Speaker 1: Bloomberg Audio Studios, podcasts, radio News.
Speaker 2: We'd like to welcome all of our viewers and listeners
Speaker 2: on Bloomberg Television and radio worldwide. And we are here
Speaker 2: in Victor, Idaho at the Rocky Mountain Economic Summit at
Speaker 2: the Bronze Buffalo Ranch at Titon Springs. And Mary Daly
Speaker 2: is joining us, the president of the San Francisco FED,
Speaker 2: and this is her district, so she's very familiar with
Speaker 2: everything that's going on around here. Now. We have, of
Speaker 2: course followed several other speakers, including Paul McCully, who I
Speaker 2: think most of our viewers know as the former chief
Speaker 2: economist at PIMCO and a number of other important jobs.
Speaker 2: And he was talking earlier about the American dream of
Speaker 2: chicken in every pot, and he said that one thing
Speaker 2: that everybody agrees, including at the FED, is that we
Speaker 2: all would like to have a bigger chicken. And I
Speaker 2: just want to make sure that that he's speaking for
Speaker 2: the FED.
Speaker 3: Absolutely we were going to have a bigger chicken or
Speaker 3: a big your vegetable, whatever it is you eat it.
Speaker 1: It's really about prosperity.
Speaker 3: There is no part of our democracy that really doesn't
Speaker 3: want more prosperity.
Speaker 1: And the FED is included in that.
Speaker 3: And our job is challenging but important and good, which
Speaker 3: is we want to support prosperity, support, you know, the
Speaker 3: labor market, and do so without having.
Speaker 1: Price stability be challenged. And that's the role of the FED.
Speaker 3: And if we do our job well and then stay
Speaker 3: in the background, all other things are possible from the
Speaker 3: businesses and consumer's households in our economy.
Speaker 2: Everybody asked me, what are you going to ask Mary?
Speaker 2: And I said, well, I'll wake up on Thursday morning
Speaker 2: and I'll look at the president's social media feed and
Speaker 2: that will tell me what the story of the day is.
Speaker 2: And of course he can't. He can't lay off. So
Speaker 2: I have to ask you, how is all that affecting
Speaker 2: you as a policymaker and your colleagues.
Speaker 1: You know, our work is really important.
Speaker 3: On the front lobby of the San Francisco FAT Head Office,
Speaker 3: we put a sign up. I put it up the
Speaker 3: very first day I became president. It says our work
Speaker 3: serves every Americans and countless global citizens, but that every
Speaker 3: American is really important. And that's the work Congress gave us,
Speaker 3: As Paul said, Congress gave us our responsibilities and our
Speaker 3: responsibilities our price stability and full employment.
Speaker 1: We work to carry those out every time.
Speaker 3: Our teams are the Committee, the FMC, we are laser
Speaker 3: focused on doing those responsibilities. And if you look at
Speaker 3: the headline numbers on inflation, we still have some work
Speaker 3: to do, but we are in a good place and
Speaker 3: we need to finish the job. So that's where we
Speaker 3: are and other things. You know, there have been periods
Speaker 3: of political pressure before and history serves us best as
Speaker 3: a guide there. When you stick to your work, the
Speaker 3: work that Congress gave us, the work that is for
Speaker 3: the American people, then everything else falls into place.
Speaker 2: So the President has obviously been sort of direct in
Speaker 2: his criticism of Chairman Pole. Jugury Secretary Scott Besson said
Speaker 2: on Bloomberg Television this week that the President is just
Speaker 2: working the refs, trying to create a favorable view of
Speaker 2: what should be done. Does that make any impression on you?
Speaker 2: Does it work to work the refs?
Speaker 3: You know? For me, what is really important is looking
Speaker 3: at the incoming information.
Speaker 1: How close we are? I think one of the Pauls said,
Speaker 1: you know, we're really close.
Speaker 3: We have an economy that's working, we have solid growth,
Speaker 3: we have a solid labor market. You know, the consumers
Speaker 3: are spending, but they're you know, making their way and
Speaker 3: their families. Ultimately, what is still bothersome is not we
Speaker 3: haven't achieved price stability. And you know, I define price
Speaker 3: stability this way. I do think it's sort of an
Speaker 3: ethos part. It's when people don't have to worry about inflation.
Speaker 3: When I go out and ask people.
Speaker 1: Across the twelfth district, across the.
Speaker 3: Country, what's your top worry and they stop saying inflation, well,
Speaker 3: then that's going to be a victory because they suffered
Speaker 3: for too long. And remember, inflation is like the largest
Speaker 3: tax people pay.
Speaker 1: It's an unpredictable tax.
Speaker 3: You're on a treadmill, you earn well, you've invest in
Speaker 3: your business, and inflation eroads you're well being. So I
Speaker 3: think ultimately that's what we have to think about. And
Speaker 3: that's really enough to think about, frankly, and that's where
Speaker 3: my focus is. So other things are not distracting us
Speaker 3: from our core missions. And our core missions, as we
Speaker 3: all know, have come from Congress.
Speaker 2: So essentially you're saying we are going to remain focused
Speaker 2: on inflation. We're not going to consider cutting rates until
Speaker 2: we are sure inflation.
Speaker 1: I did not say that.
Speaker 2: I have many words in her mouth to make it
Speaker 2: easier for the headline writers.
Speaker 3: I know that, and so that's why I did not
Speaker 3: say that, so that they understand the next part of that.
Speaker 1: No, seriously, I think right now.
Speaker 3: When I look at the economy and policy, I see
Speaker 3: them as both in a good place. But when I
Speaker 3: look out, we really have interest rates for a significant
Speaker 3: number of years now in restrictive territory, and what we
Speaker 3: have is an underlying economy that is responding those higher
Speaker 3: interest rates.
Speaker 1: You have growth slowing.
Speaker 3: The frothy labor market that was pervasive after the pandemic
Speaker 3: has now moved to a more sustainable place. People are
Speaker 3: getting jobs, but firms are finding it easier to find
Speaker 3: workers and importantly keep workers so that they're not constantly
Speaker 3: on that revolving door of train and work of the
Speaker 3: worker leaves. So I think those are all good positions.
Speaker 3: Then we have inflation coming down, and if we extract
Speaker 3: our move away from just the goods price inflations, which
Speaker 3: do show those numbers have been showing, and certainly showed
Speaker 3: in this week's print, the effect of tariffs, some of
Speaker 3: those being passed through but if you look at the
Speaker 3: other areas of inflation, you just don't see that inflation
Speaker 3: is pushing back up.
Speaker 1: You see it gradually going down.
Speaker 3: And housing services inflation, which has long been elevated, has
Speaker 3: been coming down over this year. Services inflation without housing
Speaker 3: has been coming down, slowly but coming down. So I
Speaker 3: see these is the result of the policy that we
Speaker 3: have in place. But at some point, if you hold
Speaker 3: the economy too tight, the reins we're in horse country.
Speaker 3: If you hold the bridle too tight, you actually end
Speaker 3: up stopping.
Speaker 1: And if you stop, then you take the problem people.
Speaker 3: Did have, which was inflation, and turn it into a
Speaker 3: problem that they don't have, which is the labor market.
Speaker 3: So that's why I see these two goals. The dual
Speaker 3: mandate is so critical because it gives you the kind
Speaker 3: of balance that ensures people have both things they need,
Speaker 3: opportunities in the labor market and price stability so that
Speaker 3: when they work and they invest, they can build careers
Speaker 3: and families and communities.
Speaker 2: So let me ask you how you're thinking about the
Speaker 2: economy and what you should do right now. In the
Speaker 2: sense that this was a big data week, we had
Speaker 2: consumer prices and producer prices both come in at the
Speaker 2: headline level lower than anticipated, slowing in economy, especially service prices,
Speaker 2: but we see some under lying pressures in sectors that
Speaker 2: are affected by tariffs. A retail sales today came in
Speaker 2: stronger than expected, much stronger than expected, except for a
Speaker 2: couple areas that would be affected by tariffs. So could
Speaker 2: you explain to this audience, and of course the guy
Speaker 2: at sixteen hundred Pennsylvania Avenue if he's listening, how you
Speaker 2: put all that together and decide when do winterest rates
Speaker 2: come down?
Speaker 3: Well, there's always been three scenarios that were possible.
Speaker 1: So the first.
Speaker 3: Scenario was that we'd get the tariff effect and it
Speaker 3: would spill over into all other sectors. So if the
Speaker 3: price of a tariff good goes up, then your person
Speaker 3: cutting your hair, since we were talking about barber's earlier
Speaker 3: raises his or her prices, and suddenly you've got spillover
Speaker 3: that would make it more persistent. We haven't seen any
Speaker 3: evidence that that's occurring. And I think that the house
Speaker 3: price inflation, the house services inflation, and the services inflation
Speaker 3: coming down reassures you that we're not getting that persistent component.
Speaker 1: And there's two other scenarios.
Speaker 3: One is that you get the tariff effect and it's
Speaker 3: relatively contained and it becomes a one off.
Speaker 1: And the second is you just.
Speaker 3: Don't see much of the effect because what happens is
Speaker 3: that as the tariffs settle in to whatever level they're
Speaker 3: going to be, you know, firms who are importing from
Speaker 3: other countries say you take half, I'll take half to
Speaker 3: the country. Then down the spy chain or the production chain,
Speaker 3: you're splitting it all the way and so that by
Speaker 3: the time it hits consumers it's a more muted impact
Speaker 3: than what is the announced tariffs. You know, one of
Speaker 3: the pieces of evidence we have for that is that
Speaker 3: the effective teriff right as of last week was calculator
Speaker 3: around sixteen percent, but tariff revenue is only eight percent.
Speaker 3: So that tells you there's some splitting, there's some leakages,
Speaker 3: some workarounds. Companies are very innovative, they're figuring out other
Speaker 3: ways to do things, and you know, this is a
Speaker 3: global shock, and so they're all companies across the globe
Speaker 3: are figuring it out. So when I think of that,
Speaker 3: I'm really of the mind, well, we might end up
Speaker 3: with a more muted.
Speaker 1: Impact of tariffs than we thought, and.
Speaker 3: Then I I've been this is something I've said publicly
Speaker 3: since you know, January, is all administrations come in not
Speaker 3: with one.
Speaker 1: Policy, but with a slate of policies.
Speaker 3: And you know, Paul Ryan said this this morning, and
Speaker 3: I think it's worth emphasizing the slate of policies have
Speaker 3: you know, push and pull effects, So deregulation and tax policy,
Speaker 3: tax relief, those are growth inducing policies. The tariffs could
Speaker 3: be and the immigration policy could be growth impairing policies.
Speaker 3: But we don't know yet, right and we certainly don't
Speaker 3: know thet net effect of those.
Speaker 1: And so that's why it's.
Speaker 3: Important to take in the information and not raise, not
Speaker 3: lower rates, excuse me, not lower rates preemptively, because we
Speaker 3: just don't have that certainty.
Speaker 1: And then the economy is in a good place.
Speaker 3: At the same time, you can't wait forever because if
Speaker 3: we wait too inflation gets to two percent, well then
Speaker 3: we've lost We've likely injured the economy in some way
Speaker 3: that was completely unnecessary. And so I'm of the mind
Speaker 3: that you know that the summary of economic projections we
Speaker 3: put out, which had two rate cuts for this year,
Speaker 3: I think that's a reasonable outlook to have.
Speaker 1: Of course, we are data dependent.
Speaker 3: If all of you who are business owners say no, Mary,
Speaker 3: the inflation's right around the corner and is going to
Speaker 3: spill over, well, then that's a different thing. It's one
Speaker 3: of the reasons Reserve Bank presidents in particular spends so
Speaker 3: much time in their communities asking questions like I asked Crystal.
Speaker 1: This morning, what are you thinking? What are you seeing?
Speaker 1: Are you raising prices because of this? That? And she
Speaker 1: can give me.
Speaker 3: That information, and so far I'm not hearing that that's
Speaker 3: a pervasive outcome.
Speaker 2: Let me dig deeper into that and ask you. I
Speaker 2: know you talking to CEOs and companies all across the
Speaker 2: district all the time, what's the basic attitude most of
Speaker 2: the time. I'm told by folks at the FED that
Speaker 2: everybody's just sort of sitting on their hands right now.
Speaker 1: Not in the West.
Speaker 3: Maybe it's our Western spirit, but I have the nine
Speaker 3: Western states and I don't see sitting on hands behavior.
Speaker 3: I see cautious optimism. And there's a cautiousness people, aren't.
Speaker 3: You know.
Speaker 1: What I heard originally was we're going to wait and see.
Speaker 3: But now that the direction of travel on tariff seems
Speaker 3: to be negotiation to lower rates than we're announced on
Speaker 3: Liberation Day, and the tax policy and other things that
Speaker 3: past people are already seeing that they can work in
Speaker 3: this system. And so you know, I've been to a
Speaker 3: lot of places since January, and I've been to Alaska twice,
Speaker 3: which is at the heart of some of the changes
Speaker 3: in programs that you see. And what they are is
Speaker 3: cautiously optimistic. Come to the inter Mountain West cautiously optimistic.
Speaker 3: California cautiously optimistic. So you know, whether I'm in the
Speaker 3: coastal part of my district, the you know, Alaska, I
Speaker 3: haven't been to a whye, but they're also cautiously optimistic.
Speaker 3: But the inter Mountain West, I think this is a
Speaker 3: You guys are always a little poster children for optimistic,
Speaker 3: but I think it's really optimistic at this point. And
Speaker 3: you know, recognizing costs may rise, other things may happen,
Speaker 3: but workers are easier to find opportunities are out there.
Speaker 3: Maybe not taking every risk you would take if every
Speaker 3: thing was certain, but certainly not stalling out and waiting
Speaker 3: to see, you know, the growth. One of my directors
Speaker 3: put it as growth does not come to the meek.
Speaker 1: So you have to take some risks.
Speaker 2: To do well. When you do go to Hawaii, let
Speaker 2: me know. I know, come out and cover.
Speaker 1: That I go all that I go regularly.
Speaker 3: It is in the district, but I haven't been this year,
Speaker 3: but I will let you know next time.
Speaker 2: Another question on what you're hearing from CEOs. The big
Speaker 2: question about whether we have an inflation impact from tariffs
Speaker 2: is whether companies are going to pass them along. What
Speaker 2: are the bosses out there, the people who we should
Speaker 2: have asked Crystal, what are they telling you about that?
Speaker 3: Well, no, firms live in an equilibrium or an ecosystem
Speaker 3: like everyone else, and so the impulse, of course is
Speaker 3: to pass along any cost increase and protect margins. But
Speaker 3: there's also a recognitions that customers, consumers are exhausted, right
Speaker 3: They've been paying higher price levels and then with rising inflation,
Speaker 3: and as the economy slows, and you see this in
Speaker 3: the sentiments based for consumers, they're a little more worried
Speaker 3: about the job markets. So they're going to be even pickier,
Speaker 3: and so you would expect retail spending to slow today.
Speaker 3: If you average the two months, you get something that
Speaker 3: looks kind of normal. But we see consumer spending over time,
Speaker 3: slowing from where it was, but not falling off a cliff.
Speaker 3: So I think that's just part of a solid economy.
Speaker 3: But it does discipline the idea that you'll just simply
Speaker 3: raise prices.
Speaker 1: And push them completely through.
Speaker 3: And so what we're hearing is that companies are saying
Speaker 3: they're trying to negotiate with the import country to take
Speaker 3: a little bit, the importing firms take a little bit off,
Speaker 3: and then they're trying to push it along the supply chains.
Speaker 3: They'll pass a little bit through, but unlikely to pass
Speaker 3: the whole thing through. And importantly, in the goods sector,
Speaker 3: this is especially a parent because if at the post
Speaker 3: pandemic there was this massive, really large, significant you could
Speaker 3: see it in the data rotation of consumers to goods
Speaker 3: purchases over services purchases, and people will buying many more
Speaker 3: goods than they bought. But now their coffers are probably full.
Speaker 3: They have a lot of pelotons and other things and
Speaker 3: so you know, bikes and things of that sort. So
Speaker 3: it's very easy for consumers to be priced sensitive on
Speaker 3: those items and then turn themselves back to services and
Speaker 3: buy experiences over goods.
Speaker 1: And I think the goods providers are aware of that.
Speaker 3: So whatever the impulse is, the practicality has to meet
Speaker 3: the consumer.
Speaker 2: What is you use the words of solid economy? What
Speaker 2: to you is a solid economy? And how far do
Speaker 2: you think will be from that at the end of
Speaker 2: the year.
Speaker 3: You know, if we see what we've been seeing, which
Speaker 3: is that we're slowed to a sustainable pace. And right
Speaker 3: now you know two percent growth is the estimate of trend.
Speaker 3: If you simply add up productivity growth and the labor
Speaker 3: force growth, so we could get more out of productivity
Speaker 3: and get a higher number. We could get more out
Speaker 3: of productivity, get a higher number. We could absolutely grow
Speaker 3: a little faster. I wouldn't be surprised about that, but
Speaker 3: I would I don't think we need to slow precipitously
Speaker 3: to produce the last mile on inflation.
Speaker 1: If you will, I think we can actually do it.
Speaker 3: With this study of growth, expansion and the labor market
Speaker 3: that hovers around the current level. I wouldn't want to
Speaker 3: see more weakness in the labor market. I really wouldn't
Speaker 3: want to see that, Which is why you can't wait
Speaker 3: forever thinking that inflation is just around the corner. So
Speaker 3: we have to wait till we know, I think, you know,
Speaker 3: clarity in central banking is overrated. We'd want, we want
Speaker 3: some clarity, but we can't wait for perfect clarity, because
Speaker 3: then we'll always be backward looking and by then it's
Speaker 3: too late.
Speaker 2: You mentioned potential growth, which is the sum of productivity
Speaker 2: and labor force growth. The President has also got policies
Speaker 2: on labor force growth, bringing it way down. Have you
Speaker 2: seen effects on the economy in your district yet? From that?
Speaker 3: You know, you see pockets of places where firms relied
Speaker 3: on immigration, legal immigration as well, and people have the
Speaker 3: is just a chilling effect on those markets, and so
Speaker 3: you hear it, but it's in pockets. I wouldn't say
Speaker 3: there's a broad based concern over that at this point.
Speaker 3: I think there was a lot of concern originally, but
Speaker 3: it just hasn't materialized that way, and so that's been
Speaker 3: a help. Now on we talked about labor force growth.
Speaker 3: It is a fact that we have one of the
Speaker 3: lowest labor force participation rates in the industrialized world for
Speaker 3: men largely, but women to between twenty five and fifty four.
Speaker 3: So our industrialized competitors all have higher labor force participation
Speaker 3: rates that we do. So when we talk about labor
Speaker 3: force growth, I think we have to broaden it beyond
Speaker 3: the immigration and if immigration's gone, where our hands are tied. Really,
Speaker 3: what is the remedy for so many men in particular
Speaker 3: sitting on the sidelines.
Speaker 2: Is there a model for what you think happens to
Speaker 2: the labor market based on the immigration policies the administration.
Speaker 3: Has, You know, we have a way immigration has gone.
Speaker 3: It went way up and it's come way down. One
Speaker 3: of the remedies that firms use, frankly, is they increase
Speaker 3: technology so that they can use the workforce that we
Speaker 3: have and match it with technology. And you see that,
Speaker 3: you know many we've all been to hotels and convenience
Speaker 3: stores and other things where self checkout and self check
Speaker 3: in and all these things have technology solutions coming. I
Speaker 3: also think, you know, we have this Emerging Tech Economic
Speaker 3: Research Network at the San Francisco FED. We've launched it
Speaker 3: in January twenty twenty four, and we do CEO round
Speaker 3: tables and other things around this topic. And it has
Speaker 3: been just astounding how many medium and small sized businesses
Speaker 3: are adopting generative AI or AI solutions that aren't generitive
Speaker 3: AI just planing on machine learning to augment their talent
Speaker 3: pool and actually expand their productivity with a smaller workforce
Speaker 3: that can't grow as fast.
Speaker 1: So I think there are solutions there.
Speaker 3: And if you could put that productivity and an invasion
Speaker 3: with some increase in the domestic labor force, then I
Speaker 3: think that could be a very win win situation for
Speaker 3: expanding our growth rate.
Speaker 2: When personal computers came along, the productivity gains were talted.
Speaker 2: That didn't show up for quite some time. I know
Speaker 2: you followed the tech world very closely, silicon valleys in
Speaker 2: your district. When are we going to see the productivity
Speaker 2: gains from AI and how is that offset by job
Speaker 2: losses that are going to come when the computers do
Speaker 2: what some of us do.
Speaker 3: So one of the things that are really important to know.
Speaker 3: So a little known fact. Maybe I remember it like
Speaker 3: it was yesterday, but one of my first jobs I
Speaker 3: come in as an economist. I'm a micro economist labor
Speaker 3: economist by training. But Chairman Greenspan, as you remember, was
Speaker 3: very thoughtful about productivity and he thought it was there
Speaker 3: even if we can't measure it in the statistics. The
Speaker 3: statistics are always the last to find productivity. So he
Speaker 3: set me out. His team set me out to be
Speaker 3: the collector of anecdotal information qualitative information on this, and
Speaker 3: you could see it everywhere. Companies were testing things, they
Speaker 3: were trying to bring it to scale, etc. So the
Speaker 3: productivity improvements were there long before they ever aggregated up
Speaker 3: into the aggregate statistics. So now we're going to talk
Speaker 3: about the job issues. Well, computerization was a technology that
Speaker 3: actually replaced workers more quickly than it augmented possibilities. Generative
Speaker 3: AI has a different component of possibility, and I think
Speaker 3: it's useful for us to remember this. So generative AI
Speaker 3: can make people who aren't as skilled in something newly
Speaker 3: minted workers people who are the best example I can
Speaker 3: find is physicians assistants. Physicians assistants can now triage people
Speaker 3: in the frontline medical places if they allow it with
Speaker 3: generative AI assistance. So they say you sprain your ankle, well,
Speaker 3: they have a protocol that gets spit out.
Speaker 1: Did you break your ankle? How would I know? Would
Speaker 1: I get the X ray? I put the X ray
Speaker 1: into there.
Speaker 3: So they can do these things and it makes the
Speaker 3: physician assistant more productive right away. It doesn't mean we
Speaker 3: replace doctors, but we have a shortage of doctors, and
Speaker 3: so it's a way to give care and increased productivity
Speaker 3: and a medical profession. And you know, it's a long
Speaker 3: way from being scalable, but I think those are the
Speaker 3: kinds of experiences where generative AI has the possibility to
Speaker 3: make us better overall. And then the biggest productivity gains
Speaker 3: come from things we don't even imagine today and we
Speaker 3: certainly don't have. So I am not evangelist for generative AI,
Speaker 3: but I'm also not a pessimist, and I think the
Speaker 3: big fact I keep keeping in my head is that
Speaker 3: that no technology in the history of technologies has ever
Speaker 3: taken reduced jobs on net.
Speaker 1: But it does.
Speaker 3: Change who is working and who's not and what skills
Speaker 3: are demanded. And so when I speak to younger PEO people,
Speaker 3: I say, you have an imperative to keep up with
Speaker 3: the new technology and figure out. If you're a welder,
Speaker 3: how can generative AI help you. If you're a computer
Speaker 3: coder and you're worried about your job, then learn the
Speaker 3: AI so that you can do the next job that's available.
Speaker 3: And I think that's the way we stay ahead of
Speaker 3: the job losses.
Speaker 2: I want to ask you a pre amible question to
Speaker 2: my next question. But the first part of this is
Speaker 2: just that the President keeps saying in his tweets J.
Speaker 2: Powell should lower the interest rates today. But doesn't work
Speaker 2: that way.
Speaker 1: Does it.
Speaker 3: It does not well mean first say what we've already
Speaker 3: talked about several times today. But the committee is tasked
Speaker 3: the FMC is tasked by Congress with price stability and
Speaker 3: full employment. We have a diverse set of members. There's
Speaker 3: nineteen of us. We debate and discuss vigorously what we
Speaker 3: should do for the American people again those things, and
Speaker 3: so there's two components of that that are important. All
Speaker 3: members of the committee are important and influential because they're
Speaker 3: bringing different places, whether they're reserve bank presidents and they
Speaker 3: have a different view from the context they talk to.
Speaker 1: Whether we're just from different perspectives.
Speaker 3: We're looking at different you know, we're looking at the
Speaker 3: same data and the same models, but we're coming to
Speaker 3: a different judgment. And of course we're always trying to
Speaker 3: look ahead. And the people who are the most you know,
Speaker 3: I've been working at the FED for a while and
Speaker 3: been a policymaker for a while now. The people who
Speaker 3: are the most valued to me on the committee. Are
Speaker 3: the people who don't agree with me? You know, I've
Speaker 3: got Randy Quarrels here who is along. It was a
Speaker 3: colleague of mine at the Federalserve, and Randy and I
Speaker 3: would always talk in a way that I really took away.
Speaker 1: Randy challenged my thinking.
Speaker 3: I believe I challenged Randy's thinking, but I believe that
Speaker 3: to him to say, I know Randy challenged my thinking.
Speaker 3: I was a better policymaker because I sat with somebody
Speaker 3: who was able to challenge that thinking.
Speaker 1: And that's how the FMC works.
Speaker 3: And whether you're the chair and all the committee members
Speaker 3: are challenging your thinking, or you're committee member and the
Speaker 3: chair is challenging you're thinking, the collective is we share
Speaker 3: equal responsibility when we take that vote and we walk
Speaker 3: out of there. Ultimately we're all answerable to the American people.
Speaker 1: That's what works.
Speaker 2: And now to my question, most of your colleagues have
Speaker 2: suggested that July thirtieth meeting is too soon. There's not
Speaker 2: enough information yet. Although we got this important set of
Speaker 2: data this week, two members of the committee have already
Speaker 2: said that they could see cutting rates in July. What's
Speaker 2: your position on the next meeting.
Speaker 3: So I'm going to tell you how I really think
Speaker 3: of this, and then I will give you a vague
Speaker 3: version of that an answer to that question. But let
Speaker 3: me just say this is how we go back and
Speaker 3: forth all the time. He wants a date, I say no,
Speaker 3: But seriously, I think we're asking the wrong question. I
Speaker 3: don't think the question is is it going to be
Speaker 3: July or September. I think the question is which the
Speaker 3: direction of travel? And there, when you look out the
Speaker 3: direction of travel and you saw this in the summary
Speaker 3: of economic projections, is rates will be reduced consistent with
Speaker 3: the fact that inflation's coming down and we don't want
Speaker 3: to unnecessarily tighten the economy in a way that you know,
Speaker 3: hurts the labor market or growth. So that's the direction
Speaker 3: of travel. Whether it happens in July or September some
Speaker 3: other month is really not the most relevant piece. The
Speaker 3: second most relevant piece is where will the rates settle?
Speaker 3: And there I'm very much on the camp that's going
Speaker 3: to be higher than it was in the pre pandemic era.
Speaker 3: You know, if you thought it was two and a
Speaker 3: half in the pre pandemic era, I think you have
Speaker 3: to look three or north for the nominal neutral going forward,
Speaker 3: and so that just gives us a lot of understanding
Speaker 3: of you know, we're not going back to pre pandemic rates,
Speaker 3: but some continued ongoing normalization of policy as we finish
Speaker 3: getting through the battle of high inflation and we ensure
Speaker 3: that we're trying to balance both full employment and price stability.
Speaker 3: For my own view, I think that, you know, there's
Speaker 3: a lot more information we could collect. And the thing
Speaker 3: I was looking at between you know, should we move
Speaker 3: quicker and should we move a little less quickly has
Speaker 3: to do with where's the labor market today. You know,
Speaker 3: initial claims for unemployment insurance remain low and below expectations.
Speaker 1: Inflation actually came in right on our.
Speaker 3: Expectation, my expectation, and it's not surprising. There's some inflation
Speaker 3: in the good sector, and it's very encouraging that there
Speaker 3: continues to be some disinflation and other sectors. So I
Speaker 3: think we've got policy in a good place today, and
Speaker 3: we will continue to learn more about how the uncertainty
Speaker 3: on tariffs and other things prove out. And you know,
Speaker 3: one of the big jobs we all have between now
Speaker 3: and through the rest of the year is to be
Speaker 3: out in among businesses, community groups, workers, asking what's the
Speaker 3: lived experience of the economy, and not what did you
Speaker 3: do yesterday, which is largely with the published data, tell us,
Speaker 3: but what are you going to do tomorrow? How are
Speaker 3: you planning? Are you are you building? You know, I've
Speaker 3: been doing crane counting. That's a really fascinating thing to do.
Speaker 3: If you're like men, look at the sort and I
Speaker 3: count cranes. And if you count cranes, cranes are still
Speaker 3: going up. They're not stop and they're working. We have
Speaker 3: to look at whether they're working or they're just sitting there.
Speaker 3: So I was in Boise, Idaho, just a couple a
Speaker 3: month ago for a commencement speech, and what I saw
Speaker 3: was crane's still being constructed, going up. So there's optimism there,
Speaker 3: and there's also continuing to work and to build. So
Speaker 3: I don't want to be too optimistic, but I'm certainly
Speaker 3: not pessimistic.
Speaker 2: Well, you mentioned that interest rates are going to settle
Speaker 2: at a higher rate than they were.
Speaker 1: I don't think in all likelihood, probably.
Speaker 2: Nobody expects them to go back to zero again.
Speaker 3: Two and a half though, I think is where they
Speaker 3: used to be as a nominal neutral.
Speaker 2: I know somebody who got basically a two and a
Speaker 2: half percent mortgage and cheat lets me know about that
Speaker 2: all the time. Where do you think it is? This
Speaker 2: is the question that the Paul's discussed. Where is neutral?
Speaker 3: I think, you know, my own personal view is it's
Speaker 3: I penciled in a you in.
Speaker 1: My head of three.
Speaker 3: But if you really are a student of any of
Speaker 3: the star variables other than the one that we name,
Speaker 3: which is two percent inflation, you know that there's a
Speaker 3: great deal of humility that comes with the estimate. So
Speaker 3: I think a better way to think about it is
Speaker 3: it's three or north of three.
Speaker 1: I don't see a lot.
Speaker 3: Of evidence that it's south of three, But again you
Speaker 3: have to have an open mind on these things, and
Speaker 3: the place you know it is in the economy. So
Speaker 3: right now we have interest rates much higher than three
Speaker 3: hundred basis points higher, and we still have growth coming out.
Speaker 1: Solid, And does it sells me?
Speaker 3: They're modestly restrictive, maybe moderately I don't know how to
Speaker 3: really dice and slice moderately versus modestly, but a little restrictive.
Speaker 3: And if the neutral rate was something like two and
Speaker 3: a half, they would be potentially much more restrictive than
Speaker 3: we're seeing them play out in the economy.
Speaker 2: Question about I'll just go slide in a little technical
Speaker 2: question here that came up in the earlier discussion. Why
Speaker 2: does the FED look at the personal Consumption index and
Speaker 2: make that their target instead of the CPI, which is
Speaker 2: what everybody's familiar with.
Speaker 3: So I guess it would be useful to recognize, or
Speaker 3: to say, allows everybody knows, just because we have a
Speaker 3: target variable doesn't mean we're not looking at all the
Speaker 3: other indices. When you have price stability, these indicies are
Speaker 3: all moving in the same way, and so they look
Speaker 3: really tight there next to each other. They all have
Speaker 3: a little bit of difference, but that difference is historical.
Speaker 3: It's a constant, and you can figure out that they're
Speaker 3: all moving the same way. When you don't have price stability,
Speaker 3: you're pouring over every single aspect, not just the headline numbers,
Speaker 3: but all the different sectors, trying to understand what are
Speaker 3: the leading indicators for inflation spilling over what are the
Speaker 3: lagging ones that are already behind us?
Speaker 1: So we should worry about them? And that's what we do.
Speaker 3: I mean, I have pages of what we call the
Speaker 3: dashboard of inflation indicators, and the ones that have been
Speaker 3: proven most useful are actually not those headline numbers at all,
Speaker 3: but the things that are proven most useful are There's
Speaker 3: a survey that the Bureau of Labor Statistics has done
Speaker 3: which asks what percentage of prices have gone up and
Speaker 3: what percentage of firms say they're going to raise prices
Speaker 3: in the future. And then the second part of their
Speaker 3: series is how frequently are firms changing their prices? In
Speaker 3: the heat of the seven percent inflation, firms only had
Speaker 3: one direction, I'm moving prices up, and the frequency of
Speaker 3: price changes had skyrocketed relative to normal. So we have
Speaker 3: this theory in economics called menu cost, meaning you all
Speaker 3: don't want to change your prices very frequently.
Speaker 1: You have to change the menu.
Speaker 3: Well, if you go to the local businesses out in
Speaker 3: Oakland where I live, you would see that people just
Speaker 3: took the sharpies and they just.
Speaker 1: They just wrote through the price and then wrote a
Speaker 1: new one.
Speaker 3: It was all in these paper and pencil kind of
Speaker 3: things because the prices was changing so much. So we
Speaker 3: don't see that happening now, and that's a good good sign.
Speaker 3: So the PCEE why did we pick it? You know,
Speaker 3: there's people might tell you different things, but here's ultimately why.
Speaker 3: If you look at a set of statistical analysis that
Speaker 3: say what's the best predictor of underlying inflation going forward,
Speaker 3: the PCE is the most reliable predictor and it is
Speaker 3: one where it's analytically important, So it gives us a
Speaker 3: good guidance for how to follow inflation that's not moved
Speaker 3: around by idiosyncratic factors. But I will definitely offer to
Speaker 3: you if that was all we looked at, we wouldn't
Speaker 3: have the complete picture.
Speaker 1: So we look at everything.
Speaker 2: A couple of questions on prices. Chaos in Washington. We
Speaker 2: all have seen that for the last couple of months,
Speaker 2: and yet the stock market keeps going up and up
Speaker 2: and up. How do you think about asset prices? How
Speaker 2: does that play into your view of inflation and what
Speaker 2: you need to do in terms of policy.
Speaker 3: Well, it's one variable, one financial variable in an array
Speaker 3: of financial variables that we take in. All of this
Speaker 3: is inputs to my thinking about how loose or tight
Speaker 3: our monetary policy and conditions. Financial conditions, not just monetary policy.
Speaker 3: And the stock market moves around for a variety of reasons.
Speaker 3: The mag seven is very hot and that continues to
Speaker 3: be Other stocks are building as well. But if you
Speaker 3: step back now, I think of this as just another
Speaker 3: measure of optimism or lack thereof in the economy. And
Speaker 3: if the stock market was very much out of line
Speaker 3: with what I hear when I go and talk to businesses,
Speaker 3: then I would have more concern. But right now I
Speaker 3: hear is a reflection of the optimism people have in
Speaker 3: the economy. I mean, I have the benefit of not
Speaker 3: living in Washington, and it gives you some distance, and
Speaker 3: so I spend more time with businesses and communities, and
Speaker 3: people aren't as I think. They don't read the news
Speaker 3: every day. They actually work on their business every day.
Speaker 3: And so when you work on your business every day,
Speaker 3: you're looking at do I have a demand for my products?
Speaker 3: How much does it cost to get the inputs I need?
Speaker 3: What are the opportunities for expansion than I see? And
Speaker 3: I do see that there is that cautious optimism, and
Speaker 3: that's reflected in the stock market as well.
Speaker 2: Now there are questions about how the bond market reacts
Speaker 2: to all of this, and how you affect the bond
Speaker 2: market were some of us are old enough to remember
Speaker 2: the bond vigilantes, and that's a very good analogy for
Speaker 2: out here in the West. Are you worried that they
Speaker 2: will affect the economy if you do something that they
Speaker 2: don't like? We saw yesterday a big increase in interest rates, market,
Speaker 2: interest rates at the longer end, spreads, corporate spreads when
Speaker 2: it was felt that the president was going to fire J. Powle.
Speaker 2: How closely do you watch that and how does that
Speaker 2: figure it?
Speaker 3: You know, certainly you watch the bond market. And what
Speaker 3: I'm seeing now is volatility as opposed to some significant
Speaker 3: change in how investors are pricing things. I mean that
Speaker 3: volatility that you mentioned yesterday went it went down and
Speaker 3: then up again, you know, and so it goes up
Speaker 3: and then goes down again. So my eye on longer
Speaker 3: periods of time than the daily the daily bond movements,
Speaker 3: and I think that's really important. Right now, we have,
Speaker 3: you know, financial conditions that are slightly restrictive to growth,
Speaker 3: and I think that's going to That's something that I'm
Speaker 3: keep in my eye on. If they got overly loose,
Speaker 3: then we would have to take into account that into account.
Speaker 3: But I just don't see that happening, and so many
Speaker 3: factors affect the bond market, not just the fad. It's
Speaker 3: really we are often seen as the center of the
Speaker 3: attention there, but that's really not I think true. There's
Speaker 3: lots of things that affected, including, you know, issueing for
Speaker 3: the treasury, global factors, negotiations between countries on fiscal policy,
Speaker 3: geopolitical issues, and so I don't overread the bond market
Speaker 3: because that that actually is a perilous outcome.
Speaker 2: Another price question that I'm sure you get wherever you
Speaker 2: go is how much do house prices weigh on you?
Speaker 2: And is it your fault that nobody's buying houses because
Speaker 2: interest rates are too high? Which would be the follow
Speaker 2: up question to that would be what's it going to
Speaker 2: take to get housing going again?
Speaker 3: So I think this is a terrific question, but one
Speaker 3: that when discussions I've been in, people have certain aspects
Speaker 3: of the facts, and I think we all will know this,
Speaker 3: but I'm want to put it together in the ecosystem.
Speaker 1: So we came.
Speaker 3: Into at the pre pandemic twenty nineteen, we had a
Speaker 3: housing shortage, a significant housing shortage. Then of course the
Speaker 3: pandemic made the housing shortage worse, and we build bigger
Speaker 3: and bigger homes because people want it bigger and bigger homes,
Speaker 3: but at the cost of smaller homes. So then interest
Speaker 3: rates rise, and rightly so to combat high inflation. And
Speaker 3: now people have the problem of higher priced homes and
Speaker 3: now high interest rates. But what I have seen as
Speaker 3: interest rates have started to normalize last year is builders
Speaker 3: are coming off the sidelines. They're getting started, so they
Speaker 3: don't want to overbuild. Part of the reason we have
Speaker 3: a housing shortage is because there were a lot of
Speaker 3: builders scarred after the global financial crisis, and they don't
Speaker 3: want to get in that position again. So we have
Speaker 3: a lot of pent up demand for homes, especially starter homes,
Speaker 3: the ones that you know, most new families want to
Speaker 3: go to, and importantly retired retiring people who want to
Speaker 3: live close to their grandkids but don't want a mansion anymore.
Speaker 3: You know, they don't want something that can support a
Speaker 3: family of for they want something that supports a family
Speaker 3: of two. So that's a problem we need to solve,
Speaker 3: and I'm seeing localities try to solve this. So do
Speaker 3: interest rates matter for housing demand? Absolutely, will lower interest
Speaker 3: rates solve the housing shortage? No, you need you need
Speaker 3: some more resolved locally and maybe nationally, that's not our
Speaker 3: side of the house. And fortunately and the ultimately do
Speaker 3: I do I worry about high interest rates? Yes, because
Speaker 3: but that's not because of a specific sector, but because
Speaker 3: they're an indication that inflation.
Speaker 1: Rows and now we have to get it back.
Speaker 3: When price stability is restored, then we can have the
Speaker 3: rate at neutral and we can proceed on. And ultimately,
Speaker 3: what I hope for is next year we come around
Speaker 3: and nobody asked me about inflation because it's now in
Speaker 3: the background.
Speaker 1: We have price stability, and we are able to.
Speaker 3: Make decisions based on the other things like what's the
Speaker 3: best growth industry, how do I do things like your
Speaker 3: crystal was talking about, grow my business past that legacy
Speaker 3: on so that my family can inherit it. So those
Speaker 3: are the kinds of things we want people to think about.
Speaker 2: I'm going to ask one more question and we'll do
Speaker 2: a couple of audience questions. We've talked a lot about tariffs,
Speaker 2: but what's your modeling showing you about the effect of
Speaker 2: the budget bill that just passed?
Speaker 3: You know, it's really early days, and again I'm going
Speaker 3: to put us back to something that was we talked
Speaker 3: about earlier in the Sessions, but also I mentioned what's
Speaker 3: really important is the net net of all of these policies,
Speaker 3: and so you need to know what is the growth impetus,
Speaker 3: how does it stack up, what's the time You know,
Speaker 3: bills that are tax policy, will they give relief immediately?
Speaker 3: Bills that are investment policies, those take time to work
Speaker 3: themselves out, as Paul said this morning. So this just
Speaker 3: there's a timing issue. And then of course we have
Speaker 3: the tariffs and the uncertainty there, and we have immigration.
Speaker 3: And what's really going to be important for the economy,
Speaker 3: both for the growth and.
Speaker 1: For inflation, is how does this sort itself out?
Speaker 3: And does the timing support those policies together or does
Speaker 3: the timing off and we end up with things that
Speaker 3: are growth constraining before we get growth relief.
Speaker 1: Those are the.
Speaker 3: Things that I have to keep looking on as a
Speaker 3: policy maker.
Speaker 1: But it's early days on all of this.