WEBVTT - San Francisco Fed President Mary Daly Talks Fed

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News.

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<v Speaker 2>Well, good morning from San Francisco, and thank you very

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<v Speaker 2>much to all our listeners and viewers around the world,

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<v Speaker 2>and thank you to Mary Daily for joining us today.

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<v Speaker 2>I have to start off by saying, after we had

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<v Speaker 2>the FED decision, Bloomberg had on a Wall Street analyst

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<v Speaker 2>who said, the important thing now is to find out

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<v Speaker 2>what Mary Daily thinks because she was kind of on

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<v Speaker 2>the dubvish side, and yet she's not an extreme dove.

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<v Speaker 2>So I want to get your feelings on it. And

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<v Speaker 2>the story was the dissenters on the bias for the

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<v Speaker 2>forward guidance. Would you agree with their position? You weren't

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<v Speaker 2>a voter, but did you agree with their position?

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<v Speaker 1>You know, I don't see a lot of confusion in

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<v Speaker 1>the public. When I go out in my communities, talk

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<v Speaker 1>to businesses, talk to consumers, households, I don't see a

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<v Speaker 1>lot of confusion. They know the FED is committed to

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<v Speaker 1>price stability, that that's our first priority right now. The

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<v Speaker 1>labor market is stabilized. They see that from the adjustments

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<v Speaker 1>we made last year. So for me, it's really about

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<v Speaker 1>the right policy. Decision was the one everybody agreed to.

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<v Speaker 1>Which is hold the right study, continue to collect information,

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<v Speaker 1>and you see in markets pricing even today, markets are

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<v Speaker 1>priced in equal probabilities of a cut versus a hike,

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<v Speaker 1>and the most likely probability is that we hold study.

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<v Speaker 1>And I think that's well positioned. So for me, the

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<v Speaker 1>real signal about the meeting is that everyone agreed to

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<v Speaker 1>the decision and that the communication that the share maidenance

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<v Speaker 1>press conference is higher for longer relative to last year.

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<v Speaker 1>But the households, businesses and markets that already priced that in.

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<v Speaker 2>Your colleague from Bust and Susan Collins told us yesterday

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<v Speaker 2>that the phrase about additional moves is associated in people's

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<v Speaker 2>minds with a cut now because it's been following so

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<v Speaker 2>many times. Do you still feel that that's the path

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<v Speaker 2>for monetary policy.

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<v Speaker 1>It's sometimes sad for FED officials to realize this, but

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<v Speaker 1>there are very few people other than all of you

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<v Speaker 1>and FED watchers who look at our statement. Most people

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<v Speaker 1>look at how we position ourselves, and there I would

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<v Speaker 1>say that most people aren't worrying about that phrase, and

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<v Speaker 1>so I think the phrasing of the statement is less

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<v Speaker 1>important than the actions of the FMC and the actions

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<v Speaker 1>of the FOMC have been to really focus on price

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<v Speaker 1>stability when we think inflation is rising, and really focus

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<v Speaker 1>on being patient enough to see if the concerns we

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<v Speaker 1>have are even going to materialize. So it all comes

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<v Speaker 1>back to how long does the conflict last? And if

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<v Speaker 1>it's prolonged, then we might see more spillovers of oil

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<v Speaker 1>and other commodity prices into other goods and services. And

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<v Speaker 1>if it comes up quickly it ends soon, then the

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<v Speaker 1>forward contracts on oil or for oil to come back

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<v Speaker 1>down to around seventy five dollars depending on the day.

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<v Speaker 1>And that is something where our businesses are telling us, oh,

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<v Speaker 1>we're looking through the shock right now, because we don't

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<v Speaker 1>it'll last forever, but it won't be forever that we

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<v Speaker 1>can look through it. And consumers are doing the same,

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<v Speaker 1>look at the spending they're mostly looking through.

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<v Speaker 2>But policy wise, is the cutting cycle over now? I

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<v Speaker 2>don't think.

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<v Speaker 1>I think it's really too early to tell. If the

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<v Speaker 1>conflict ends and oil prices come back down and that

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<v Speaker 1>doesn't get passed into the broader economy, then I expect

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<v Speaker 1>the underlying dynamics that we were facing prior to the

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<v Speaker 1>conflict to return, which is policy is slightly restrictive continues

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<v Speaker 1>to put downward pressure on inflation. The labor market is

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<v Speaker 1>stable right now, but it's not creating any inflationary pressures,

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<v Speaker 1>and businesses are cautiously optimistic. So that's a good dynamic

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<v Speaker 1>for the economy and one where I expect inflation to

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<v Speaker 1>come back down to our two percent target. But the

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<v Speaker 1>main issue is what is the risk out there? How

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<v Speaker 1>does the oil price shock move its way through the economy,

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<v Speaker 1>how long does the conflict last? And can we really

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<v Speaker 1>get that two percent target that we've been that we've

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<v Speaker 1>been working towards that, and that's what we're determined.

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<v Speaker 2>To do to chieve that. Can you get to that target?

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<v Speaker 2>The Fed watches inflation expectations. The New York Fed survey

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<v Speaker 2>of consumers today showed inflation expectations rising to three point

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<v Speaker 2>six percent for the next year. Are you in danger

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<v Speaker 2>of having those become unanchored? You know?

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<v Speaker 1>The short term inflation expectations are a reflection of what

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<v Speaker 1>people are feeling right now at the gas pomp in

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<v Speaker 1>the grocery stores, etcsme, fertilizers and other things start to

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<v Speaker 1>spill over. That is not something that indicates a drift

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<v Speaker 1>of the anchor. What we really have to focus on

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<v Speaker 1>is does that translate into a move in medium term

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<v Speaker 1>inflation expectations or longer run inflation expectations. You really don't

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<v Speaker 1>see that right now, but that's not satisfying to say

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<v Speaker 1>we don't see it, so it's not there. You have

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<v Speaker 1>to dig deeper. What are we really seeing in terms

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<v Speaker 1>of wage negotiations? What do we see in terms of

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<v Speaker 1>firms passing a long thing? So I spend a lot

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<v Speaker 1>of time, as you know, going around the twelve districts,

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<v Speaker 1>and I just don't find a lot of producers and

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<v Speaker 1>sellers feeling like they can pass through the price increases

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<v Speaker 1>to consumers that have consumers stay in the game. So

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<v Speaker 1>you're seeing some surg charges emerge on energy, but other

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<v Speaker 1>than that, you're not seeing a lot of pass through

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<v Speaker 1>as of yet. So I think the economy is in

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<v Speaker 1>a place where I wouldn't jump to the conclusion that

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<v Speaker 1>we're going to have persistently high inflation. I would jump

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<v Speaker 1>to the data and say, what can we see? And

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<v Speaker 1>the inflation expectations being well anchored is an important component

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<v Speaker 1>of our ability to be patient.

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<v Speaker 2>Well, we've been largely talking about energy inflation here tariffs

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<v Speaker 2>are still on and according to the administration, there are

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<v Speaker 2>more coming within the next month or so. What are

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<v Speaker 2>companies saying about how they're dealing with this now that

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<v Speaker 2>they're a year into it.

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<v Speaker 1>Well, right now they're trying to get refunds if they're

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<v Speaker 1>eligible for them, and they're working towards that. But they didn't,

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<v Speaker 1>you know, not all of them pass through the full

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<v Speaker 1>tariff burden. They split it up on things, and they

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<v Speaker 1>see those burdens as rolling off that is more or

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<v Speaker 1>less coming back to normal. You know, tariffs are a

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<v Speaker 1>one time price adjustment, and they they calculate how much,

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<v Speaker 1>how much can I take out of margins, how much

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<v Speaker 1>can I share with other producers, how much do I

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<v Speaker 1>need to pass along to consumers? So I would say

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<v Speaker 1>that's in train and moving into direction we had anticipated.

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<v Speaker 1>The new information is that we've got an oil price

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<v Speaker 1>shock added to that, while inflation has been elevated since

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<v Speaker 1>for almost five years or five years, and so consumers

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<v Speaker 1>are just feeling the ongoing pressure of dealing with higher

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<v Speaker 1>price levels and inflation that's above our target. So you know,

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<v Speaker 1>the way I think about that is we have to

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<v Speaker 1>continue to work towards restoring price stability, but overreacting to

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<v Speaker 1>the news or then expectation that something's coming down the

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<v Speaker 1>pipe can be as damaging to the economy as underreacting.

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<v Speaker 1>So you have to balance both of those risks and

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<v Speaker 1>really watch the information that we have, not just the

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<v Speaker 1>backward looking information about what inflation did last month, but

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<v Speaker 1>the forward looking information about how consumers, producers, and sellers

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<v Speaker 1>are really responding to the challenges ahead of that.

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<v Speaker 2>Well, Jeremy Polliny's news conference suggested that there is a concern,

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<v Speaker 2>or at least he has a concern that after a

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<v Speaker 2>number of supply side shocks in the last five to

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<v Speaker 2>ten years, consumers are no longer thinking that two percent

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<v Speaker 2>is normal.

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<v Speaker 1>Well, that's what we have to treat absolutely. So there

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<v Speaker 1>is this whole concern, and it's in the research literature, etc.

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<v Speaker 1>That you can only put so much pressure on the

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<v Speaker 1>goal if we print higher and higher above the goal,

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<v Speaker 1>that that actually bleeds into people's expectations. So that's one

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<v Speaker 1>of the things I think is really important to study.

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<v Speaker 1>I know we're both going down to Hoover tomorrow and

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<v Speaker 1>it's going to be a topic of conversations. The focus

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<v Speaker 1>of my research team's work and the research. I think

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<v Speaker 1>we're doing in academia to really think does this bleed through?

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<v Speaker 1>But for now, what we're doing is looking at all

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<v Speaker 1>the other information and asking has it happened? And I

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<v Speaker 1>don't see a lot of evidence in the data that

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<v Speaker 1>longer or medium run inflation expectations have drifted off the

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<v Speaker 1>two percent anchor, and certainly wage inflation is consistent right

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<v Speaker 1>now with the two percent target. So you know, it's

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<v Speaker 1>right to look, it's right to study that, it's right

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<v Speaker 1>to ask the question. You can't jump to the conclusion

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<v Speaker 1>that just because it might be true, it is true.

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<v Speaker 2>You'll have a new boss, not boss because of the

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<v Speaker 2>way the Fed's set up, but a new chair next week,

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<v Speaker 2>probably my fifth chair by the way. Congratulations. I'd like

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<v Speaker 2>to run through a number of Kevin Walsh's ideas and

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<v Speaker 2>see what you think of them. And the first one

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<v Speaker 2>is a smaller balance sheet, And there are two ways

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<v Speaker 2>of looking at that. One is just to bring the

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<v Speaker 2>balance sheet down and use various ways to ensure there's liquidity,

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<v Speaker 2>and the other is to go back to a scarce

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<v Speaker 2>reserve system. How do you think about either one of those?

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<v Speaker 1>You know, it's interesting, I think this has been a

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<v Speaker 1>topic for a long time that is really important for

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<v Speaker 1>us to grapple with. The balance sheet comes with optics

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<v Speaker 1>that are hard to control, and people worry about the footprint, etc.

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<v Speaker 1>And so you know, I gave a speech back last

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<v Speaker 1>year on how do we communicate the balance sheet? Whatever

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<v Speaker 1>it is? The truth is, you figure out what you

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<v Speaker 1>need to do, and I think providing liquidity is an

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<v Speaker 1>important component. We don't want to risk, you know, businesses

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<v Speaker 1>like we did in the financial crisis, not being able

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<v Speaker 1>to get liquidity even though they're well capitalized, simply because

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<v Speaker 1>they didn't have the counterparty.

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<v Speaker 2>So that's scarce.

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<v Speaker 1>Liquidity is just a challenge for the financial system. But

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<v Speaker 1>there are many ways to provide liquidity without actually, you know,

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<v Speaker 1>being in the situation we're in. And I look forward

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<v Speaker 1>to working with Kevin Warris Sho as chair and also

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<v Speaker 1>all my colleagues to really think through that. I think

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<v Speaker 1>the thing that the American people should know, your listeners

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<v Speaker 1>should know is there's two components of balance sheet policy.

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<v Speaker 1>One is the plumbing, how do you actually do it?

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<v Speaker 1>And the second is the explanation. How do you explain

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<v Speaker 1>what you're doing and how do you ensure that markets

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<v Speaker 1>understand where you're going with the balance sheet, that we

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<v Speaker 1>know that the public understands why it's growing or shrinking,

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<v Speaker 1>and that ultimately we're we're putting those two things together there.

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<v Speaker 1>You know, the ECB does a different thing. They have

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<v Speaker 1>ample on demand run an ample on supply. Certainly we

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<v Speaker 1>can consider those types of things as well. So I'm

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<v Speaker 1>in the point of it's a good thing for us

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<v Speaker 1>to study, and I don't want to prejudge the conclusion

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<v Speaker 1>because there's a lot of work we can do to

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<v Speaker 1>figure out what the optimal way to do it is,

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<v Speaker 1>not just from the plumbing, but also from the communication.

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<v Speaker 2>What about the SEP the dot plot. You have moved

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<v Speaker 2>to talking about scenarios rather than exact forecast. Is that

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<v Speaker 2>something that FED should do well?

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<v Speaker 1>You know, again, I'll leave it to the deliberations we

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<v Speaker 1>take at the FMC, but I do think scenarios in

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<v Speaker 1>of time when you have a lot of shocks coming

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<v Speaker 1>your way, are really important.

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<v Speaker 2>You know, the.

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<v Speaker 1>Strict forward guidance and this goes all the way back

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<v Speaker 1>to Bernanki and predates him when he was an academic.

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<v Speaker 1>Not that chair, is that you know the idea that

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<v Speaker 1>you're going to provide a lot of precision. When you don't,

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<v Speaker 1>you have a very uncertain future. Is just it's a

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<v Speaker 1>false precision. We don't have it, So what do you do?

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<v Speaker 2>Well?

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<v Speaker 1>Then, scenarios can be helpful because they help the public

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<v Speaker 1>understand what is most critical to understand the fed's reaction function.

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<v Speaker 1>You know, there are point testaments about what we think

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<v Speaker 1>will happen in a month or two months or six months,

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<v Speaker 1>and then what we would do if it happened. Those

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<v Speaker 1>are much less interesting.

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<v Speaker 2>Would you get rid of the SEP? Would you get

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<v Speaker 2>rid of the doctor? I am?

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<v Speaker 1>You know you're going to be dissatisfied with this, Mike,

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<v Speaker 1>But I'm going to say that I think that I

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<v Speaker 1>look forward to deliberations on all of these topics. Ultimately,

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<v Speaker 1>the fed's communication has to and I've talked about this

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<v Speaker 1>many times. Transparency and communication are critical to having an

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<v Speaker 1>accountable FED a reserve, and how we communicate should be

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<v Speaker 1>you know, studied, maybe change to meet the moments that

0:11:44.400 --> 0:11:46.080
<v Speaker 1>we have in front of us. And I think that's

0:11:46.120 --> 0:11:48.600
<v Speaker 1>the real evolution I'm looking forward to. But I don't

0:11:48.640 --> 0:11:51.360
<v Speaker 1>want to prejudge or stake out any territory about my

0:11:51.400 --> 0:11:54.359
<v Speaker 1>thinking until we all have a chance to deliberate it collectively.

0:11:54.520 --> 0:11:57.800
<v Speaker 2>Okay, one last question. Kevin Warsh has suggested that y'all

0:11:57.840 --> 0:12:01.920
<v Speaker 2>talk too much. There's too much fed canmmunication. What do

0:12:01.920 --> 0:12:05.400
<v Speaker 2>you think of that? And would you be willing to

0:12:05.520 --> 0:12:09.280
<v Speaker 2>cut back on communication except when doing interviews with us?

0:12:09.640 --> 0:12:12.160
<v Speaker 1>Ah, Yes, this is what everybody's going to ask us.

0:12:12.200 --> 0:12:14.880
<v Speaker 1>But the thing that I think is really important is

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<v Speaker 1>to ask ourselves why do we communicate? What are we accomplishing?

0:12:19.200 --> 0:12:21.720
<v Speaker 1>Here's how I think of it for myself. We're trying

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<v Speaker 1>to explain what our reaction function is and why the

0:12:25.760 --> 0:12:30.880
<v Speaker 1>policy choices that we're making or thinking about are really

0:12:30.920 --> 0:12:33.839
<v Speaker 1>for the American people. What variables are we thinking about,

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<v Speaker 1>et cetera. Where I and you know this because it

0:12:36.440 --> 0:12:39.560
<v Speaker 1>often causes dissatisfaction. Where we're going to go next week?

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<v Speaker 1>What my thinking is today is much less relevant about

0:12:43.400 --> 0:12:46.679
<v Speaker 1>the point estimates on the policy decision. It's what's much

0:12:46.720 --> 0:12:50.280
<v Speaker 1>more important is how would I react to economic situations

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<v Speaker 1>coming forward. So again, I look forward to to having

0:12:53.760 --> 0:12:56.920
<v Speaker 1>Kevin join our Kevin worsh when he's confirmed, having him

0:12:56.960 --> 0:12:59.679
<v Speaker 1>join the FMC, having him chair it and lead it.

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<v Speaker 1>And I also look forward to the debates that you know.

0:13:02.800 --> 0:13:06.600
<v Speaker 1>I know Kevin well enough to say that he does

0:13:06.720 --> 0:13:08.440
<v Speaker 1>mean what he says when he says he wants to

0:13:08.520 --> 0:13:12.040
<v Speaker 1>have real debates, real discussions, and I look forward to those.

0:13:12.400 --> 0:13:14.760
<v Speaker 2>Well, we look forward to you continuing to talk to us,

0:13:14.880 --> 0:13:17.880
<v Speaker 2>even if Kevin says you can't talk to anybody. We'll

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<v Speaker 2>see how that goes. Very daily. The president of the

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<v Speaker 2>San Francisco FED, thank you very much,