Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. We'd like to welcome
Speaker 1: San Francisco Fed President Mary Daily to our studios here.
Speaker 1: Thank you for joining us. Before we get into the
Speaker 1: cycle question that Tim raised, I want to ask you
Speaker 1: if you're on the same page with the chairman. You
Speaker 1: and others had said you wanted to see more data,
Speaker 1: and we still have a jobs report in CPI report,
Speaker 1: but it looks like a cut is now all but certain.
Speaker 2: Well, to my mind, we've been on this path of
Speaker 2: ready to adjust policy rates for several months. We just
Speaker 2: needed to get a little more confidence, and inflation was
Speaker 2: truly on its path to two percent, and I wanted
Speaker 2: to see the labor market come into balance. But I
Speaker 2: think that's completely happened, and the risk to our goals
Speaker 2: are now balanced in the time to adjust policy is
Speaker 2: up on us.
Speaker 1: Is there anything that could derail a cut in September?
Speaker 3: To my mind, that would be hard to imagine.
Speaker 2: At this point, I do see that adjusting policy is appropriate.
Speaker 2: We don't want to get ourselves into a situation where
Speaker 2: we're keeping policy highly restrictive into a slowing economy. And remember,
Speaker 2: every time inflation comes down, the policy gets more restrictive,
Speaker 2: and I think that's a recipe, if you will, for
Speaker 2: overtightening and injuring the labor marketing growth.
Speaker 1: Well, the Chairman and basically the Open Market Committee said
Speaker 1: coming out of the meeting that the downside risks are
Speaker 1: greater to unemployment than to inflation. How big are the
Speaker 1: downside risks to employment right now?
Speaker 2: That's the very important question, and so we definitely have
Speaker 2: to keep that in mind because, as you know, the
Speaker 2: labor market when it starts to adjust often has adjusted
Speaker 2: abruptly and significantly.
Speaker 3: But right now we don't see any signs of that.
Speaker 2: You look at initial claims for unemployment insurance, you look
Speaker 2: at early indications of layoffs. They're just not present, and
Speaker 2: so that's not giving us any signs that there's a deterioration. Importantly,
Speaker 2: as you know, the Reserve Bank presidents spend to consider
Speaker 2: amount of time talking to contacts, businesses, workers. We're really
Speaker 2: not hearing signs that firms are poised for layoffs. What
Speaker 2: they are doing is managing headcount, making sure that they
Speaker 2: really want to refill a job before they do it.
Speaker 2: But at this point I don't see any warning signs
Speaker 2: of weakness. But we want to make sure that we
Speaker 2: are adjusting policy as we go so that it's ready
Speaker 2: for the economy we have and for the economy we're
Speaker 2: likely to get, and ensure that we don't end up
Speaker 2: in that situation where we see real weakness.
Speaker 1: All right, let's talk about tactics. Markets are now pricing
Speaker 1: one hundred basis points that cuts by the end of
Speaker 1: the year, but there are only three meetings left, which
Speaker 1: would imply at least one fifty basis point cut. Do
Speaker 1: you think the markets are wrong or is a good
Speaker 1: possibility we see a fifty somewhere.
Speaker 2: Well, I think everyone's looking at the economic projections and
Speaker 2: then making a decision. For me, what I'm going to
Speaker 2: be doing is looking at the incoming information. As you said,
Speaker 2: we have another CPI, another labor market report discussed with
Speaker 2: my colleagues, talk to our contacts and fashion the policy
Speaker 2: that's right for the economy that we see. So it's
Speaker 2: too early to know exactly what the tactics will be.
Speaker 2: We do know one thing, the direction of changes down,
Speaker 2: and we need to do it in a way that
Speaker 2: is responsive to the economy and not let the economy
Speaker 2: get in a position of weakness.
Speaker 1: Well, let me quote the fed back to you. If
Speaker 1: the economy evolves as we expect, as you always say,
Speaker 1: would that imply a twenty five basis point cut in
Speaker 1: September versus fifty.
Speaker 2: So I think of it as his scenarios, if I
Speaker 2: may so. The scenario that is my most likely outcome,
Speaker 2: and what I see in the data and the projections
Speaker 2: is that we continue to get gradual slowing and inflation,
Speaker 2: and we continue to get that study sustainable pace of
Speaker 2: growth in the labor market. If those things happen, then
Speaker 2: adjusting policy at the regular normal cadence seems reasonable. But
Speaker 2: if we see a further deterioration or we haven't seen
Speaker 2: any deterioration yet in the labor market, if we should
Speaker 2: see deterioration or any signs of weakness, then being more
Speaker 2: aggressive to ensure that we don't see that it would
Speaker 2: be appropriate. So I think it's too early to know,
Speaker 2: and I don't want to make a declaration when none
Speaker 2: is necessary. The direction of changes down and the time
Speaker 2: to adjust is now, in my opinion, some of.
Speaker 1: Your colleagues at the regional banks told me in Jackson
Speaker 1: Hole that they want to see a methodical, step by
Speaker 1: step process and that companies want to see that as well.
Speaker 1: What markets are reading into a little bit of what
Speaker 1: jay Pole said when he did not or did not
Speaker 1: say because he didn't use the word patient, do you
Speaker 1: think that there is a sort of bias to maybe
Speaker 1: do more if the labor market is a little bit
Speaker 1: weaker than anticipated.
Speaker 2: Well, let me speak about myself, and I see further
Speaker 2: signs that the economy or the labor market is slowing,
Speaker 2: is unwelcomed, and I do not want to see that.
Speaker 2: That's not what we're looking for. We're looking for, and
Speaker 2: the Chair said this in this speech. We're looking for
Speaker 2: inflation to come down, can be sustainably down to two percent,
Speaker 2: and for the labor market to stay right about where
Speaker 2: it is. You don't want to see additional weakness because
Speaker 2: that's actually what we're trying to prevent. Ultimately, we have
Speaker 2: two goals, price stability, full employment. We're trying to get
Speaker 2: those two goals to simultaneously exist, and adjusting the policy
Speaker 2: rate to ensure that happens is what we will need
Speaker 2: to do.
Speaker 3: And so I will back.
Speaker 2: Away or stay away from any kind of playbook or
Speaker 2: program and instead continue to be data dependent and recognize
Speaker 2: policy adjust to the data as it comes in.
Speaker 1: Is this probing the economy or are you basically setting
Speaker 1: out on a path to neutral?
Speaker 2: Now. I don't think we want to declare that we're
Speaker 2: setting on a path to neutral, because we have a
Speaker 2: lot of uncertainty still. But it is definitely the case
Speaker 2: that we have a policy rate that's highly restrictive and
Speaker 2: that we need to right size it for the economy
Speaker 2: that is slowing. Policy will remain restrictive even when we
Speaker 2: make adjustments, and that means that we'll continue to put
Speaker 2: downward pressure on inflation, continue to have growth bridled. But
Speaker 2: we want to make sure we don't overdo that and
Speaker 2: find ourselves with economy that's weakening when weakening is warranted.
Speaker 2: We were getting inflation to come down without instilling any weakness,
Speaker 2: and I think we want to continue to focus on that.
Speaker 1: Well, do you have an idea where you think neutral
Speaker 1: might be as potential growth faster now than it had
Speaker 1: been and will stay that way. You know?
Speaker 2: The neutral rate of interest is is of course constantly
Speaker 2: debated and people are thinking about that now. For my
Speaker 2: own self, I think of it as if we came
Speaker 2: in to the pandemic at a point five real neutral rate.
Speaker 2: I can see it being as high as one now,
Speaker 2: and we will find that as we go. I think
Speaker 2: the really relevant thing now is that even when we
Speaker 2: make adjustments to the policy rate to make sure it's right,
Speaker 2: we will still be in restrictive territory and we will
Speaker 2: still we have a long ways to go before we
Speaker 2: get to two point five or three in the nominal
Speaker 2: neutral space.
Speaker 1: Well, we have a new summary of economic projections in September.
Speaker 1: Where are you going to put your growth forecast for
Speaker 1: the next couple of quarters.
Speaker 3: I really think that growth is around trend.
Speaker 2: My trend is, you know, like most people, between one
Speaker 2: point five and two percent, And I will work with
Speaker 2: my team look at more information and things before I
Speaker 2: write down any numbers, but I think I think growth
Speaker 2: at or a little bit below trend is what we're seeing.
Speaker 2: And the labor market's now in balance, and we're just
Speaker 2: trying to sustain those conditions while we see the arrest
Speaker 2: of monetary policy take effect on inflation and bring us
Speaker 2: into that two percent target.
Speaker 1: Well, if you've got two percent growth, market is looking
Speaker 1: for something like three hundred basis points of cuts by
Speaker 1: the end of the next two years. Are you looking
Speaker 1: at getting inflation down low enough to make that make sense.
Speaker 2: We have to get inflation down to two percent. That
Speaker 2: is the commitment we've made, and I believe we have
Speaker 2: the tools and the will.
Speaker 3: I think that will is the second.
Speaker 2: Part that's really important, the will to do that. But
Speaker 2: the goal has always been since the beginning of this
Speaker 2: effort to bring inflation down, to do it as gently
Speaker 2: as we can, not injure the labor market in any
Speaker 2: way that's unnecessary. We've shown so far, the data have
Speaker 2: shown that we were able to bring inflation down through
Speaker 2: improvements in supply and restrictive monetary policy, and the labor
Speaker 2: market has not faltered. That is still the goal. I mean,
Speaker 2: ultimately people want a sustainable growth rate, is sustainable unemployment
Speaker 2: our employment picture, and two percent inflation. So there's a
Speaker 2: lot of work to do to get there, and we're
Speaker 2: far from declaring victory, but we have the tools in
Speaker 2: the will to do it.
Speaker 1: What are you telling people who look at the SAM
Speaker 1: rule and we've passed that, so they're putting up umbrellas
Speaker 1: because they think a storm is coming.
Speaker 2: Well, you know, these historical regularities is what the SAM
Speaker 2: rules based on. But other different mechanisms They're all about
Speaker 2: what has happened historically, and there have been and I
Speaker 2: think this has often forgotten. There have been a couple
Speaker 2: periods in our history where unemployment rose, but we didn't
Speaker 2: end up with that sharp spike in unemployment and the
Speaker 2: labor market didn't deteriorate. You have to look back to
Speaker 2: the nineties in two thousands for that. But these things
Speaker 2: are possible, and importantly, we do need to look under
Speaker 2: the dashboard of the headline indicators, you know, employment growth
Speaker 2: and unemployment. We have to look underneath that say why
Speaker 2: are these things happening. We've got improvements in labor supply.
Speaker 3: We really have to put this whole constellation.
Speaker 2: As you know, we famously said, I think Vice Cherry
Speaker 2: Yellen at the time said during the financial crisis, we
Speaker 2: need a this aftermath, we need a full dashboard of
Speaker 2: labor market indicators. As a labor economist, I definitely look
Speaker 2: at the full dashboard. And the time is now to
Speaker 2: talk to our contacts, talk to workers, talk to firms,
Speaker 2: look at the dashboard and make the right decision.
Speaker 1: Now, the FED said it would end QT before cutting.
Speaker 1: You didn't want to do both at the same time
Speaker 1: since they kind of work in opposite directions that I
Speaker 1: assume is off the table. Now, how do you mean
Speaker 1: you're going to keep QT running even when you're cutting great?
Speaker 3: I see that. You know.
Speaker 2: What we ultimately announced is that we're going to reduce
Speaker 2: the size of our balance sheet and we are going
Speaker 2: to adjust policy both of those. I think of it
Speaker 2: a little differently, which is why I ask for clarification.
Speaker 2: I think of it as we are normalizing both the
Speaker 2: balance sheet and policy rate.
Speaker 3: At some point.
Speaker 2: We're not there yet were you know, could start that soon.
Speaker 2: And both of those things are consistent with bringing our
Speaker 2: toolkit back into its normal position so that we're ready
Speaker 2: going forward. But while we do that, we have to
Speaker 2: continue to remember that we need to bring inflation down
Speaker 2: fully the two percent.
Speaker 1: Well, you're worried. I didn't get a chance to ask
Speaker 1: you this last week about the revisions to the BLS
Speaker 1: Establishment survey being so large, and suggesting that maybe not
Speaker 1: through any fault of yours because you work with the
Speaker 1: data you have, but that you might be behind the curve.
Speaker 2: You know, we periods of adjustment, large adjustments like these.
Speaker 2: You know, I started working at the FED in nineteen
Speaker 2: ninety six as labor economists. This was a very traditional
Speaker 2: kind of adjustment that would occur. It often occurs at
Speaker 2: inflection points in the economy that these adjustments are larger.
Speaker 2: But we have a feeling that these adjustments are coming.
Speaker 2: We do our own estimates. We know adjustments of some
Speaker 2: size are coming, and that it is why you don't
Speaker 2: look at just employment growth, just the payroll employment growth.
Speaker 2: We look at the household survey, which tells us other indicators.
Speaker 2: What was really interesting if you look back over the
Speaker 2: last year and a half is that these numbers of
Speaker 2: job growth, we're feeling inconsistent with the rest of the indicators,
Speaker 2: and so I think these adjustments are just bringing it
Speaker 2: back consistent with the other indicators in the labor market.
Speaker 2: Bottom line is people are still getting jobs. People are
Speaker 2: still coming into the labor force, usually a good sign
Speaker 2: that jobs are available. Initial claims for unemployment insurance haven't
Speaker 2: really moved up in a sharp way, and firms are
Speaker 2: interested in growing their businesses consistent with the economy. So
Speaker 2: I think that that's important for us to look at,
Speaker 2: But we don't want to get over rotated on that
Speaker 2: one adjustment when we have so many pieces of information
Speaker 2: we can look to Before I let you.
Speaker 1: Go, one last question. We've got the framework review coming
Speaker 1: up this fall. What would you like to see it
Speaker 1: look at.
Speaker 2: Well, you know, I'll be debating that with my colleagues
Speaker 2: and discussing that. I don't want to front run what
Speaker 2: we're doing. What I really want to focus on though,
Speaker 2: in the framework is that you know, we've made a
Speaker 2: commitment to review our framework every five years. That's a
Speaker 2: very different process than the one I grew up in,
Speaker 2: and I think it's really important that we look at
Speaker 2: the information we have and we think about, Okay, does
Speaker 2: that affect how we use our tools, what our tools
Speaker 2: should be, and that we're transparent about it as we
Speaker 2: were last year. Those are the components that are really
Speaker 2: important to me, and I'll delay specifics until we have
Speaker 2: I've had a chance to talk to my colleagues about that.
Speaker 1: All right, Well, thank you very much. We'll have you
Speaker 1: back to tell us once you get into that.
Speaker 3: It's a commitment very daily.
Speaker 1: The president of the San Francisco Federal Reserve Bank