeling pressed and working on a budget. And this is a foodie town, not quite as foodie as New York, but still considered a foodie town, and people are trying to figure out how to have their meals at a lower cost. So my point is this is not an environment where firms are looking to raise prices so that can they’re looking to grow, but they’re not looking to raise prices. So there’s two ways to get revenue – grow or raise prices. If you grow and raise prices, that’s golden, but remember, they weren’t growing and raising prices, except in a narrow set of sectors, they were raising prices and hanging on, at least in this medium and small sized firms. So again, bottom line, summarizing all that, I don’t think we can reflexively take growth and employment growth and say, ‘Oh, inflation is around the corner.’ That’s a fear more than a fact, but we should absolutely investigate whether that’s happening, and the best place to investigate that is with talking to firms and asking what they’re doing, and then seeing, are consumers trading down or not? What is the consumer doing? The consumer is a very important bridling effort on inflation. It is one of the best attributes of slowing consumers to see if it brings down inflation.

Jeff Cox, CNBC:

I wanted to get a little bit more familiar in terms of the framework review. Looking back over your shoulder at all and wondering, you know, whether the flexible average inflation targeting was the right way to go? I mean, is that something that’s on the table now? And are you reconsidering that in terms of, you know, allowing inflation to run a little hotter? And if I could get two for the price of one, were you one of the members who wanted to go 25 in July?

Mary C. Daly:

I’m going to disappoint you on two fronts, but let me start with the first one. So I really can’t divulge anything about the framework other than you know, to say it’s time to do it, and the Chair will be the person who will go over all the parameters of that. And certainly, it’s time to think about those things. I will say, though, this is a question that you’ve asked, but I’m getting, I get asked it over the whole course of our tightening cycle, is did the new framework cause, or was it related to some of the challenges of high inflation? And my answer is not for me, absolutely not. What was really related to the inflation run up was the pandemic, and what was related to the Fed’s, I think, ex post slower response than we would have, than I would have wanted, was the belief that you don’t offset a supply shock and that the supply shock was transitory, or temporary. Turns out that it wasn’t temporary. It was more much more persistent, and demand was going to outstrip supply for a long time, and prices were going to go up quite a lot. Inflation was going to rise quite considerably and be persistently high. And there we had to catch up on that, if you will, and raise rates aggressively to beat it back down, or to get inflation back down. But now that that’s past us, you know, I can say with full confidence that for me, it wasn’t. I really never thought about average inflation targeting. What I thought about is we’re coming through a pandemic. It’s not clear how robust demand will be right at the beginning of that recovery space. It was hard to imagine that the global supply chain would be so persistently disrupted as it was, but it did happen. And those two things, the persistence of strong demand and the persistence of very limited supply recovery, really collided to create inflation, and then it took us a while to bring it back down. And that has been something that, you know, I have looked at and re looked at, and never once did the framework come up for me.

Megan Leonhardt, Barron’s:

Mary, you talked a bit during your remarks about how you’re not looking at the jobs report as your main indicator for labor conditions ahead of the November meeting, in part because of some of the storm disruptions. And so, I’m curious how much disruption you’re expecting to see because of the storm? And then, relatedly, is there a framework that you’re sort of taking into account when it comes to weather related distortions, as we start to see these storms intensify because of climate change?

Mary C. Daly:

So let me just, I’ll just kind of unpack those because they’re they sit in two parts of my mind, actually. So let me talk about the jobs reports. And so my point was a broader one, and I’m sorry if it seemed narrow, but the point was a broader one. It’s not just because of the weather disruptions, the hurricanes, that have disrupted the jobs market report. The jobs market report is always one of many inputs in my data collection about the labor market. You know, I guess way back in just the six months after the financial crisis, we started building, I remember Bart Hobijn and I back in the Fed, started building a labor market heat map. And we had as many possible indicators real time, you know, etc., that we could find. We labeled them red, yellow, orange, green. And then we actually ran correlations, ex ante, ex post, and things to see if they were contemporaneous, leading, or lagging indicators. And that’s the same mindset I use today. And the jobs market report is only one of those factors, right? And you enter separately payroll job growth from household, and you put them all in there together, and you’re really looking at that preponderance of evidence. So that’s how I always work. It’s not just something. To this day, we have that heat map, and that’s just for internal me, but I do like to maintain things. But you know, I use that because it’s always the case that some labor market indicator is going to be experiencing some sort of volatility. And if you look at one of them only and say that’s a great summary statistic, you’re almost always going to be wrong. But if you look over the broader swaths of time, they are largely correlated. So that’s what that was the reason I mentioned the labor market report. I always go in with a full range of indicators.

On the weather-related disruptions, you know, one of the things that we’ve learned over time by studying, we’ve studied weather related issues for a long time at the San Francisco Fed. And one of the reasons we did it, the first person who ever suggested we do this, it’s interesting, this is almost this was a decade ago was an exporting farmer in Oregon, and she said that the number of weather-related and significance of the weather-related disruptions to her export business was large. And it wasn’t just related to whether Oregon had a drought, it was related to the areas where she exported. So if her export areas were getting drought, she was a bigger exporter because they didn’t have anything to put in from their own and so she was highly attuned to weather. It had weather maps and all kinds of things. And she said we should study this, because she said increasingly weather is going to be an issue, because with global supply chains, people can offset it that way. So she was thinking of it from portfolio management. So we started doing it, and then what we found out is that increasingly, it was causing what the people on the ground in the area would call significant disruptions, to production, etc. So then what we’ve learned is that while those things, those significant disruptions to the area, don’t usually make it up into the macro statistics, they definitely if they happen frequently enough and are a large enough scale in a particular area. And now I’m to the level where we’re all part of the conversation. They’re to the level where businesses think about relocating or locating at all. Insurance companies get very worried about insuring in those spaces, and banks and other lending organizations charge a premium to lend or make you have covenants or put extra insurance on or something in order to lend to you. And that’s happening now across the country. But if you look in the Twelfth District, you’re seeing that in the wine production areas in California. You’re seeing that in some ag sectors in the intermountain states. You’re seeing this in where people locate industries that have a lot of outdoor work attached to them, because you can’t work outdoors as easily in hot climates during the day. So all of these things are changing.

This final thing I’ll say about that is one of the very, you know, I think informative and very interesting things we’re seeing is, for the last five years at least, firms are aware of this, and they’re already innovating. Agricultural innovation is unbelievable. If you ever have a chance to go and talk to some of the ag producers that have made innovations to use less water or recycle like there’s onion factories that recycle the onion waste to make fuel to fuel the onion plants, processing plants. It’s actually pretty cool and it sort of makes them climate neutral from their goals, but it also makes them very resilient to power disruptions, if they’re on a grid that goes down. So I think those are the things we’re studying. We’re ultimately interested in how it affects economic allocation and economic growth.

Hannah Lang, Marketwatch:

Hi. Thanks for doing this. I wanted to ask a little bit about the consumer. You mentioned in one of your speeches earlier this month about the pain that inflation causes for a lot of people and how that’s lingered even as wages have outpaced price increases. I wanted to ask how long you think it might take for that pain to fade and for more Americans to move from that point of cautiously optimistic to just optimistic?

Mary C. Daly:

Let me start with the first one. Then go to this, the more sentiment-oriented question. On the first one, it depends on where you are and whether you’re moving jobs, etc., moving locations. But you know, one of the exercises you can do is just look up and down, you won’t see individual people, because it’s only cross-sectional data. But you could look at, say, the 75th the 50th and 25th percentile of wage earners, and just ask, have their real wages at the 25th percentile kept up with real cost of goods and you you’d have to do that for the average, because we don’t have a lot of good distributional data for spending by income level. But you can just imagine that those individuals, we have a limited information for low- and moderate-income households. Those individuals spend a disproportionate share on things that have gone up a lot. And what you see there is that 75th recovered, 50th depends on how you calculate what series you use. After you get past the 50^th, it’s not as complete, but it’s faster for areas where wages are growing faster, and it’s faster for people who have skills, marketable skills that they can use. And those skills aren’t limited to just schooling. Sometimes their skills, like we were just in Boise, Idaho, and we went to College of Western Idaho … and they teach so many things. And they were telling us that their welding program, they’re thinking about teaching a night shift in welding, because they’ve moved. They have Saturday, Sunday – they have two shifts a day on the daytime, and they still can’t get enough welders to meet all the demand. And so welders are a hot commodity in building trades, and they are thinking about teaching overnight a graveyard shift of welding classes. … My point is if you’re a welder, you’re going to catch up faster than if you’re someone who has no particular certified skillset that is just out in the regular marketplace. So that’s, that’s how it will work.

But I generally, historically, let me just put back to average. Historically, it takes two to three years, usually two years after inflation has come to rest. And that’s not going to be for everybody, as the one of the students in the audience asked, you know, it’s not about equity issues, because there will be gaps between people. It’s really about, how does the population move?