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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This week we got the most recent numbers on inflation,

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Speaker 2: the ones that FED pays attention to and core PCEE

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Speaker 2: came in just about we're expected, showing inflation growing two

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Speaker 2: point four percent year over year. After the most recent numbers,

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Speaker 2: we sat down with San Francisco FED President Mary Daily

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Speaker 2: and asked her how she squares the strong growth and

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Speaker 2: jobs numbers with the relatively weak consumer centimate figures.

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Speaker 1: When you think about how hard it is to work

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Speaker 1: as hard as you can work multiple jobs and not

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Speaker 1: be able to afford things one month to the next,

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Speaker 1: that has a psychological toll that I think we can't underestimate.

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Speaker 1: And as the economy continues to make gains and we

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Speaker 1: bring inflation down, that scar, if you will, will start

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Speaker 1: to heal. But people need that certainty and that's why

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Speaker 1: we keep saying we're not done until we're done. You

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Speaker 1: know these good inflation data that we're seeing that's not

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Speaker 1: price stability too.

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Speaker 2: Is for people in financial media and on Wall Street,

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Speaker 2: the number one issue is rate cuts.

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Speaker 1: Yes, that is their number one issue. But we work

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Speaker 1: for the American people, not necessarily not for markets.

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Speaker 2: But explain it to it in your summary of economic projections,

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Speaker 2: the last one you have three in for the year.

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Speaker 2: That's a projection, it's not a promise, but and some

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Speaker 2: people think you should have more. Maybe some people think

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Speaker 2: you have less. Why are we talking about rate cuts

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Speaker 2: at all given the strength of the economy and the

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Speaker 2: economy seems to be doing just fine with the rate

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Speaker 2: cuts you've put in place.

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Speaker 1: So we put a projection out about what we think

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Speaker 1: we'll need to do if the economy evolves as we

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Speaker 1: expect it to. So what's the expectation inflation continues to

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Speaker 1: come down gradually the labor market and the economy slow

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Speaker 1: but don't tip over, and then it would be appropriate

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Speaker 1: as inflation comes down to bring the nominal rate of

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Speaker 1: interest down to make sure we're not how holding on

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Speaker 1: even tighter, because we want to avoid the following. We

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Speaker 1: want to avoid holding on all the way to two percent.

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Speaker 1: They're putting policy very tight and then cause an unnecessary

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Speaker 1: downturn that you give people lower inflation, but you cost

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Speaker 1: them their jobs. So that's a balancing act. That means

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Speaker 1: we have to be calibrating. So I want to just

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Speaker 1: be clear. Though you don't see many fed officials, including myself,

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Speaker 1: talking about rate cuts. You see us talking about restoring

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Speaker 1: price stability, bringing inflation down, being data dependent, looking at

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Speaker 1: the full balance, being patient and methodical. So I do

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Speaker 1: think that message is clear. It's not always what people

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Speaker 1: necessarily want to hear, but it is a clear message

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Speaker 1: that we've been on.

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Speaker 2: I'm not expecting to tell usc one you're going to

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Speaker 2: cut rates. But let me ask a different question. I'm

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Speaker 2: old enough to remember when Potter Stewit in the Spreme

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Speaker 2: Court said about obsentity, you'll note when you see it.

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Speaker 2: How will you know it when you see it? That's

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Speaker 2: the time we should start cutting rates.

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Speaker 1: That's a great question. So what I look at is

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Speaker 1: what I think of as a dashboard of indicators, And

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Speaker 1: the dashboard of indicators has the published data, which everybody

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Speaker 1: focuses on. But those tend to be data points, and

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Speaker 1: you don't want to be data point dependent. You want

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Speaker 1: to be data dependent. So you have to look underneath

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Speaker 1: the hood of those data and really see what's driving them,

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Speaker 1: and also you have to talk to people. And what

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Speaker 1: I'm looking for right now is for the published data

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Speaker 1: continue to gradually slow and inflation to gradually come down,

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Speaker 1: but for the behavior when I talk to firms, when

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Speaker 1: I talk to businesses, etc. That they're saying, oh, yes,

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Speaker 1: we're not going to continue to raise prices. Oh yes,

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Speaker 1: we see input costs coming down. Workers saying, we see jobs,

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Speaker 1: we want to stick with our employer. We are not

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Speaker 1: worried about five percent wage growth because we don't feel

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Speaker 1: inflations going to continue. I'm looking for those things to

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Speaker 1: all come together and form a collage of evidence, if

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Speaker 1: you will, that we are on the path to price

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Speaker 1: stability sustainably. I'm seeing parts of that. I see a

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Speaker 1: lot of green shoots, as we like to say, but

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Speaker 1: we're not there yet.

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Speaker 2: You talked about your dashboard. Let me ask about one

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Speaker 2: specific figure on your dashboard, and that is inflation numbers.

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Speaker 2: There's some concern now that maybe inflation's overstated. I've talked

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Speaker 2: to a couple of people who are pretty active in

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Speaker 2: real estate commercial real estate in recent days who said

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Speaker 2: the owner equivalent ret is overstating inflation as pactive matter.

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Speaker 2: Somebody said, actually, recently on this program, as much as

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Speaker 2: one point seven to one point eight percent, are you

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Speaker 2: concerned that maybe we're overstating inflation right now?

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Speaker 1: So that's a really terrific question, and it might help

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Speaker 1: for me to just talk about how I look at

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Speaker 1: the data. So there are multiple inflation indicators, and you

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Speaker 1: can unpack all of them into what's driving them. But

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Speaker 1: we can't just look at those published inflation data to

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Speaker 1: see the story. We have to actually go into communities

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Speaker 1: and look at what's happening with local house price appreciation,

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Speaker 1: what's happening with rental price appreciation, and there you do

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Speaker 1: see the elements of the slowing you would expect to see.

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Speaker 1: So I actually am growing more confident that housing inflation,

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Speaker 1: shelter inflation, rental inflation are coming down. The speed at

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Speaker 1: which they come down is still unknown, but I'm not

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Speaker 1: seeing signs that they're picking back up yet.

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Speaker 2: One of the hot questions about the economy right now

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Speaker 2: is why productivity numbers have appeared to rise and whether

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Speaker 2: it has anything to do with generative AI.

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Speaker 1: Now, the thing I learned I went to the FED

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Speaker 1: to work for the first time in nineteen ninety six,

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Speaker 1: so I'm on the ground in the Bay Area looking

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Speaker 1: at this productivity boom, and what I learned from that

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Speaker 1: period of time is that it's not about the innovation itself.

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Speaker 1: It's about how people use it, and if we use

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Speaker 1: this effectively and well, and we make sure we have

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Speaker 1: the right rules and regulations and work together on it,

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Speaker 1: then it has a chance to create a productivity boom.

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Speaker 1: If we don't, then it will just be the next

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Speaker 1: newest thing that ends in some productivity gains, but not

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Speaker 1: lasting productivity growth. And I think that's really the choice

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Speaker 1: point we're at. So yes, I see it, but I'm

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Speaker 1: unwilling to say this is the next productivity boom. But

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Speaker 1: I think the little seeds of it are certainly out.

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Speaker 2: There understanding it's way too soon to tell for sure,

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Speaker 2: Still to think about the possibilities, what possible effects could

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Speaker 2: this have on economic possim particularly monetary policy, because if

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Speaker 2: you really do have abundant productivity growth that affects your

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Speaker 2: inflation calculation, does it matter.

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Speaker 1: Absolutely. So one of the things we saw last year,

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Speaker 1: and I think it's useful to just look at last year,

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Speaker 1: we had two things that were surprising. We had greater

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Speaker 1: labor supply based on just the domestic workforce increasing their

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Speaker 1: labor force participation. And we had more immigration than many

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Speaker 1: had penciled in. So that's a positive in terms of

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Speaker 1: the number of workers interested in working. The second thing

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Speaker 1: we had, though, was this boom in productivity growth that

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Speaker 1: you noted. You put those two things together and we

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Speaker 1: were able to grow faster without being inflationary. And I

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Speaker 1: think that is the number one question on my mind

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Speaker 1: for policy. Are we working with a fixed pie that's

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Speaker 1: growing slowly, you know, the economies expanding slowly, or are

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Speaker 1: we getting something on the productivity side that allows us

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Speaker 1: to grow more quickly without inflation rising up. And that's

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Speaker 1: the question for policy. If we get the productivity boom,

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Speaker 1: then like in the nineteen nineties, we don't have to

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Speaker 1: try to slow growth in order to bring inflation down.

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Speaker 2: Tech and most recently generative AI has been driving the

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Speaker 2: economy and the markets, and Silicon Valley is something of

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Speaker 2: a poster child for what tech has become. But we

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Speaker 2: may overlook other places where tech is making a big difference,

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Speaker 2: places like Oregon.

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Speaker 1: It is not just Silicon Valley. You can go to Oregon.

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Speaker 1: That's the home of chip manufacturing and has been for

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Speaker 1: two decades or more. We have silicon slopes in Salt

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Speaker 1: Lake City, a burgeoning community even in periods when people

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Speaker 1: think of it as northern California. But La has a

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Speaker 1: considerable amount of tech and Boise, Idaho is building itself

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Speaker 1: up as a tech center. Now. They all do different

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Speaker 1: kinds of things. But to suggest that Silicon Valleys the

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Speaker 1: only thing out there is really a misnomer.

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Speaker 2: What is the reason why you have such a concentration

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Speaker 2: of tech in your district? I mean, we tend to

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Speaker 2: think about Silicon Valley as being close to Stanford and

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Speaker 2: Berkeley and some universities. Is it the educational system there,

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Speaker 2: is it some other factors? Just critical mass?

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Speaker 1: I think there is a bit of critical mass, and

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Speaker 1: there's a number of research studies that say, you know,

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Speaker 1: these network effects are large. So one of the things

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Speaker 1: we've seen is, and you see this anywhere in the country,

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Speaker 1: really is that people might start in Silicon Valley, they

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Speaker 1: might start in Austin, Texas, they might start in Boston,

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Speaker 1: but then they move, you know, family things take them

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Speaker 1: other places that we have a lot of lovely states

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Speaker 1: to live in. So people go other places, and then

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Speaker 1: they build those tech centers around them because they have

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Speaker 1: the expertise.

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Speaker 2: As strong as the tech sector is in Mary Daily's region,

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Speaker 2: commercial real estate has been struggling a bit, as it

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Speaker 2: has in some other major urban areas.

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Speaker 1: Commercial real estate's a big name for a lot of

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Speaker 1: different segments. So if you're in an industrial and warehousing space,

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Speaker 1: you're feeling very good about things right now. If you're

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Speaker 1: in retail space or even multi family housing out in

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Speaker 1: suburban areas, then you're feeling really good. You're confident. The

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Speaker 1: place where you're seeing weakness and everybody knows it is

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Speaker 1: in the urban core of particularly cities like Seattle, Portland,

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Speaker 1: San Francisco. LA is doing a little bit better, but

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Speaker 1: you can find pockets of this in LA and that

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Speaker 1: has to do with the fact that a lot of

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Speaker 1: people are still working from home in those communities. Those

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Speaker 1: big office complexes that were built up for those individuals

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Speaker 1: to work in, they just aren't They're not filled, and

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Speaker 1: so there will be a repricing and a resettlement. The

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Speaker 1: thing is, we've known it's coming for a while, and

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Speaker 1: I see private equity money, venture money sitting on the

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Speaker 1: sidelines ready to come in when the price is right.

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Speaker 1: So there'll be some repricing, there'll be some loss of valuations,

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Speaker 1: for sure, but it doesn't seem today to be the

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Speaker 1: kind of disorderly adjustment that you would worry about it's

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Speaker 1: something that is more orderly, even though it might be

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Speaker 1: certainly going to be painful for those involved, as likely

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Speaker 1: to be as disruptive.

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Speaker 2: One of the concerns is about regional banks, which tend

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Speaker 2: to be more exposed to commercial real estate. And then

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Speaker 2: we've heard about that from the FED in Washington about that.

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Speaker 2: How do you assess it out there? You have a

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Speaker 2: little experience with this with Silicon Valley Bank and things

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Speaker 2: like that. How do you assess the risk for the

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Speaker 2: banks the regional banks?

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Speaker 1: Yes, so I would separate the failure of Silicon Valley Bank,

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Speaker 1: Signature Bank, and First Republic, which really they all three

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Speaker 1: had the same experience, which is depositors who were uninsured

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Speaker 1: ran and that's a different situation than the commercial real estate.

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Speaker 1: But what they did, what that situation did is it

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Speaker 1: alerted all investors and depositors to the fact that there's

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Speaker 1: a portfolio underlying the health of a bank, and we

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Speaker 1: should focus on that portfolio. I think it's useful to

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Speaker 1: remind people too. We have over forty five hundred banks

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Speaker 1: in the United States and only three failed. So the

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Speaker 1: banking system is safe and sound and resilient, but there

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Speaker 1: will be adjustments and one of the things that you've

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Speaker 1: heard the Vice Chair of Supervision Michael Barr speak about

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Speaker 1: and other the FDIC chair and OCC is really focusing

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Speaker 1: their efforts on ensuring that banks are preparing for those adjustments.

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Speaker 1: So it's certainly there. The final thing, though, that I

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Speaker 1: think is really often got known, is that regional banks

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Speaker 1: don't have a lot in these big urban core office buildings.

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Speaker 1: Those are really investor owned, and so it's useful to

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Speaker 1: separate the concerns you might have about regional banks on

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Speaker 1: commercial real estate from those big, monolithic empty buildings that

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Speaker 1: everybody's worried won't get filled.

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Speaker 2: Many thanks to Mary Daily, president of the San Francisco

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Speaker 2: Fed