1 00:00:00,080 --> 00:00:03,640 Speaker 1: Federal Reserve Bank of San Francisco president Mary Daily says 2 00:00:03,680 --> 00:00:08,000 Speaker 1: it's possible for policymakers to hold raid steady. Speaking at 3 00:00:08,039 --> 00:00:10,959 Speaker 1: an event at the Economic Club of New York, Daily 4 00:00:11,160 --> 00:00:14,840 Speaker 1: said recent bond market tightening could have a similar impact 5 00:00:14,840 --> 00:00:18,280 Speaker 1: as a rate hike, giving policymakers more room to stand 6 00:00:18,320 --> 00:00:21,880 Speaker 1: pat She talked about what else Fed officials might consider 7 00:00:22,160 --> 00:00:26,360 Speaker 1: as the inflation fight continues. With Bloomberg's Surveillance co host 8 00:00:26,520 --> 00:00:30,080 Speaker 1: Lisa Abromowitz, Let's listen in as they discuss what the 9 00:00:30,120 --> 00:00:33,160 Speaker 1: Fed's plan looks like heading into the end of this year. 10 00:00:33,440 --> 00:00:35,960 Speaker 2: In the June Summary of Economic projections, there were two 11 00:00:35,960 --> 00:00:38,840 Speaker 2: more rate hikes projected for this year. Then in July 12 00:00:39,159 --> 00:00:42,800 Speaker 2: we took one of those rate hikes and another one 13 00:00:42,840 --> 00:00:46,960 Speaker 2: in the September. At sep was the median outlook. But 14 00:00:47,080 --> 00:00:49,920 Speaker 2: the bond market has tightened quite considerably over about a 15 00:00:49,960 --> 00:00:52,599 Speaker 2: thirty six basis points since we met in September. Well, 16 00:00:52,640 --> 00:00:55,600 Speaker 2: that is equivalent to about a rate hike, right, and 17 00:00:55,640 --> 00:00:59,920 Speaker 2: so then the need to do tightening additionally is not there. 18 00:01:00,320 --> 00:01:03,000 Speaker 2: So from my own perspective, that's what I look at 19 00:01:03,040 --> 00:01:05,600 Speaker 2: my job as I see it, our job as I 20 00:01:05,640 --> 00:01:09,560 Speaker 2: see It is not to tighten, just do our part. 21 00:01:10,360 --> 00:01:14,000 Speaker 2: It's to watch financial conditions. Because monetary policy works, We 22 00:01:14,480 --> 00:01:16,960 Speaker 2: raise the funds rate and it moves through all the 23 00:01:17,000 --> 00:01:20,840 Speaker 2: other interest rates. If financial conditions are sufficiently tight, our 24 00:01:20,880 --> 00:01:23,360 Speaker 2: work is not necessary because we don't need to boost 25 00:01:23,400 --> 00:01:25,880 Speaker 2: them more. Yeah, that makes sense absolutely. 26 00:01:25,880 --> 00:01:28,240 Speaker 3: Amache clared I said today that the rise and yields 27 00:01:28,280 --> 00:01:32,240 Speaker 3: actually does the Fed's job for it. Would you agree 28 00:01:32,280 --> 00:01:34,440 Speaker 3: with that? Would you sympathize with that kind of sentiment? 29 00:01:34,560 --> 00:01:37,360 Speaker 2: That is actually how it works, right, if financial conditions tighten. 30 00:01:37,440 --> 00:01:38,920 Speaker 2: I mean, one of the things that's happened in the 31 00:01:39,000 --> 00:01:42,480 Speaker 2: last ninety days and certainly in the last few weeks, 32 00:01:42,840 --> 00:01:46,880 Speaker 2: is that financial markets have collectively seem to take on 33 00:01:46,959 --> 00:01:49,440 Speaker 2: board a variety of things. But one of the things 34 00:01:49,480 --> 00:01:52,080 Speaker 2: that I heard from many commentators and many of the 35 00:01:52,120 --> 00:01:55,200 Speaker 2: market outreach I do is that they have a general 36 00:01:55,280 --> 00:01:59,800 Speaker 2: understanding now that we are committed at the FOMC to 37 00:02:00,080 --> 00:02:03,279 Speaker 2: keeping rates higher for longer in an effort to bring 38 00:02:03,400 --> 00:02:07,360 Speaker 2: inflation fully back down to two percent. And that recognition, 39 00:02:07,440 --> 00:02:09,480 Speaker 2: along with all the other factors we could put in 40 00:02:09,520 --> 00:02:13,040 Speaker 2: a list about why bond yields have risen, are affecting 41 00:02:13,080 --> 00:02:15,679 Speaker 2: certainly the financial conditions and it's tightening. And I see 42 00:02:15,720 --> 00:02:19,040 Speaker 2: that as a positive outcome that we would have tighter 43 00:02:19,080 --> 00:02:22,040 Speaker 2: financial conditions, because then we can really get the job 44 00:02:22,120 --> 00:02:24,560 Speaker 2: done of putting inflation back to rest. 45 00:02:25,000 --> 00:02:28,520 Speaker 3: When is a sell off something that's welcome from a 46 00:02:28,560 --> 00:02:31,280 Speaker 3: perspective of finding the market is coming to terms with 47 00:02:31,360 --> 00:02:33,640 Speaker 3: what the FED has been saying, and when is it 48 00:02:33,720 --> 00:02:37,480 Speaker 3: disorderly disruptive on a level that causes concern? 49 00:02:38,320 --> 00:02:42,200 Speaker 2: So you always want an orderly repricing over a disorderly repricing. 50 00:02:42,240 --> 00:02:45,120 Speaker 2: And so far, what I see is this, you know, 51 00:02:45,160 --> 00:02:46,800 Speaker 2: and this is why we watch it so carefully. But 52 00:02:46,800 --> 00:02:49,919 Speaker 2: here's how I'm seeing it is that what we're having, 53 00:02:49,960 --> 00:02:52,280 Speaker 2: what is happening is financial markets are actually trying to 54 00:02:52,320 --> 00:02:55,600 Speaker 2: find they're footing in the right price for things, and 55 00:02:55,600 --> 00:02:58,480 Speaker 2: they've going to digest a lot of information. One is 56 00:02:58,480 --> 00:03:01,720 Speaker 2: the supply and demand changes in the treasury space right 57 00:03:01,800 --> 00:03:05,760 Speaker 2: so supplies going up and demand is going down, especially 58 00:03:05,760 --> 00:03:08,840 Speaker 2: from foreign buyers. So that is a one factor to digest. 59 00:03:08,880 --> 00:03:13,480 Speaker 2: Another factor to FED policy and for guidance in the SEP. 60 00:03:13,880 --> 00:03:17,160 Speaker 2: A third factor to digest is this increasing conversation people 61 00:03:17,200 --> 00:03:20,360 Speaker 2: are having about whether the real neutral rate of interest 62 00:03:20,440 --> 00:03:23,920 Speaker 2: is actually risen. So we came into the pandemic or 63 00:03:24,400 --> 00:03:27,040 Speaker 2: with it at about point five, which means nominal neutral 64 00:03:27,080 --> 00:03:29,840 Speaker 2: about two point five. And when people say, oh, the 65 00:03:29,840 --> 00:03:33,160 Speaker 2: neutral rate might have risen for variety of factors, I'm 66 00:03:33,200 --> 00:03:36,680 Speaker 2: hearing everything from maybe it's five to something that I 67 00:03:36,760 --> 00:03:39,320 Speaker 2: would seem more likely, which is between two five and 68 00:03:39,680 --> 00:03:42,240 Speaker 2: three for the nominal neutral. You know, probably there is. 69 00:03:42,480 --> 00:03:44,520 Speaker 2: We don't know if it's risen. Frankly, I don't think 70 00:03:44,560 --> 00:03:47,400 Speaker 2: anybody really knows, but certainly we should have those conversations. 71 00:03:47,480 --> 00:03:49,600 Speaker 2: But then markets try to price that in. So all 72 00:03:49,640 --> 00:03:51,760 Speaker 2: of those factors, and there's lots of uncertainty in the 73 00:03:51,800 --> 00:03:55,120 Speaker 2: economy and geopolitical risk and you know, our own fiscal risk, 74 00:03:55,200 --> 00:03:57,680 Speaker 2: and so that's what markets do. They digest a lot 75 00:03:57,680 --> 00:04:00,120 Speaker 2: of information and try to find their footing on it, 76 00:04:00,320 --> 00:04:02,480 Speaker 2: and I think that's what we're seeing. But so far, 77 00:04:02,560 --> 00:04:05,960 Speaker 2: it hasn't spilled over into disorderly so far, even today 78 00:04:06,000 --> 00:04:08,160 Speaker 2: when the job's claims came up and it was sort 79 00:04:08,160 --> 00:04:09,920 Speaker 2: of I don't know what to make of it, right, 80 00:04:09,960 --> 00:04:12,440 Speaker 2: So that's where the market server readit. You didn't see 81 00:04:12,560 --> 00:04:16,360 Speaker 2: things shaking up in a wild or disorderly fashion. So 82 00:04:16,360 --> 00:04:17,280 Speaker 2: so far, so good. 83 00:04:17,680 --> 00:04:19,800 Speaker 3: Your bond quote of the day four seventy on the 84 00:04:19,800 --> 00:04:22,080 Speaker 3: tenure I just checked. So that's it seems like yields 85 00:04:22,080 --> 00:04:24,440 Speaker 3: are coming in as we speak to to your point 86 00:04:24,440 --> 00:04:27,680 Speaker 3: about it not being disorderly. Back in March, when there 87 00:04:27,839 --> 00:04:31,520 Speaker 3: was this concern about the banking situation, yields were. 88 00:04:31,440 --> 00:04:32,839 Speaker 2: At the low of March. 89 00:04:33,040 --> 00:04:35,800 Speaker 3: We're about one hundred and fifty basis points lower than 90 00:04:35,800 --> 00:04:39,080 Speaker 3: where they are now. Are you seeing the same type 91 00:04:39,080 --> 00:04:43,120 Speaker 3: of financial distress today that you did back then, even 92 00:04:43,240 --> 00:04:47,240 Speaker 3: on the periphreeze. How do you rationalize why it hasn't 93 00:04:47,279 --> 00:04:48,960 Speaker 3: materialized in the same kind of way. 94 00:04:49,240 --> 00:04:51,880 Speaker 2: So March was a unique situation, and we want to 95 00:04:51,960 --> 00:04:54,359 Speaker 2: learn from that unique situation. But it was an unique 96 00:04:54,400 --> 00:04:57,040 Speaker 2: situation in this way. We had a bank run, an old, 97 00:04:57,400 --> 00:05:02,039 Speaker 2: very old fashion but true bank run where the bank's 98 00:05:02,040 --> 00:05:05,000 Speaker 2: liquidity was completely squeezed and it went, you know, it 99 00:05:05,080 --> 00:05:08,200 Speaker 2: dissolved in a period that was very it was short, 100 00:05:08,480 --> 00:05:11,200 Speaker 2: rapid period of dissolution, and then that's filled over to 101 00:05:11,240 --> 00:05:15,320 Speaker 2: two other banks and that was the extent. Now, one 102 00:05:15,320 --> 00:05:17,359 Speaker 2: of the things I always remind people of is we 103 00:05:17,440 --> 00:05:20,280 Speaker 2: have over four thousand banks in the country and three 104 00:05:20,400 --> 00:05:23,799 Speaker 2: failed and all other banks that even felt the stresses, 105 00:05:23,800 --> 00:05:26,080 Speaker 2: and there were a large number that felt stresses because 106 00:05:26,120 --> 00:05:29,839 Speaker 2: they were near neighbors in sort of size and balance 107 00:05:29,839 --> 00:05:34,800 Speaker 2: sheet distribution composition. They felt stresses, but they managed those 108 00:05:34,839 --> 00:05:37,080 Speaker 2: stresses because in part they had been a little more 109 00:05:37,080 --> 00:05:39,560 Speaker 2: effective at edging their risks. And then the FED and 110 00:05:39,600 --> 00:05:42,160 Speaker 2: the Treasure with the Treasury support came in with the BTFP, 111 00:05:42,760 --> 00:05:45,599 Speaker 2: and that produced a lot of calmness in the water. 112 00:05:45,760 --> 00:05:49,120 Speaker 2: So since that time, banking stresses have really not been 113 00:05:49,240 --> 00:05:52,200 Speaker 2: something that when you ask people in the community or 114 00:05:52,279 --> 00:05:54,920 Speaker 2: the business leaders what are you top of your worries, 115 00:05:55,080 --> 00:05:59,520 Speaker 2: that is not something they list. They list inflation, uncertainty, etc. 116 00:06:00,000 --> 00:06:02,440 Speaker 2: So I think one of the reasons that we are 117 00:06:02,520 --> 00:06:07,320 Speaker 2: seeing this yield rising not spilling back over is that 118 00:06:07,720 --> 00:06:10,000 Speaker 2: essentially we know what's going on in the banking sector. 119 00:06:10,040 --> 00:06:13,440 Speaker 2: Investor letters have been published for months saying here's what 120 00:06:13,440 --> 00:06:15,440 Speaker 2: this balance sheet looks like. Here's what this balance sheet 121 00:06:15,480 --> 00:06:17,839 Speaker 2: looks like. So there's not a surprise. And the second 122 00:06:17,960 --> 00:06:21,120 Speaker 2: is because the banking system is safe, sound, and resilient, 123 00:06:21,400 --> 00:06:24,000 Speaker 2: and we have remedies in place that solved parts of 124 00:06:24,040 --> 00:06:27,040 Speaker 2: the crisis, and the stresses. So I think we're coming 125 00:06:27,080 --> 00:06:29,000 Speaker 2: in it's the same thing when you have the rise 126 00:06:29,000 --> 00:06:32,080 Speaker 2: and yields. We're doing it against a strong economy. We're 127 00:06:32,120 --> 00:06:35,360 Speaker 2: doing it against a strong, a solid banking system. So 128 00:06:35,400 --> 00:06:39,640 Speaker 2: that just means that the ripple effects are not going 129 00:06:39,680 --> 00:06:43,640 Speaker 2: to be tipping things over. The fragility is not there, right, 130 00:06:43,680 --> 00:06:46,279 Speaker 2: it's a sound system, and then you have this and 131 00:06:46,320 --> 00:06:50,039 Speaker 2: so then you have it able to absorb the tension points. 132 00:06:50,480 --> 00:06:53,159 Speaker 3: One thing that there's been a huge debate around is 133 00:06:53,160 --> 00:06:56,120 Speaker 3: the long and variable lags. And this really speaks to 134 00:06:56,120 --> 00:06:58,120 Speaker 3: this question of all of a sudden, if you think 135 00:06:58,120 --> 00:07:00,760 Speaker 3: that ten year yields are at five five percent rather 136 00:07:00,800 --> 00:07:03,279 Speaker 3: than four percent or three and a half percent, that 137 00:07:03,520 --> 00:07:07,920 Speaker 3: changes what implication there is into different business models. How 138 00:07:08,000 --> 00:07:11,240 Speaker 3: much does it change the business model of commercial real 139 00:07:11,320 --> 00:07:14,720 Speaker 3: estate owners, of different residential real estate owners, of some 140 00:07:14,760 --> 00:07:17,040 Speaker 3: of the constituents who you speak to on a regular basis. 141 00:07:17,200 --> 00:07:19,080 Speaker 2: So I'm going to separate that's a terrific question, but 142 00:07:19,120 --> 00:07:20,640 Speaker 2: I'm going to unpack it into two parts. If you 143 00:07:20,680 --> 00:07:24,880 Speaker 2: don't mind the long and variable lags and the how 144 00:07:24,920 --> 00:07:28,120 Speaker 2: are people reacting to that? And I just met with 145 00:07:28,160 --> 00:07:32,120 Speaker 2: a variety of commercial real estate CEOs with national footprints 146 00:07:32,160 --> 00:07:33,720 Speaker 2: on Monday, so I can bring some of that to 147 00:07:33,800 --> 00:07:36,160 Speaker 2: this conversation. But we start with the long and variable 148 00:07:36,240 --> 00:07:39,480 Speaker 2: lags part. So definitely there's always a debate if you 149 00:07:39,680 --> 00:07:41,920 Speaker 2: want to really get into debate at a PhD in economics, 150 00:07:41,920 --> 00:07:43,040 Speaker 2: and you know, spent a lot of time if you're 151 00:07:43,040 --> 00:07:45,960 Speaker 2: in macro debating long and variable lags of monetary policy. 152 00:07:46,760 --> 00:07:49,800 Speaker 2: So here's what we can all agree on. There are 153 00:07:49,960 --> 00:07:53,520 Speaker 2: lags and they're variable, and then people even debate about 154 00:07:53,560 --> 00:07:56,840 Speaker 2: long how long are they? But I go with long 155 00:07:56,840 --> 00:08:00,000 Speaker 2: and variable lags, and the question is we know they 156 00:08:00,280 --> 00:08:05,600 Speaker 2: that from the FEDS, communications to financial markets went quickly, 157 00:08:05,920 --> 00:08:08,000 Speaker 2: and then the question is how long does it take 158 00:08:08,000 --> 00:08:11,160 Speaker 2: to get through the economy. I'm of the view that 159 00:08:11,320 --> 00:08:13,480 Speaker 2: we're still seeing the effects of that. We saw it 160 00:08:13,560 --> 00:08:16,600 Speaker 2: initially in housing, then we started seeing it in investment. 161 00:08:16,960 --> 00:08:19,680 Speaker 2: Now we're starting to see it in the labor market 162 00:08:19,720 --> 00:08:24,240 Speaker 2: and inflation, etc. And so it's absolutely happening and we 163 00:08:24,240 --> 00:08:26,640 Speaker 2: want to continue to watch that because we ought were 164 00:08:26,760 --> 00:08:29,280 Speaker 2: with the risk more balanced on the economy, we could 165 00:08:29,440 --> 00:08:33,480 Speaker 2: as easily I think at this point overcorrect than undercorrect. 166 00:08:33,559 --> 00:08:35,840 Speaker 2: And that's why taking the time to do it right 167 00:08:36,000 --> 00:08:38,200 Speaker 2: is sort of where I think we need to be 168 00:08:38,720 --> 00:08:42,839 Speaker 2: now on what I'm hearing in these rising yields, they're 169 00:08:42,960 --> 00:08:45,520 Speaker 2: less concerned about They have been less concerned at least 170 00:08:45,520 --> 00:08:49,400 Speaker 2: my commercial real estate roundtable, less concerned about the lags 171 00:08:49,400 --> 00:08:52,400 Speaker 2: in monetary policy as much as this there is this 172 00:08:52,600 --> 00:08:57,080 Speaker 2: time when people were in one of one person described 173 00:08:57,120 --> 00:09:00,000 Speaker 2: it as sort of a it's almost like a foot rate, 174 00:09:00,400 --> 00:09:03,800 Speaker 2: but it's really just like a I have to see 175 00:09:03,840 --> 00:09:07,040 Speaker 2: if the Fed will cut rates before I have to 176 00:09:07,120 --> 00:09:11,800 Speaker 2: refinance my properties. And so you're in a look ahead 177 00:09:11,880 --> 00:09:14,360 Speaker 2: and you're saying, well, if the Fed cuts rates like 178 00:09:14,400 --> 00:09:18,000 Speaker 2: the market suggest they will market suggested six months ago, 179 00:09:18,480 --> 00:09:21,240 Speaker 2: early in twenty twenty four, or at least by the 180 00:09:21,280 --> 00:09:23,520 Speaker 2: middle of twenty twenty four, then I can by the 181 00:09:23,520 --> 00:09:28,040 Speaker 2: time I refinance, I'm golden. But that equation changes if 182 00:09:28,240 --> 00:09:31,280 Speaker 2: we're higher for longer to get inflation down, or if 183 00:09:31,480 --> 00:09:34,679 Speaker 2: the noominal if the yields are just going to be higher, well, 184 00:09:34,720 --> 00:09:38,880 Speaker 2: then projects that penciled out at near zero interest rates 185 00:09:39,000 --> 00:09:41,120 Speaker 2: or something much lower, they don't pencil out at five. 186 00:09:41,360 --> 00:09:43,160 Speaker 2: And so I think one of the things that we 187 00:09:44,360 --> 00:09:48,600 Speaker 2: think a lot about is what's the switch point for 188 00:09:48,760 --> 00:09:51,240 Speaker 2: commercial real estate, because you really want that to be 189 00:09:51,280 --> 00:09:54,560 Speaker 2: an orderly repricing, and so far it has been rather 190 00:09:54,640 --> 00:09:57,600 Speaker 2: than a disorderly one. But I think that's something that's 191 00:09:57,600 --> 00:10:00,320 Speaker 2: a risk worth watching, is that these higher year fields 192 00:10:00,600 --> 00:10:03,559 Speaker 2: change the psychology of what's possible for people and they 193 00:10:03,679 --> 00:10:09,080 Speaker 2: start making those adjustments immediately, as opposed to a timeline 194 00:10:09,080 --> 00:10:10,360 Speaker 2: that goes with the REFI schedule. 195 00:10:10,640 --> 00:10:13,559 Speaker 3: Just to build on that, this idea of five percent 196 00:10:13,720 --> 00:10:16,040 Speaker 3: or four point eight or four point seven percent of 197 00:10:16,160 --> 00:10:19,920 Speaker 3: long term rates that's being increasingly priced into markets, how 198 00:10:20,000 --> 00:10:24,479 Speaker 3: much does that imply a significantly greater degree of distress 199 00:10:24,800 --> 00:10:28,040 Speaker 3: in some of these areas like real estate, commercial real 200 00:10:28,160 --> 00:10:31,640 Speaker 3: estate that rely on this idea of refinancing five ten 201 00:10:31,720 --> 00:10:32,559 Speaker 3: years down the line. 202 00:10:33,000 --> 00:10:35,000 Speaker 2: You know, it's I think we have to and this 203 00:10:35,080 --> 00:10:36,200 Speaker 2: is one of the things we're going to have to 204 00:10:36,240 --> 00:10:40,440 Speaker 2: do just as a nation, is if we're in a 205 00:10:40,679 --> 00:10:44,560 Speaker 2: low higher interest rate environment in general, and I can't 206 00:10:44,679 --> 00:10:46,720 Speaker 2: I don't think we should jump to the conclusion that 207 00:10:46,720 --> 00:10:48,520 Speaker 2: that's where we are. I think we should have a 208 00:10:48,559 --> 00:10:51,640 Speaker 2: conversation is going to be the low interest rate environment 209 00:10:51,720 --> 00:10:53,800 Speaker 2: or we're going to have a dominal neutral of two 210 00:10:53,840 --> 00:10:55,720 Speaker 2: point five or is it going to be something higher? 211 00:10:56,200 --> 00:10:58,520 Speaker 2: Is are we going to be fighting inflation from above 212 00:10:58,559 --> 00:11:01,560 Speaker 2: our target now persistent amount of time or is it 213 00:11:01,600 --> 00:11:03,800 Speaker 2: going to go back to fighting it or a target. 214 00:11:03,960 --> 00:11:05,959 Speaker 2: We don't know the answers yet, So I think what 215 00:11:06,120 --> 00:11:09,440 Speaker 2: I'm what I was really important is commercial real estate 216 00:11:09,559 --> 00:11:12,680 Speaker 2: owners and purchasers and things. They have to be willing 217 00:11:12,679 --> 00:11:15,360 Speaker 2: to play the longer game. Right, what's the longer game 218 00:11:15,400 --> 00:11:17,480 Speaker 2: look like? And how do I get to the longer game? 219 00:11:17,800 --> 00:11:21,360 Speaker 2: And I'm hearing this in the San Francisco CEO round table, 220 00:11:21,400 --> 00:11:23,640 Speaker 2: and I think, again, these folks have a national footprint. 221 00:11:23,640 --> 00:11:25,880 Speaker 2: But I'll share what I learned is that you know 222 00:11:25,880 --> 00:11:29,240 Speaker 2: they're already trunching their properties. If you've got really high 223 00:11:29,320 --> 00:11:32,920 Speaker 2: quality stuff, you're putting all your work in terms of 224 00:11:32,960 --> 00:11:35,360 Speaker 2: leasing into that property. And there are deals to be had, 225 00:11:35,600 --> 00:11:40,160 Speaker 2: so people with income to use they're buying those properties 226 00:11:40,240 --> 00:11:43,080 Speaker 2: up because you know, property ultimately and buildings are valuable 227 00:11:43,120 --> 00:11:45,960 Speaker 2: down the road. If you have property that you think 228 00:11:46,040 --> 00:11:49,240 Speaker 2: isn't just in the world of higher interest rates and 229 00:11:49,920 --> 00:11:53,360 Speaker 2: lower Okay, I'm going to go back to land value 230 00:11:53,480 --> 00:11:55,719 Speaker 2: and I'm going to not try to spend a lot 231 00:11:55,720 --> 00:11:58,480 Speaker 2: of time leasing that property or wait it out because 232 00:11:59,120 --> 00:12:01,320 Speaker 2: and I think that's the repricing we're going to need 233 00:12:01,360 --> 00:12:03,600 Speaker 2: to see. We are just going to need to digest 234 00:12:03,600 --> 00:12:07,800 Speaker 2: some of those losses and position for the new world. 235 00:12:07,520 --> 00:12:12,120 Speaker 2: The yield's going up, I think it's just it doesn't 236 00:12:12,240 --> 00:12:16,480 Speaker 2: change that dynamic. It just brings people awareness sharply to 237 00:12:16,600 --> 00:12:19,320 Speaker 2: the problem. Right You could have seen the problem coming, 238 00:12:19,360 --> 00:12:22,080 Speaker 2: and I think many did, which is why I'm not. 239 00:12:23,200 --> 00:12:25,880 Speaker 2: I don't have alarm bells ringing commercial real estate people. 240 00:12:25,920 --> 00:12:27,320 Speaker 2: They just tell me this all the time, and I 241 00:12:27,360 --> 00:12:30,600 Speaker 2: have learned to believe them. You really have to have 242 00:12:30,640 --> 00:12:33,880 Speaker 2: a strong constitution to be in commercial real estate because 243 00:12:33,880 --> 00:12:37,640 Speaker 2: it goes through cycles. And the way the successful ones 244 00:12:37,760 --> 00:12:42,160 Speaker 2: persist is they recognize that the downpoint isn't forever, nor 245 00:12:42,240 --> 00:12:44,120 Speaker 2: is the high point, so they get used to it, 246 00:12:44,160 --> 00:12:46,920 Speaker 2: and they stockpile and they refi early when they see 247 00:12:46,960 --> 00:12:49,040 Speaker 2: interest rates going up. They're trying to put stuff into 248 00:12:49,040 --> 00:12:51,560 Speaker 2: longer maturity so that they can not have to refly 249 00:12:51,640 --> 00:12:54,520 Speaker 2: at the higher interest rates right away. So I think 250 00:12:54,520 --> 00:12:56,680 Speaker 2: that's going on. But that is a sector to watch, 251 00:12:56,679 --> 00:12:59,800 Speaker 2: as all of us know, and this will be just 252 00:12:59,840 --> 00:13:03,280 Speaker 2: an another piece. The higher bond yields will be another 253 00:13:03,280 --> 00:13:05,760 Speaker 2: piece that makes the scrutiny have to be more intense. 254 00:13:05,960 --> 00:13:08,520 Speaker 3: To connect that to the idea of financial distress. People 255 00:13:08,520 --> 00:13:10,719 Speaker 3: talk about a FED put How high is the bar 256 00:13:10,840 --> 00:13:12,880 Speaker 3: for the FED put How high is the bar for 257 00:13:12,920 --> 00:13:15,640 Speaker 3: financial distress for the FED Reserve to come in and 258 00:13:15,679 --> 00:13:19,319 Speaker 3: to cut rates and to take actions to add liquidity 259 00:13:19,320 --> 00:13:23,240 Speaker 3: to the system. How much higher is the bar at 260 00:13:23,240 --> 00:13:25,559 Speaker 3: a time where inflation is still running at the levels 261 00:13:25,559 --> 00:13:26,080 Speaker 3: that it's running. 262 00:13:26,160 --> 00:13:28,199 Speaker 2: So I'm going to separate these two things. I think 263 00:13:28,200 --> 00:13:30,440 Speaker 2: they get pushed together all the time in a way 264 00:13:30,440 --> 00:13:32,199 Speaker 2: that I don't think about them, so I want to 265 00:13:32,240 --> 00:13:36,480 Speaker 2: separate them. So there's monetary policy that's about the two 266 00:13:36,559 --> 00:13:39,800 Speaker 2: goals that Congress gave us full employment, price stability, and 267 00:13:40,200 --> 00:13:42,520 Speaker 2: we raise and lower the funds rate to do those 268 00:13:42,559 --> 00:13:46,280 Speaker 2: types that work. And because it's made this is all 269 00:13:46,320 --> 00:13:49,120 Speaker 2: gets conflated more easily because we have a balance sheet policy. 270 00:13:49,400 --> 00:13:53,000 Speaker 2: So we use the asset purchases for two functions, market 271 00:13:53,080 --> 00:13:59,160 Speaker 2: dysfunction and quantitative easing, right to put additional policy accommodation 272 00:13:59,280 --> 00:14:02,480 Speaker 2: in when we hit the ZLB. So we have both, 273 00:14:02,640 --> 00:14:07,000 Speaker 2: but they can't actually persist separately. So let's take the 274 00:14:07,040 --> 00:14:11,640 Speaker 2: BTFP the BTFP didn't change monetary policy. We went in. 275 00:14:11,720 --> 00:14:14,520 Speaker 2: We saw some stress in the banking sector with the help, 276 00:14:14,559 --> 00:14:17,479 Speaker 2: but the backstop from the treasury open to the BTFP 277 00:14:17,640 --> 00:14:21,800 Speaker 2: facility helped calm the banking stresses and monetary policy went on. 278 00:14:22,280 --> 00:14:24,880 Speaker 2: And I think that's the way you should think about it. 279 00:14:24,920 --> 00:14:27,240 Speaker 2: So I unpack those things. I hear a lot about 280 00:14:27,240 --> 00:14:29,560 Speaker 2: the FED flood in this. What I really would do 281 00:14:29,680 --> 00:14:33,520 Speaker 2: is we have tools that can be used, and the 282 00:14:33,560 --> 00:14:39,560 Speaker 2: tools we use for financial dislocation are different than the 283 00:14:39,600 --> 00:14:42,720 Speaker 2: tools we use for monetary policy, and both can occur. 284 00:14:42,880 --> 00:14:45,360 Speaker 2: So we shouldn't have to give up our promise to 285 00:14:45,560 --> 00:14:48,720 Speaker 2: the American people, our commitment to achieve our mandated goals 286 00:14:48,960 --> 00:14:52,640 Speaker 2: and bring inflation back down to price stability because we 287 00:14:52,760 --> 00:14:55,440 Speaker 2: have some dysfunction in the markets. But I right now 288 00:14:55,480 --> 00:14:58,280 Speaker 2: don't see dysfunction. What I see is prices have gone 289 00:14:58,360 --> 00:15:01,240 Speaker 2: up for bond, yield prices gone down. Yields have gone 290 00:15:01,280 --> 00:15:05,480 Speaker 2: up for bonds. The ten year now and other rates 291 00:15:05,680 --> 00:15:08,840 Speaker 2: look similar to what you know we might have penciled 292 00:15:08,840 --> 00:15:11,000 Speaker 2: in in the SCP for how much we were going 293 00:15:11,080 --> 00:15:14,280 Speaker 2: to hold rates higher for longer because of the inflation. 294 00:15:14,680 --> 00:15:17,040 Speaker 2: And I think they'll respond as the data come in 295 00:15:17,400 --> 00:15:20,480 Speaker 2: to I think markets had a better sense now, although 296 00:15:20,680 --> 00:15:22,520 Speaker 2: you know, I can't be sure this. I I don't 297 00:15:22,560 --> 00:15:24,600 Speaker 2: want to say things that don't I don't have certainty about. 298 00:15:24,720 --> 00:15:27,160 Speaker 2: But it seems there's a more more of an understanding 299 00:15:27,160 --> 00:15:29,960 Speaker 2: about the Fed's reaction function now. And big part of 300 00:15:30,000 --> 00:15:33,960 Speaker 2: the reaction function understanding that seemed to be missing was 301 00:15:34,000 --> 00:15:35,920 Speaker 2: that we want to get inflation down to two percent, 302 00:15:36,360 --> 00:15:38,880 Speaker 2: and in our forecast, we don't see it coming down 303 00:15:38,880 --> 00:15:41,480 Speaker 2: to two percent like that. And in order to keep 304 00:15:41,520 --> 00:15:43,200 Speaker 2: it coming down to two percent, we have to keep 305 00:15:43,240 --> 00:15:47,120 Speaker 2: rates restrictive in order to bring the economy more into balance, 306 00:15:47,320 --> 00:15:49,760 Speaker 2: the labor market into balance, and inflation down. 307 00:15:49,560 --> 00:15:53,720 Speaker 1: To two that's San Francisco FED President Mary Daily speaking 308 00:15:53,800 --> 00:15:58,400 Speaker 1: with Bloomberg Surveillance co hosts Lisa Abromowitz at an event 309 00:15:58,640 --> 00:16:01,400 Speaker 1: at the Economic Club of New We've got more of 310 00:16:01,440 --> 00:16:05,760 Speaker 1: that conversation up next. I'm Charlie Pelatan. This is Bloomberg. 311 00:16:06,360 --> 00:16:10,080 Speaker 1: You're listening to a special conversation with San Francisco FED 312 00:16:10,120 --> 00:16:13,520 Speaker 1: President Mary Daly at the Economic Club of New York 313 00:16:13,600 --> 00:16:18,160 Speaker 1: with Bloomberg Surveillance co host Lisa A. Bromwitz. Let's listen 314 00:16:18,200 --> 00:16:20,680 Speaker 1: into a bit more of their discussion on the fed's 315 00:16:20,760 --> 00:16:21,480 Speaker 1: path forward. 316 00:16:21,720 --> 00:16:24,640 Speaker 3: You talked about vigilance, and you talked about agility, and 317 00:16:24,680 --> 00:16:27,120 Speaker 3: with respect to agility, you wanted to be able to 318 00:16:27,120 --> 00:16:30,680 Speaker 3: treat policy according to what you're seeing in markets. And 319 00:16:30,720 --> 00:16:33,600 Speaker 3: one thing that people have been speculating, and I'm sure 320 00:16:33,720 --> 00:16:35,520 Speaker 3: this is sort of one of these theoreticals that make 321 00:16:35,560 --> 00:16:36,400 Speaker 3: you roll your eyes. 322 00:16:36,520 --> 00:16:37,840 Speaker 2: Goodness, I never rolled my eyes. 323 00:16:38,600 --> 00:16:42,000 Speaker 4: Well, I will say when people talk about what you 324 00:16:42,120 --> 00:16:46,640 Speaker 4: said in your speech, which is that as inflation falls 325 00:16:46,680 --> 00:16:50,800 Speaker 4: and as growth slows, that the policy rate, even by 326 00:16:50,840 --> 00:16:52,080 Speaker 4: not moving, by keeping. 327 00:16:51,880 --> 00:16:54,840 Speaker 3: It steady, is a policy action. It is actually tightening 328 00:16:54,880 --> 00:16:59,520 Speaker 3: policy at that point. How agile should the FED be 329 00:17:00,080 --> 00:17:02,760 Speaker 3: to make adjustments to the rate so that the restrictive 330 00:17:02,840 --> 00:17:05,399 Speaker 3: level is the same. That might be lowering rates, but 331 00:17:05,440 --> 00:17:08,040 Speaker 3: not because of financial distress, not because of some sort 332 00:17:08,040 --> 00:17:09,880 Speaker 3: of recession, not because of weakness. 333 00:17:10,119 --> 00:17:13,200 Speaker 2: So that's a terrific question. And I would argue that 334 00:17:13,240 --> 00:17:17,200 Speaker 2: we're now entering into the hardest phases of policy making, right. 335 00:17:17,240 --> 00:17:20,320 Speaker 2: The hard part, so I think of phase one is 336 00:17:21,160 --> 00:17:23,520 Speaker 2: the one we just com the when we completed we 337 00:17:24,000 --> 00:17:27,560 Speaker 2: completed it earlier this year. Rates are too low inflation's 338 00:17:27,600 --> 00:17:32,240 Speaker 2: too high. There's only one direction north, so everybody can agree, 339 00:17:32,320 --> 00:17:34,959 Speaker 2: there's no nobody's confused. It's just a matter of how 340 00:17:35,000 --> 00:17:39,000 Speaker 2: quickly can you get to restrictive territory and without causing 341 00:17:39,040 --> 00:17:43,200 Speaker 2: any concerning disruptions. So we've accomplished that phase one. Phase 342 00:17:43,240 --> 00:17:45,520 Speaker 2: one was an easy phase. You just have to communicate 343 00:17:45,560 --> 00:17:47,960 Speaker 2: we're going that way. Inflation will come down. The biggest 344 00:17:47,960 --> 00:17:50,440 Speaker 2: concern that I had during that phase one, well, I 345 00:17:50,480 --> 00:17:54,560 Speaker 2: had two how fast can we go without distressing things? 346 00:17:54,680 --> 00:17:59,360 Speaker 2: And two? Oh, how will we communicate that we're doing that? Right? 347 00:17:59,480 --> 00:18:01,480 Speaker 2: Those are the two things I was worried about. How 348 00:18:01,520 --> 00:18:04,000 Speaker 2: far fast can we go? And how can we communicate 349 00:18:04,040 --> 00:18:07,000 Speaker 2: that so that we don't lose credibility? Right? Because I 350 00:18:07,040 --> 00:18:09,560 Speaker 2: was worried about the inflation expectation. So that's down. Phase 351 00:18:09,600 --> 00:18:13,200 Speaker 2: two is fine tuning where we maintain the peak rate, 352 00:18:13,480 --> 00:18:15,960 Speaker 2: and then phase three is trying to bring it down 353 00:18:16,040 --> 00:18:18,520 Speaker 2: to two percent. And so right now of the way 354 00:18:18,560 --> 00:18:22,200 Speaker 2: it's penciled in in the SEP. If the inflation forecast 355 00:18:22,280 --> 00:18:25,440 Speaker 2: holds and the inflation forecast you see more generally policy 356 00:18:25,480 --> 00:18:28,520 Speaker 2: is growing more restrictive. So you might ask we why, Well, 357 00:18:28,560 --> 00:18:32,159 Speaker 2: I think it's because it's challenging to get that supercore 358 00:18:32,200 --> 00:18:35,600 Speaker 2: inflation down. We've got the easy ones behind us, right. 359 00:18:35,640 --> 00:18:38,960 Speaker 2: Goods inflation has already come down a lot. Housing inflation 360 00:18:39,080 --> 00:18:41,560 Speaker 2: is in train. We have to keep watching it. But 361 00:18:41,600 --> 00:18:45,040 Speaker 2: that supercore is going to need persistent work. But if 362 00:18:45,400 --> 00:18:47,960 Speaker 2: we saw and the labor market strong, We're doing this 363 00:18:48,040 --> 00:18:51,200 Speaker 2: against a very strong labor market. We'll see tomorrow effect persists. 364 00:18:51,240 --> 00:18:55,320 Speaker 2: But so far, pretty strong solid labor market, good consumer spending, 365 00:18:55,400 --> 00:18:58,960 Speaker 2: good GDP growth. I mean, there's nothing about the economy 366 00:18:59,000 --> 00:19:02,560 Speaker 2: that's faltering. So but if that should change, well, then 367 00:19:02,600 --> 00:19:05,120 Speaker 2: of course we could adjust rates so that we keep 368 00:19:05,160 --> 00:19:07,640 Speaker 2: the level of restriction right for the economy we have. 369 00:19:08,200 --> 00:19:10,959 Speaker 2: I don't really want to try to tell you what 370 00:19:10,960 --> 00:19:13,360 Speaker 2: that's going to be, because honestly, that's what the whole 371 00:19:13,400 --> 00:19:17,480 Speaker 2: speech about is about. We have to tolerate our uncertainty 372 00:19:17,760 --> 00:19:20,679 Speaker 2: of not knowing what's going to do next year, but 373 00:19:20,760 --> 00:19:23,080 Speaker 2: to know what elements we have and how would we 374 00:19:23,200 --> 00:19:27,320 Speaker 2: react to whatever situation unfolds. That's ultimately humans hate this 375 00:19:27,560 --> 00:19:31,440 Speaker 2: and markets hate it more. Don't Nobody likes uncertainty, right, 376 00:19:31,440 --> 00:19:33,280 Speaker 2: They want to know, people, We all want to know 377 00:19:33,320 --> 00:19:35,840 Speaker 2: exactly what's going to happen. But I think right now, 378 00:19:36,440 --> 00:19:42,840 Speaker 2: projecting to confidently what will happen is actually a policy mistake, 379 00:19:43,160 --> 00:19:46,160 Speaker 2: because then you end up with surprising people and things. 380 00:19:46,160 --> 00:19:47,919 Speaker 2: So I just I think it's really important that we 381 00:19:47,960 --> 00:19:51,480 Speaker 2: stick to conveying our reaction function, conveying how we trade 382 00:19:51,480 --> 00:19:54,679 Speaker 2: off and balance things, how we approach the uncertainties, and 383 00:19:54,720 --> 00:19:58,120 Speaker 2: then as we get more information, as everybody does, then 384 00:19:58,240 --> 00:19:59,680 Speaker 2: we'll of course see what to do next. 385 00:20:00,040 --> 00:20:02,520 Speaker 3: In respect to the actual economy, what's going on and 386 00:20:02,560 --> 00:20:05,600 Speaker 3: what you see going on there? You talk about the 387 00:20:05,680 --> 00:20:07,560 Speaker 3: labor market and how strong the labor market is, and 388 00:20:07,600 --> 00:20:10,080 Speaker 3: I know you've done an incredible amount of research in 389 00:20:10,359 --> 00:20:14,320 Speaker 3: economic inequality and the worker and the labor market through 390 00:20:14,359 --> 00:20:17,680 Speaker 3: that lens, how do you view some of the labor strikes, 391 00:20:17,960 --> 00:20:21,040 Speaker 3: what's going on in Detroit, what's going on with respect 392 00:20:21,080 --> 00:20:23,760 Speaker 3: to the Kaiser health systems, what's going on with just 393 00:20:24,000 --> 00:20:26,240 Speaker 3: the Hollywood strikes which are sort of resolved. 394 00:20:25,880 --> 00:20:29,720 Speaker 2: But maybe not so. I think, you know, the picture 395 00:20:29,760 --> 00:20:32,240 Speaker 2: of the labor market is broader than just the strikes. 396 00:20:32,280 --> 00:20:34,400 Speaker 2: I think the strikes get a lot of because they're 397 00:20:34,440 --> 00:20:39,040 Speaker 2: big labor actions, but in general, we've seen a rebalancing 398 00:20:39,200 --> 00:20:44,199 Speaker 2: of the of the labor relationships with firms. That is 399 00:20:44,240 --> 00:20:49,200 Speaker 2: a very common occurrence in an extremely tight labor market. Right, 400 00:20:49,200 --> 00:20:52,840 Speaker 2: They're demand for workers is outstrip supply of workers. That 401 00:20:52,880 --> 00:20:55,399 Speaker 2: means that workers would have more power to say, I 402 00:20:55,480 --> 00:20:58,280 Speaker 2: want to live here, do this have this other thing? 403 00:20:58,760 --> 00:21:03,000 Speaker 2: So workers who aren't unions and don't have regularly scheduled 404 00:21:03,080 --> 00:21:08,440 Speaker 2: negotiated contracts, well, they can make those adjustments more continuously. Right. 405 00:21:08,560 --> 00:21:12,320 Speaker 2: So a lot make sure you've experienced this too. But 406 00:21:12,800 --> 00:21:15,920 Speaker 2: if you were an employer in twenty two and even 407 00:21:16,040 --> 00:21:23,359 Speaker 2: late twenty one, you really saw wage demands rise special circumstances. 408 00:21:23,359 --> 00:21:25,880 Speaker 2: I want to live in here and work in there, 409 00:21:25,920 --> 00:21:27,359 Speaker 2: and I don't want to come back to the office. 410 00:21:27,400 --> 00:21:30,080 Speaker 2: A lot of changes in how workers were relating to 411 00:21:30,080 --> 00:21:33,440 Speaker 2: their employers, and there was also a relative demand shock 412 00:21:33,840 --> 00:21:39,560 Speaker 2: for low wage workers that moved restaurant workers in hotel 413 00:21:39,600 --> 00:21:43,560 Speaker 2: workers to delivery drivers and other things, so that whole 414 00:21:44,200 --> 00:21:50,119 Speaker 2: work situation was changed. I see the labor actions that 415 00:21:50,160 --> 00:21:54,080 Speaker 2: have been taken recently as they're on regularly negotiated contract schedules, 416 00:21:54,320 --> 00:21:56,560 Speaker 2: and those schedules came up and they say, well, we've 417 00:21:56,600 --> 00:22:01,679 Speaker 2: got to A Lot's changed since we negotiated contract pandemic 418 00:22:02,119 --> 00:22:05,160 Speaker 2: wage rates have risen. We have not been in continuous 419 00:22:05,200 --> 00:22:07,800 Speaker 2: negotiations with you, and we want to get in a 420 00:22:07,800 --> 00:22:11,719 Speaker 2: better negotiation with you to ensure that we have some 421 00:22:12,359 --> 00:22:17,080 Speaker 2: shared responsibility for the rapidly rising inflation and rapidly rising 422 00:22:17,240 --> 00:22:20,080 Speaker 2: changes in the contours of the labor market. So I 423 00:22:20,119 --> 00:22:22,600 Speaker 2: think this is so to answer your question, I think 424 00:22:22,640 --> 00:22:28,800 Speaker 2: this is completely predictable given the imbalance we've had between 425 00:22:28,880 --> 00:22:31,919 Speaker 2: demand and supply for workers, and there are going to 426 00:22:31,920 --> 00:22:35,280 Speaker 2: be some renegotiations, either in continuous space like we have 427 00:22:35,359 --> 00:22:38,960 Speaker 2: been seeing, or when contracts become up for negotiation and 428 00:22:39,000 --> 00:22:41,480 Speaker 2: you have to renegotiate the terms of employment. 429 00:22:41,840 --> 00:22:45,600 Speaker 3: What's the difference between renegotiating the terms of your employment 430 00:22:45,600 --> 00:22:46,440 Speaker 3: and a wage price. 431 00:22:46,320 --> 00:22:49,520 Speaker 2: Spirral, Oh, that's a huge difference. So let me I 432 00:22:49,640 --> 00:22:54,879 Speaker 2: love that kind of question. Fantastic. Okay, So up straight, 433 00:22:56,080 --> 00:23:00,600 Speaker 2: labor renegotiations are I'm looking at you know what I've 434 00:23:00,640 --> 00:23:02,159 Speaker 2: had to put up, what I've had to deal with 435 00:23:02,160 --> 00:23:04,880 Speaker 2: as an employee. A lot of it is I've got 436 00:23:04,880 --> 00:23:06,879 Speaker 2: this wage and the inflation's going up this so my 437 00:23:06,960 --> 00:23:09,640 Speaker 2: real wage is falling. That's something that was commonly happening 438 00:23:09,680 --> 00:23:11,920 Speaker 2: in twenty two in the United States. Real wages we're 439 00:23:11,920 --> 00:23:15,480 Speaker 2: falling for many, many groups of workers, many tiers of wages. 440 00:23:15,840 --> 00:23:19,840 Speaker 2: And that's something people workers recognize, right They recognize when 441 00:23:19,880 --> 00:23:21,840 Speaker 2: the real wages are falling, they're losing purchasing power, they're 442 00:23:21,840 --> 00:23:25,000 Speaker 2: falling behind even though they're earning. So that is what 443 00:23:25,040 --> 00:23:27,520 Speaker 2: a labor negotiation is. It also could be like in 444 00:23:27,560 --> 00:23:31,480 Speaker 2: healthcare and things, hours work, terms of trade, you know, schedules, 445 00:23:31,480 --> 00:23:35,960 Speaker 2: et cetera. A wage price spiral is that people get 446 00:23:36,000 --> 00:23:40,439 Speaker 2: wage growth and then producers I mean you know, firm selling, 447 00:23:40,600 --> 00:23:44,000 Speaker 2: passed that along to consumers. That causes inflation to go up, 448 00:23:44,160 --> 00:23:46,000 Speaker 2: and then they see that inflation and they ask for 449 00:23:46,040 --> 00:23:49,320 Speaker 2: wage growth and you see this high correlation. A fact 450 00:23:49,400 --> 00:23:52,520 Speaker 2: that's worth looking at. It's a very cool plot because 451 00:23:52,520 --> 00:23:54,240 Speaker 2: it tells you why we're not in a wage price 452 00:23:54,280 --> 00:23:58,280 Speaker 2: spiral right now. Is prior to eighty five, the correlation 453 00:23:58,400 --> 00:24:01,280 Speaker 2: between wage growth and price growth is zero point eighty five. 454 00:24:02,359 --> 00:24:05,880 Speaker 2: That broke down after the vulgar disinflation, and it really 455 00:24:05,920 --> 00:24:09,240 Speaker 2: is now like point two five point three, et cetera. 456 00:24:09,440 --> 00:24:12,400 Speaker 2: So you don't have that one for one pass through 457 00:24:12,440 --> 00:24:14,840 Speaker 2: of wages to prices, prices to wages. It just doesn't 458 00:24:14,880 --> 00:24:17,600 Speaker 2: work that way. And even now you see wage growth 459 00:24:17,640 --> 00:24:20,960 Speaker 2: moderate rating. And I also look at short run inflation expectations. 460 00:24:21,119 --> 00:24:24,359 Speaker 2: Short run inflation expectations are coming down as they come down. 461 00:24:24,720 --> 00:24:27,000 Speaker 2: Research out of the San Francisco Fed is shown and 462 00:24:27,040 --> 00:24:31,720 Speaker 2: others have confirmed this that short run inflation expectations are 463 00:24:31,760 --> 00:24:34,760 Speaker 2: what people are using when they go into negotiate wages, 464 00:24:35,200 --> 00:24:37,080 Speaker 2: and so as those come down, you get release of 465 00:24:37,119 --> 00:24:40,480 Speaker 2: wage pressure. So we are the worries about wage price spiral. 466 00:24:40,960 --> 00:24:43,320 Speaker 2: You know, people were worried about it in twenty two, 467 00:24:43,520 --> 00:24:46,439 Speaker 2: and I really we took that very seriously. We asked 468 00:24:46,480 --> 00:24:49,320 Speaker 2: how that was going. At this point, those are really abated, 469 00:24:49,600 --> 00:24:52,000 Speaker 2: and now we're really at a point about getting the 470 00:24:52,040 --> 00:24:56,000 Speaker 2: wage growth rate to be balanced in the economy, bringing 471 00:24:56,040 --> 00:24:59,680 Speaker 2: the labor market into balance. At the kinds of thout, 472 00:25:00,000 --> 00:25:01,800 Speaker 2: we knew about a hundred thousand of jobs per month 473 00:25:02,040 --> 00:25:04,920 Speaker 2: to keep pace with the labor force growth. At the 474 00:25:05,000 --> 00:25:07,000 Speaker 2: last call, we were at one hundred and fifty. So 475 00:25:07,080 --> 00:25:09,440 Speaker 2: tomorrow's labor market report will tell us whether we've made 476 00:25:09,440 --> 00:25:12,280 Speaker 2: more progress on that space or just sort of in 477 00:25:12,320 --> 00:25:15,280 Speaker 2: the same place we've been in. But that's that's how 478 00:25:15,320 --> 00:25:18,000 Speaker 2: it's different. They're completely different. One keeps me up at night. 479 00:25:18,320 --> 00:25:20,280 Speaker 2: One is just a natural part of an economy. 480 00:25:20,560 --> 00:25:22,679 Speaker 3: So I love that. When we were speaking ahead of this, 481 00:25:23,200 --> 00:25:25,560 Speaker 3: we were talking about anecdotal data and I said, you know, 482 00:25:25,640 --> 00:25:28,560 Speaker 3: I love that to study the sociology of markets and 483 00:25:28,600 --> 00:25:30,560 Speaker 3: anecdotes are really important, and she said, I don't view 484 00:25:30,560 --> 00:25:32,880 Speaker 3: them as anecdotes. They're qualitative data. 485 00:25:32,960 --> 00:25:33,879 Speaker 2: I think I said it that way. 486 00:25:34,040 --> 00:25:36,480 Speaker 3: You did, and you corrected me. You said, absolutely not. 487 00:25:36,560 --> 00:25:39,199 Speaker 3: I wouldn't call it anecdotes. It is qualitative data. What 488 00:25:39,320 --> 00:25:42,720 Speaker 3: is the qualitative data or the anecdotes that the colications that. 489 00:25:42,880 --> 00:25:45,320 Speaker 2: Here's why I do call it anecdotes, because anecdotes are 490 00:25:45,320 --> 00:25:47,720 Speaker 2: like I talked to Bob in the grocery store and 491 00:25:47,720 --> 00:25:50,159 Speaker 2: then I now I know everything that And that's what 492 00:25:50,400 --> 00:25:52,639 Speaker 2: you know. People trade anecdotes all the time because they 493 00:25:52,680 --> 00:25:55,159 Speaker 2: heard one person to people, four people at a party 494 00:25:55,200 --> 00:25:59,680 Speaker 2: say it. At the FED, the regional thread presidents in particular, 495 00:25:59,680 --> 00:26:01,600 Speaker 2: I think one of the big benefits of having a 496 00:26:01,640 --> 00:26:04,800 Speaker 2: regional FED. When the folks who set this up set 497 00:26:04,800 --> 00:26:07,000 Speaker 2: it up, I think they thought this would happen, and 498 00:26:07,080 --> 00:26:09,240 Speaker 2: it does happen. Is the regional FED presidents and the 499 00:26:09,440 --> 00:26:15,000 Speaker 2: entire regional FED teams. We're in our districts collecting qualitative 500 00:26:15,000 --> 00:26:17,960 Speaker 2: information by talking to many people like you, having roundtables, 501 00:26:17,960 --> 00:26:20,000 Speaker 2: et cetera. But then we write it up. And so 502 00:26:20,040 --> 00:26:22,800 Speaker 2: the difference in an anecdote and qualitative information is we 503 00:26:23,320 --> 00:26:27,159 Speaker 2: quantify the qualitative information. If one person says it, it 504 00:26:27,200 --> 00:26:30,119 Speaker 2: does not mean it's the thing we should take on 505 00:26:30,280 --> 00:26:33,120 Speaker 2: is fact. But if fifty people say the same thing, 506 00:26:33,240 --> 00:26:36,760 Speaker 2: well that's an early warning sign or some flavor that 507 00:26:36,880 --> 00:26:40,760 Speaker 2: helps us, you know, push flesh out what the the 508 00:26:41,000 --> 00:26:43,119 Speaker 2: what the aggregate data are telling it. So what the 509 00:26:43,200 --> 00:26:46,560 Speaker 2: qualitative data are telling me are really O. There's many things, 510 00:26:46,560 --> 00:26:49,120 Speaker 2: but I'll tell you a few. So at the beginning 511 00:26:49,160 --> 00:26:52,640 Speaker 2: of this year, I'd say most of my conversations when 512 00:26:52,680 --> 00:26:55,520 Speaker 2: I ask them what's your biggest concern, they said recession. 513 00:26:56,720 --> 00:27:01,000 Speaker 2: Then it switched to stagflation. We're going to have high 514 00:27:01,040 --> 00:27:04,080 Speaker 2: inflation forever, just low growth like we did before the pandemic. 515 00:27:04,320 --> 00:27:07,960 Speaker 2: And now I say what's your biggest worry? And this 516 00:27:08,040 --> 00:27:11,159 Speaker 2: is really remarkable. They say, well, I'm really worried about 517 00:27:11,359 --> 00:27:15,040 Speaker 2: generative AI and how it changes my business in ten 518 00:27:15,119 --> 00:27:18,440 Speaker 2: years I'm really worried we're not educating our population enough 519 00:27:18,440 --> 00:27:21,119 Speaker 2: to keep pace with the jobs we are creating. So 520 00:27:21,200 --> 00:27:24,560 Speaker 2: why am I focusing on those? Because those are longer 521 00:27:24,640 --> 00:27:28,000 Speaker 2: term concerns, which means the anxiety they have about their 522 00:27:28,000 --> 00:27:31,440 Speaker 2: short term business has gone down and it's being replaced 523 00:27:31,480 --> 00:27:33,919 Speaker 2: with the things that really should keep business leaders up 524 00:27:33,920 --> 00:27:36,760 Speaker 2: at night, right is how is this going to transform 525 00:27:36,800 --> 00:27:39,800 Speaker 2: my business? Do I have the workforce I need? Not today, 526 00:27:39,840 --> 00:27:42,080 Speaker 2: but five years from now, ten years from now. What 527 00:27:42,240 --> 00:27:44,720 Speaker 2: do I need to do in my communities to ensure 528 00:27:44,760 --> 00:27:47,520 Speaker 2: that we're durable. So that has been a sea change. 529 00:27:47,640 --> 00:27:49,320 Speaker 2: And then when you meet, when you drill down, like 530 00:27:49,320 --> 00:27:52,920 Speaker 2: with commercial real estate leaders, of course they're thinking hard 531 00:27:52,960 --> 00:27:57,560 Speaker 2: about Okay, I've got this property, what's the future? But 532 00:27:57,600 --> 00:28:01,680 Speaker 2: their attitude it was really interesting across the board. Doesn't 533 00:28:01,680 --> 00:28:04,800 Speaker 2: matter what position they're holding, as they say, they're going 534 00:28:04,840 --> 00:28:08,239 Speaker 2: to be losses, but they're going to be opportunities. And 535 00:28:08,280 --> 00:28:10,119 Speaker 2: what I'm trying to do in my business when I 536 00:28:10,160 --> 00:28:12,520 Speaker 2: went around to each of them, is say, I'm trying 537 00:28:12,560 --> 00:28:16,400 Speaker 2: to minimize the losses and maximize my ability to see 538 00:28:16,400 --> 00:28:19,959 Speaker 2: and take the opportunities. And so I see that as 539 00:28:20,000 --> 00:28:23,520 Speaker 2: a positive change in the environment we're in. And it's 540 00:28:23,560 --> 00:28:27,679 Speaker 2: why I said in the speech that the recession fears 541 00:28:27,680 --> 00:28:31,159 Speaker 2: are being replaced by soft landing. Soft landing is just 542 00:28:31,200 --> 00:28:34,480 Speaker 2: in their description, something that happens that doesn't break the 543 00:28:34,520 --> 00:28:36,879 Speaker 2: economy and bring all their attention to how do I 544 00:28:36,960 --> 00:28:41,240 Speaker 2: manage through a significant downturn? And I am not seeing that, 545 00:28:41,360 --> 00:28:44,360 Speaker 2: and when I take the temperature on that, I'm seeing 546 00:28:44,360 --> 00:28:46,480 Speaker 2: Instead they're talking about these longer term issues that they're 547 00:28:46,480 --> 00:28:47,120 Speaker 2: grappling with. 548 00:28:47,280 --> 00:28:51,280 Speaker 3: Does that mean that they're hoarding labor reluctant to cut 549 00:28:51,360 --> 00:28:54,240 Speaker 3: jobs because they do have this expectation that even if 550 00:28:54,240 --> 00:28:56,719 Speaker 3: there is some sort of slowdown, there is going to 551 00:28:56,720 --> 00:28:59,880 Speaker 3: be a brighter future ahead with not as many qualified 552 00:29:00,200 --> 00:29:02,880 Speaker 3: employees available to do the jobs that need to get done. 553 00:29:03,040 --> 00:29:05,800 Speaker 2: So I'm gonna I have the benefit of having done 554 00:29:05,800 --> 00:29:07,920 Speaker 2: this work for a while. I was at the FED 555 00:29:08,000 --> 00:29:09,880 Speaker 2: long before I became the president, and I've been a 556 00:29:09,920 --> 00:29:13,240 Speaker 2: labor economist in my whole career. So I would like 557 00:29:13,280 --> 00:29:16,680 Speaker 2: to broaden that part out just to take ad So, 558 00:29:17,120 --> 00:29:21,720 Speaker 2: it is very common when employers go through big shocks 559 00:29:22,320 --> 00:29:25,120 Speaker 2: that that carries over into their behavior. So let's go 560 00:29:25,280 --> 00:29:30,240 Speaker 2: to the fact that in the financial crisis, employers had 561 00:29:30,280 --> 00:29:34,840 Speaker 2: to cut nominal wages. They hate cutting nominal wages, they 562 00:29:35,560 --> 00:29:39,080 Speaker 2: because it demoralizes employees, et cetera. So that had a 563 00:29:39,120 --> 00:29:42,280 Speaker 2: long tail. They had to fire a lot of workers, right, 564 00:29:42,280 --> 00:29:43,880 Speaker 2: they had to let go and they you know, for 565 00:29:43,920 --> 00:29:46,400 Speaker 2: a lot of employers, if you're not the very largest 566 00:29:46,400 --> 00:29:49,600 Speaker 2: employers in our country, you're letting go of people, you know, 567 00:29:49,720 --> 00:29:51,920 Speaker 2: each and every member of your team. And you had 568 00:29:51,920 --> 00:29:53,800 Speaker 2: to let those workers go, and then you had to 569 00:29:53,800 --> 00:29:57,080 Speaker 2: cut nominal wages. It's extremely painful. So then they hired 570 00:29:57,160 --> 00:30:02,479 Speaker 2: extraordinarily slowly and kept working people over time and other things, 571 00:30:02,760 --> 00:30:04,520 Speaker 2: just so they didn't have to be in a situation 572 00:30:04,800 --> 00:30:06,640 Speaker 2: where they would have to let go of workers should 573 00:30:06,640 --> 00:30:09,200 Speaker 2: another shot come. So now what I'm seeing is the 574 00:30:09,240 --> 00:30:13,800 Speaker 2: opposite of this. In the pandemic, people lost workers because 575 00:30:13,800 --> 00:30:15,400 Speaker 2: they were afraid to come to work, or they just 576 00:30:15,720 --> 00:30:18,240 Speaker 2: they decided to take early retirement, or they moved away. 577 00:30:18,640 --> 00:30:21,320 Speaker 2: And so now employers are like, oh, gosh, I better 578 00:30:21,400 --> 00:30:24,520 Speaker 2: keep people. So I think we have to put certain 579 00:30:24,600 --> 00:30:27,720 Speaker 2: amount of this behavior we're seeing to that. But the 580 00:30:27,760 --> 00:30:30,360 Speaker 2: other part is, and this is another benefit of doing 581 00:30:30,360 --> 00:30:32,240 Speaker 2: this for a while, I think is another part is 582 00:30:32,320 --> 00:30:35,640 Speaker 2: that the way it works in most cycles is that 583 00:30:35,680 --> 00:30:38,680 Speaker 2: the very first thing that happens is hiring slows. The 584 00:30:38,720 --> 00:30:41,479 Speaker 2: second thing that happens is layoffs occur. You don't have 585 00:30:41,520 --> 00:30:44,240 Speaker 2: a lot of firms laying people off before they slowed 586 00:30:44,240 --> 00:30:46,760 Speaker 2: their hiring. So when I'm looking at metrics for what 587 00:30:46,800 --> 00:30:48,600 Speaker 2: I think is happening to the labor market, I'm looking 588 00:30:48,640 --> 00:30:52,160 Speaker 2: at hiring statistics, job filling rates. You might have postings 589 00:30:52,160 --> 00:30:54,320 Speaker 2: out there, but you're not filling. And what I'm seeing 590 00:30:54,400 --> 00:30:57,640 Speaker 2: is a general slow down, but not a cliff. But 591 00:30:57,800 --> 00:31:00,000 Speaker 2: you know, obviously if there was a significant down time 592 00:31:00,160 --> 00:31:03,480 Speaker 2: and then businesses have to resize, but we're not seeing 593 00:31:03,480 --> 00:31:05,920 Speaker 2: that yet. Even the layoffs we've seen have come in 594 00:31:05,920 --> 00:31:08,400 Speaker 2: the tech sector where they got a little bit ahead 595 00:31:08,400 --> 00:31:11,000 Speaker 2: of themselves on growth and then had to rebalance their 596 00:31:12,160 --> 00:31:15,360 Speaker 2: workforce to meet the actual growth they were going to have. 597 00:31:15,720 --> 00:31:18,920 Speaker 2: So I don't see anything out there that is ringing 598 00:31:18,920 --> 00:31:22,800 Speaker 2: an alarm bell about the workforce. And people say labor hoarding, 599 00:31:22,840 --> 00:31:25,360 Speaker 2: I kind of think of it as we're just always 600 00:31:25,400 --> 00:31:28,080 Speaker 2: fighting the last war, and you fight the last war 601 00:31:28,160 --> 00:31:29,600 Speaker 2: of we had to lay off a lot of people, 602 00:31:29,640 --> 00:31:32,080 Speaker 2: you don't want anybody new. You fight the last war 603 00:31:32,120 --> 00:31:33,600 Speaker 2: of Oh my gosh, I lost a lot of people. 604 00:31:33,640 --> 00:31:35,760 Speaker 2: You hang on tight. We're also in a very tight 605 00:31:35,800 --> 00:31:39,720 Speaker 2: labor market from the employer's perspective. You know it's loosening, 606 00:31:39,880 --> 00:31:42,000 Speaker 2: but from an employer's perspective, they still have to spend 607 00:31:42,040 --> 00:31:46,120 Speaker 2: a lot of their time finding workers to replace workers 608 00:31:46,120 --> 00:31:48,080 Speaker 2: you leave where if they want to open a new slot, 609 00:31:48,640 --> 00:31:51,320 Speaker 2: that's expensive, So they definitely want to hang on to 610 00:31:51,400 --> 00:31:52,600 Speaker 2: as many people as possible. 611 00:31:52,680 --> 00:31:54,560 Speaker 3: I have to open it up to questions in a second, 612 00:31:54,560 --> 00:31:56,120 Speaker 3: but I do want to just ask you this before 613 00:31:56,160 --> 00:31:58,680 Speaker 3: I do that. What do you think right now is 614 00:31:58,720 --> 00:32:02,920 Speaker 3: the biggest misconception about the FED and how they're operating policy. 615 00:32:05,560 --> 00:32:08,200 Speaker 2: Well, one, miss, I don't know if it's the biggest misconception. 616 00:32:08,320 --> 00:32:09,800 Speaker 2: I would love to hear what you all think the 617 00:32:09,800 --> 00:32:12,600 Speaker 2: biggest conception is so that I can tell you to 618 00:32:12,600 --> 00:32:17,560 Speaker 2: whether it's a actual misconception or true. But I think 619 00:32:17,600 --> 00:32:21,240 Speaker 2: one thing that I've seen people say is and it's 620 00:32:21,320 --> 00:32:26,880 Speaker 2: just interesting. So we always have vigorous debates. That's I mean, 621 00:32:26,880 --> 00:32:29,520 Speaker 2: that's what you should expect from us, that we vigorously 622 00:32:29,600 --> 00:32:32,560 Speaker 2: debate and discuss people are bringing. I mean, we all 623 00:32:32,560 --> 00:32:36,160 Speaker 2: come from different backgrounds. We use different lenses, we have 624 00:32:36,200 --> 00:32:38,640 Speaker 2: different information, we talk to different people, we have different 625 00:32:38,640 --> 00:32:41,120 Speaker 2: research teams, so of course we're all bringing it in, 626 00:32:41,160 --> 00:32:43,800 Speaker 2: but we're all working towards the same goal, which is 627 00:32:43,960 --> 00:32:46,800 Speaker 2: what's the best policy we can make today that will 628 00:32:46,840 --> 00:32:49,640 Speaker 2: serve the goals of achieving price stability and full employment. 629 00:32:50,640 --> 00:32:53,360 Speaker 2: That's what we're doing. When we were in the pandemic, 630 00:32:53,920 --> 00:32:55,960 Speaker 2: if you look at the adopt plots and things, it 631 00:32:56,000 --> 00:32:58,040 Speaker 2: looked like there was a ton of agreement. Well, how 632 00:32:58,440 --> 00:33:00,360 Speaker 2: of course there's a ton of agreement. The only thing 633 00:33:00,360 --> 00:33:02,360 Speaker 2: we can do is lead support to the economy. Then 634 00:33:02,360 --> 00:33:04,960 Speaker 2: when inflation seven percent, there's a ton of agreement about 635 00:33:04,960 --> 00:33:09,360 Speaker 2: what we should do with rates. Not surprisingly, the inflation's 636 00:33:09,400 --> 00:33:12,280 Speaker 2: way off our goal. We have to raise rates. Now 637 00:33:12,280 --> 00:33:14,480 Speaker 2: we're going to start to see a little more dispersion 638 00:33:14,520 --> 00:33:16,800 Speaker 2: in the dots. But that is not because we suddenly 639 00:33:16,840 --> 00:33:20,480 Speaker 2: started debating and suddenly started disagreeing with one another. It's 640 00:33:20,520 --> 00:33:24,160 Speaker 2: because the situations around us changed. And we've always debate 641 00:33:24,200 --> 00:33:27,040 Speaker 2: and discussed and things like that, but now the policy 642 00:33:27,520 --> 00:33:31,320 Speaker 2: projections change because people have a different projection about how 643 00:33:31,360 --> 00:33:33,880 Speaker 2: they see the economy unfolding. And yet we all come 644 00:33:33,920 --> 00:33:36,840 Speaker 2: together eight times a year and make a policy decision. 645 00:33:37,040 --> 00:33:39,600 Speaker 2: And I see that as the real strength of the FMC. 646 00:33:39,720 --> 00:33:41,400 Speaker 2: It's one of the reasons I've worked at the FED 647 00:33:41,440 --> 00:33:43,800 Speaker 2: as long as I have is because when you close 648 00:33:43,880 --> 00:33:49,000 Speaker 2: that door to the meeting, there's no politics, there's no ego, 649 00:33:49,640 --> 00:33:53,240 Speaker 2: there's just, Hey, let's try to figure out what we're 650 00:33:53,240 --> 00:33:56,800 Speaker 2: going to do that's best for the American people, and 651 00:33:56,840 --> 00:33:58,719 Speaker 2: how do we do this well, and how do we 652 00:33:58,720 --> 00:33:59,960 Speaker 2: stay vigilant and ancial. 653 00:34:00,520 --> 00:34:03,600 Speaker 1: That's Mary Daily, president of the Federal Reserve Bank of 654 00:34:03,640 --> 00:34:08,960 Speaker 1: San Francisco, speaking with Bloomberg's Surveillance co host Lisa Bromowitz 655 00:34:09,000 --> 00:34:12,680 Speaker 1: at the Economic Club of New York. For more conversations 656 00:34:12,840 --> 00:34:16,800 Speaker 1: like this one, subscribe to the Bloomberg Talks podcast. I'm 657 00:34:16,920 --> 00:34:19,279 Speaker 1: Charlie Pellatan. This is Bloomberg