WEBVTT - San Francisco Fed President Mary Daly Talks Rate Cuts

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News. We'd like to welcome

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<v Speaker 1>San Francisco Fed President Mary Daily to our studios here.

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<v Speaker 1>Thank you for joining us. Before we get into the

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<v Speaker 1>cycle question that Tim raised, I want to ask you

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<v Speaker 1>if you're on the same page with the chairman. You

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<v Speaker 1>and others had said you wanted to see more data,

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<v Speaker 1>and we still have a jobs report in CPI report,

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<v Speaker 1>but it looks like a cut is now all but certain.

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<v Speaker 2>Well, to my mind, we've been on this path of

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<v Speaker 2>ready to adjust policy rates for several months. We just

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<v Speaker 2>needed to get a little more confidence, and inflation was

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<v Speaker 2>truly on its path to two percent, and I wanted

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<v Speaker 2>to see the labor market come into balance. But I

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<v Speaker 2>think that's completely happened, and the risk to our goals

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<v Speaker 2>are now balanced in the time to adjust policy is

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<v Speaker 2>up on us.

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<v Speaker 1>Is there anything that could derail a cut in September?

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<v Speaker 3>To my mind, that would be hard to imagine.

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<v Speaker 2>At this point, I do see that adjusting policy is appropriate.

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<v Speaker 2>We don't want to get ourselves into a situation where

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<v Speaker 2>we're keeping policy highly restrictive into a slowing economy. And remember,

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<v Speaker 2>every time inflation comes down, the policy gets more restrictive,

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<v Speaker 2>and I think that's a recipe, if you will, for

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<v Speaker 2>overtightening and injuring the labor marketing growth.

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<v Speaker 1>Well, the Chairman and basically the Open Market Committee said

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<v Speaker 1>coming out of the meeting that the downside risks are

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<v Speaker 1>greater to unemployment than to inflation. How big are the

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<v Speaker 1>downside risks to employment right now?

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<v Speaker 2>That's the very important question, and so we definitely have

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<v Speaker 2>to keep that in mind because, as you know, the

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<v Speaker 2>labor market when it starts to adjust often has adjusted

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<v Speaker 2>abruptly and significantly.

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<v Speaker 3>But right now we don't see any signs of that.

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<v Speaker 2>You look at initial claims for unemployment insurance, you look

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<v Speaker 2>at early indications of layoffs. They're just not present, and

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<v Speaker 2>so that's not giving us any signs that there's a deterioration. Importantly,

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<v Speaker 2>as you know, the Reserve Bank presidents spend to consider

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<v Speaker 2>amount of time talking to contacts, businesses, workers. We're really

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<v Speaker 2>not hearing signs that firms are poised for layoffs. What

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<v Speaker 2>they are doing is managing headcount, making sure that they

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<v Speaker 2>really want to refill a job before they do it.

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<v Speaker 2>But at this point I don't see any warning signs

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<v Speaker 2>of weakness. But we want to make sure that we

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<v Speaker 2>are adjusting policy as we go so that it's ready

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<v Speaker 2>for the economy we have and for the economy we're

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<v Speaker 2>likely to get, and ensure that we don't end up

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<v Speaker 2>in that situation where we see real weakness.

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<v Speaker 1>All right, let's talk about tactics. Markets are now pricing

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<v Speaker 1>one hundred basis points that cuts by the end of

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<v Speaker 1>the year, but there are only three meetings left, which

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<v Speaker 1>would imply at least one fifty basis point cut. Do

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<v Speaker 1>you think the markets are wrong or is a good

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<v Speaker 1>possibility we see a fifty somewhere.

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<v Speaker 2>Well, I think everyone's looking at the economic projections and

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<v Speaker 2>then making a decision. For me, what I'm going to

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<v Speaker 2>be doing is looking at the incoming information. As you said,

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<v Speaker 2>we have another CPI, another labor market report discussed with

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<v Speaker 2>my colleagues, talk to our contacts and fashion the policy

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<v Speaker 2>that's right for the economy that we see. So it's

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<v Speaker 2>too early to know exactly what the tactics will be.

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<v Speaker 2>We do know one thing, the direction of changes down,

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<v Speaker 2>and we need to do it in a way that

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<v Speaker 2>is responsive to the economy and not let the economy

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<v Speaker 2>get in a position of weakness.

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<v Speaker 1>Well, let me quote the fed back to you. If

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<v Speaker 1>the economy evolves as we expect, as you always say,

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<v Speaker 1>would that imply a twenty five basis point cut in

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<v Speaker 1>September versus fifty.

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<v Speaker 2>So I think of it as his scenarios, if I

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<v Speaker 2>may so. The scenario that is my most likely outcome,

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<v Speaker 2>and what I see in the data and the projections

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<v Speaker 2>is that we continue to get gradual slowing and inflation,

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<v Speaker 2>and we continue to get that study sustainable pace of

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<v Speaker 2>growth in the labor market. If those things happen, then

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<v Speaker 2>adjusting policy at the regular normal cadence seems reasonable. But

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<v Speaker 2>if we see a further deterioration or we haven't seen

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<v Speaker 2>any deterioration yet in the labor market, if we should

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<v Speaker 2>see deterioration or any signs of weakness, then being more

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<v Speaker 2>aggressive to ensure that we don't see that it would

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<v Speaker 2>be appropriate. So I think it's too early to know,

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<v Speaker 2>and I don't want to make a declaration when none

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<v Speaker 2>is necessary. The direction of changes down and the time

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<v Speaker 2>to adjust is now, in my opinion, some of.

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<v Speaker 1>Your colleagues at the regional banks told me in Jackson

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<v Speaker 1>Hole that they want to see a methodical, step by

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<v Speaker 1>step process and that companies want to see that as well.

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<v Speaker 1>What markets are reading into a little bit of what

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<v Speaker 1>jay Pole said when he did not or did not

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<v Speaker 1>say because he didn't use the word patient, do you

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<v Speaker 1>think that there is a sort of bias to maybe

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<v Speaker 1>do more if the labor market is a little bit

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<v Speaker 1>weaker than anticipated.

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<v Speaker 2>Well, let me speak about myself, and I see further

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<v Speaker 2>signs that the economy or the labor market is slowing,

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<v Speaker 2>is unwelcomed, and I do not want to see that.

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<v Speaker 2>That's not what we're looking for. We're looking for, and

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<v Speaker 2>the Chair said this in this speech. We're looking for

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<v Speaker 2>inflation to come down, can be sustainably down to two percent,

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<v Speaker 2>and for the labor market to stay right about where

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<v Speaker 2>it is. You don't want to see additional weakness because

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<v Speaker 2>that's actually what we're trying to prevent. Ultimately, we have

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<v Speaker 2>two goals, price stability, full employment. We're trying to get

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<v Speaker 2>those two goals to simultaneously exist, and adjusting the policy

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<v Speaker 2>rate to ensure that happens is what we will need

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<v Speaker 2>to do.

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<v Speaker 3>And so I will back.

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<v Speaker 2>Away or stay away from any kind of playbook or

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<v Speaker 2>program and instead continue to be data dependent and recognize

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<v Speaker 2>policy adjust to the data as it comes in.

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<v Speaker 1>Is this probing the economy or are you basically setting

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<v Speaker 1>out on a path to neutral?

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<v Speaker 2>Now. I don't think we want to declare that we're

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<v Speaker 2>setting on a path to neutral, because we have a

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<v Speaker 2>lot of uncertainty still. But it is definitely the case

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<v Speaker 2>that we have a policy rate that's highly restrictive and

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<v Speaker 2>that we need to right size it for the economy

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<v Speaker 2>that is slowing. Policy will remain restrictive even when we

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<v Speaker 2>make adjustments, and that means that we'll continue to put

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<v Speaker 2>downward pressure on inflation, continue to have growth bridled. But

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<v Speaker 2>we want to make sure we don't overdo that and

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<v Speaker 2>find ourselves with economy that's weakening when weakening is warranted.

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<v Speaker 2>We were getting inflation to come down without instilling any weakness,

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<v Speaker 2>and I think we want to continue to focus on that.

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<v Speaker 1>Well, do you have an idea where you think neutral

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<v Speaker 1>might be as potential growth faster now than it had

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<v Speaker 1>been and will stay that way. You know?

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<v Speaker 2>The neutral rate of interest is is of course constantly

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<v Speaker 2>debated and people are thinking about that now. For my

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<v Speaker 2>own self, I think of it as if we came

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<v Speaker 2>in to the pandemic at a point five real neutral rate.

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<v Speaker 2>I can see it being as high as one now,

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<v Speaker 2>and we will find that as we go. I think

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<v Speaker 2>the really relevant thing now is that even when we

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<v Speaker 2>make adjustments to the policy rate to make sure it's right,

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<v Speaker 2>we will still be in restrictive territory and we will

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<v Speaker 2>still we have a long ways to go before we

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<v Speaker 2>get to two point five or three in the nominal

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<v Speaker 2>neutral space.

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<v Speaker 1>Well, we have a new summary of economic projections in September.

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<v Speaker 1>Where are you going to put your growth forecast for

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<v Speaker 1>the next couple of quarters.

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<v Speaker 3>I really think that growth is around trend.

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<v Speaker 2>My trend is, you know, like most people, between one

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<v Speaker 2>point five and two percent, And I will work with

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<v Speaker 2>my team look at more information and things before I

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<v Speaker 2>write down any numbers, but I think I think growth

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<v Speaker 2>at or a little bit below trend is what we're seeing.

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<v Speaker 2>And the labor market's now in balance, and we're just

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<v Speaker 2>trying to sustain those conditions while we see the arrest

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<v Speaker 2>of monetary policy take effect on inflation and bring us

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<v Speaker 2>into that two percent target.

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<v Speaker 1>Well, if you've got two percent growth, market is looking

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<v Speaker 1>for something like three hundred basis points of cuts by

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<v Speaker 1>the end of the next two years. Are you looking

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<v Speaker 1>at getting inflation down low enough to make that make sense.

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<v Speaker 2>We have to get inflation down to two percent. That

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<v Speaker 2>is the commitment we've made, and I believe we have

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<v Speaker 2>the tools and the will.

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<v Speaker 3>I think that will is the second.

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<v Speaker 2>Part that's really important, the will to do that. But

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<v Speaker 2>the goal has always been since the beginning of this

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<v Speaker 2>effort to bring inflation down, to do it as gently

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<v Speaker 2>as we can, not injure the labor market in any

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<v Speaker 2>way that's unnecessary. We've shown so far, the data have

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<v Speaker 2>shown that we were able to bring inflation down through

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<v Speaker 2>improvements in supply and restrictive monetary policy, and the labor

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<v Speaker 2>market has not faltered. That is still the goal. I mean,

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<v Speaker 2>ultimately people want a sustainable growth rate, is sustainable unemployment

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<v Speaker 2>our employment picture, and two percent inflation. So there's a

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<v Speaker 2>lot of work to do to get there, and we're

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<v Speaker 2>far from declaring victory, but we have the tools in

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<v Speaker 2>the will to do it.

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<v Speaker 1>What are you telling people who look at the SAM

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<v Speaker 1>rule and we've passed that, so they're putting up umbrellas

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<v Speaker 1>because they think a storm is coming.

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<v Speaker 2>Well, you know, these historical regularities is what the SAM

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<v Speaker 2>rules based on. But other different mechanisms They're all about

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<v Speaker 2>what has happened historically, and there have been and I

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<v Speaker 2>think this has often forgotten. There have been a couple

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<v Speaker 2>periods in our history where unemployment rose, but we didn't

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<v Speaker 2>end up with that sharp spike in unemployment and the

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<v Speaker 2>labor market didn't deteriorate. You have to look back to

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<v Speaker 2>the nineties in two thousands for that. But these things

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<v Speaker 2>are possible, and importantly, we do need to look under

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<v Speaker 2>the dashboard of the headline indicators, you know, employment growth

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<v Speaker 2>and unemployment. We have to look underneath that say why

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<v Speaker 2>are these things happening. We've got improvements in labor supply.

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<v Speaker 3>We really have to put this whole constellation.

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<v Speaker 2>As you know, we famously said, I think Vice Cherry

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<v Speaker 2>Yellen at the time said during the financial crisis, we

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<v Speaker 2>need a this aftermath, we need a full dashboard of

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<v Speaker 2>labor market indicators. As a labor economist, I definitely look

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<v Speaker 2>at the full dashboard. And the time is now to

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<v Speaker 2>talk to our contacts, talk to workers, talk to firms,

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<v Speaker 2>look at the dashboard and make the right decision.

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<v Speaker 1>Now, the FED said it would end QT before cutting.

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<v Speaker 1>You didn't want to do both at the same time

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<v Speaker 1>since they kind of work in opposite directions that I

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<v Speaker 1>assume is off the table. Now, how do you mean

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<v Speaker 1>you're going to keep QT running even when you're cutting great?

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<v Speaker 3>I see that. You know.

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<v Speaker 2>What we ultimately announced is that we're going to reduce

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<v Speaker 2>the size of our balance sheet and we are going

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<v Speaker 2>to adjust policy both of those. I think of it

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<v Speaker 2>a little differently, which is why I ask for clarification.

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<v Speaker 2>I think of it as we are normalizing both the

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<v Speaker 2>balance sheet and policy rate.

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<v Speaker 3>At some point.

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<v Speaker 2>We're not there yet were you know, could start that soon.

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<v Speaker 2>And both of those things are consistent with bringing our

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<v Speaker 2>toolkit back into its normal position so that we're ready

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<v Speaker 2>going forward. But while we do that, we have to

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<v Speaker 2>continue to remember that we need to bring inflation down

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<v Speaker 2>fully the two percent.

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<v Speaker 1>Well, you're worried. I didn't get a chance to ask

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<v Speaker 1>you this last week about the revisions to the BLS

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<v Speaker 1>Establishment survey being so large, and suggesting that maybe not

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<v Speaker 1>through any fault of yours because you work with the

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<v Speaker 1>data you have, but that you might be behind the curve.

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<v Speaker 2>You know, we periods of adjustment, large adjustments like these.

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<v Speaker 2>You know, I started working at the FED in nineteen

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<v Speaker 2>ninety six as labor economists. This was a very traditional

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<v Speaker 2>kind of adjustment that would occur. It often occurs at

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<v Speaker 2>inflection points in the economy that these adjustments are larger.

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<v Speaker 2>But we have a feeling that these adjustments are coming.

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<v Speaker 2>We do our own estimates. We know adjustments of some

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<v Speaker 2>size are coming, and that it is why you don't

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<v Speaker 2>look at just employment growth, just the payroll employment growth.

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<v Speaker 2>We look at the household survey, which tells us other indicators.

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<v Speaker 2>What was really interesting if you look back over the

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<v Speaker 2>last year and a half is that these numbers of

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<v Speaker 2>job growth, we're feeling inconsistent with the rest of the indicators,

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<v Speaker 2>and so I think these adjustments are just bringing it

0:11:25.640 --> 0:11:28.640
<v Speaker 2>back consistent with the other indicators in the labor market.

0:11:28.640 --> 0:11:31.880
<v Speaker 2>Bottom line is people are still getting jobs. People are

0:11:31.920 --> 0:11:35.360
<v Speaker 2>still coming into the labor force, usually a good sign

0:11:35.400 --> 0:11:38.800
<v Speaker 2>that jobs are available. Initial claims for unemployment insurance haven't

0:11:38.840 --> 0:11:41.800
<v Speaker 2>really moved up in a sharp way, and firms are

0:11:41.800 --> 0:11:45.840
<v Speaker 2>interested in growing their businesses consistent with the economy. So

0:11:46.040 --> 0:11:48.800
<v Speaker 2>I think that that's important for us to look at,

0:11:48.840 --> 0:11:51.280
<v Speaker 2>But we don't want to get over rotated on that

0:11:51.400 --> 0:11:54.360
<v Speaker 2>one adjustment when we have so many pieces of information

0:11:54.440 --> 0:11:55.840
<v Speaker 2>we can look to Before I let you.

0:11:55.840 --> 0:11:58.440
<v Speaker 1>Go, one last question. We've got the framework review coming

0:11:58.520 --> 0:12:00.480
<v Speaker 1>up this fall. What would you like to see it

0:12:00.480 --> 0:12:00.880
<v Speaker 1>look at.

0:12:01.520 --> 0:12:03.840
<v Speaker 2>Well, you know, I'll be debating that with my colleagues

0:12:03.840 --> 0:12:05.560
<v Speaker 2>and discussing that. I don't want to front run what

0:12:05.600 --> 0:12:07.839
<v Speaker 2>we're doing. What I really want to focus on though,

0:12:07.880 --> 0:12:10.600
<v Speaker 2>in the framework is that you know, we've made a

0:12:10.600 --> 0:12:13.560
<v Speaker 2>commitment to review our framework every five years. That's a

0:12:13.679 --> 0:12:17.679
<v Speaker 2>very different process than the one I grew up in,

0:12:17.720 --> 0:12:20.080
<v Speaker 2>and I think it's really important that we look at

0:12:20.080 --> 0:12:22.840
<v Speaker 2>the information we have and we think about, Okay, does

0:12:22.880 --> 0:12:24.959
<v Speaker 2>that affect how we use our tools, what our tools

0:12:24.960 --> 0:12:27.600
<v Speaker 2>should be, and that we're transparent about it as we

0:12:27.600 --> 0:12:29.600
<v Speaker 2>were last year. Those are the components that are really

0:12:29.679 --> 0:12:32.680
<v Speaker 2>important to me, and I'll delay specifics until we have

0:12:33.280 --> 0:12:35.240
<v Speaker 2>I've had a chance to talk to my colleagues about that.

0:12:35.400 --> 0:12:37.280
<v Speaker 1>All right, Well, thank you very much. We'll have you

0:12:37.320 --> 0:12:38.880
<v Speaker 1>back to tell us once you get into that.

0:12:39.400 --> 0:12:41.040
<v Speaker 3>It's a commitment very daily.

0:12:41.080 --> 0:12:43.760
<v Speaker 1>The president of the San Francisco Federal Reserve Bank