Speaker 1: Bloomberg Audio Studios, podcasts, radio news that's turn.
Speaker 2: To the Federal Reserve policymaker is remaining divided ahead of
Speaker 2: the December meeting. The San Francisco Fed President Merry Daily,
Speaker 2: writing in a blog this morning, we must ask ourselves,
Speaker 2: are we in the nineteen seventies or the nineteen nineties.
Speaker 2: We can't ignore the seventies or the post pandemic inflation
Speaker 2: run up, but we can't ignore the rest of history either.
Speaker 2: The Fed President Merry Daily joined us now for more.
Speaker 2: President Daddy, welcome back to the program. Always good to
Speaker 2: see you. Let's just start with that question that you
Speaker 2: ask yourself what's guiding your assessment of where we are.
Speaker 3: So I'm looking at both inflation and productivity. And if
Speaker 3: you look at inflation, you're seeing that it's been pretty
Speaker 3: contained so far in the goods prices which have been
Speaker 3: directly tariffed. And then you look at the other parts
Speaker 3: of inflation, you just don't see much of a run up.
Speaker 3: So that's good news, and inflation expectations what people expect.
Speaker 1: Remain very well anchored.
Speaker 3: Look at productivity and you see that activity is rising
Speaker 3: GDP growth is rising, while the labor market is slowing,
Speaker 3: So that tells me there's a little bit of that
Speaker 3: boost coming from firms looking to do more with less,
Speaker 3: but that's also causing a slow down in the labor market.
Speaker 3: So the fifty basis point adjustment we've made has helped
Speaker 3: support the labor market, but still keeps policy restrictive so
Speaker 3: that we can put downward pressure on inflation.
Speaker 4: President Daily, what are you looking at to determine whether
Speaker 4: it's the nineteen seventies the nineteen nineties.
Speaker 3: Well, I'm going to really look at things that improve
Speaker 3: productivity to think about the nineties, And it's more than
Speaker 3: just the stock market valuations for AI companies. It really
Speaker 3: is about the companies out there who might be using
Speaker 3: AI and then asking them, going directly to them and
Speaker 3: asking them, what's it doing for your bottom line and
Speaker 3: how are you using it? And what we're hearing are
Speaker 3: pretty encouraging, but very early signs.
Speaker 1: They see how it can help.
Speaker 3: Their bottom line, how can improve their productivity, even how
Speaker 3: they can be supportive of their workers, give them more
Speaker 3: interesting work, take the less interesting work away. But they
Speaker 3: all tell us it's early days, so more to come
Speaker 3: on that. And then on the inflation part, are we
Speaker 3: in the nineteen seventies, really asking employers and firms what
Speaker 3: are you doing with prices? Are you thinking about raising
Speaker 3: your prices? How are you going to think about losing
Speaker 3: volumes if you do so in a slowing economy, especially
Speaker 3: for consumers you know, from the fiftieth percentile down. And
Speaker 3: putting those two things together, I think we'll get a
Speaker 3: lot of clarity about which direction we're heading. And with policy,
Speaker 3: you know, been slightly adjusted, we are in a good
Speaker 3: place to continue to evaluate the information before we make
Speaker 3: any decisions.
Speaker 1: We can't know x Ante.
Speaker 3: Before the day to come out, and before we get
Speaker 3: that information really what we're facing. We just have to
Speaker 3: have an open mind about which one it could be
Speaker 3: and maybe other periods of history.
Speaker 1: I didn't even mention.
Speaker 4: President Daily how different would the neutral rate be if
Speaker 4: it were, say, more like the nineteen seventies or more
Speaker 4: like the nineteen nineties. Just how different would FED policy
Speaker 4: be in response to one or the other paradigm?
Speaker 3: Well, you know it, there's many nuanced ways it could
Speaker 3: affect the neutral rate. But I can back up from
Speaker 3: that and just ask what were the policy remedies if
Speaker 3: you think we're about to have an inflation run up.
Speaker 3: Then we obviously would have to hold policy tighter for
Speaker 3: longer because we wouldn't want that to occur. You know, honestly,
Speaker 3: Americans have endured already too much inflation, and we really
Speaker 3: need to get that back down to two percent to
Speaker 3: restore price stability, as we've committed to. On the other side,
Speaker 3: if it's productivity, you would start seeing the economy.
Speaker 1: Able to run a little bit longer.
Speaker 3: Maybe if you go back to the debates of the nineties,
Speaker 3: you know, we saw the labor market slow. Workers were insecure,
Speaker 3: but the labor market had unemployment that was fairly low,
Speaker 3: and many at the time were worried that could spur inflation.
Speaker 3: But Greenspan chairman green Span held on with his colleagues.
Speaker 3: They didn't raise rates. And what you saw was, you know,
Speaker 3: the nineties, which was a booming time, and we ended
Speaker 3: around target inflation and we had a productivity boom. So
Speaker 3: you're trying to balance those two things together, and it
Speaker 3: means not looking just at headlined information, but getting below
Speaker 3: that information, talking to firms, talking to consumers, talking to workers,
Speaker 3: really on the ground work, like we do at the
Speaker 3: reserve banks and other places. You know, the FED is
Speaker 3: built to do this on the ground work as well
Speaker 3: as look at the published data.
Speaker 4: President Daily reading the blog post this morning, it seems
Speaker 4: like you're leaning more toward the nineteen ninety side of
Speaker 4: things than in nineteen seventies. Is that right?
Speaker 1: Well?
Speaker 3: You know right now, you know, I'm in the West,
Speaker 3: in I have the nine states in the Western United States,
Speaker 3: and it's not just Silicon Valley that seems interested in AI.
Speaker 3: No matter who we talk to, whether they're you know,
Speaker 3: small businesses, medium or large businesses, manufacturing, tourism, etc. They're
Speaker 3: using AI in a way that they say is going
Speaker 3: to improve their productivity, and they're already seeing parts of it.
Speaker 3: So when I see that, I'm like, Okay, we need
Speaker 3: to think about that. What really will spur this is
Speaker 3: an ongoing thing, is if they start to change their
Speaker 3: business processes.
Speaker 1: So that's what I'm looking at now.
Speaker 3: That means, but I guess a different way to say
Speaker 3: that is we cannot take our eyes off inflation again.
Speaker 3: Americans have endured high inflation too long. That's our mandate.
Speaker 3: So while I'm looking for productivity gains and seeing if
Speaker 3: they're going to continue, I'm also keeping my eye completely
Speaker 3: focused on inflation to make sure that it doesn't pick
Speaker 3: up in a way that would suggest we need to
Speaker 3: do more or we need to hold longer.
Speaker 2: President Teddy, how would you respond to the criticism that
Speaker 2: the Federal Reserve as an institution has taken its high
Speaker 2: off inflation, that inflation is close to the three than
Speaker 2: it is the two, and the Fed's been kind of
Speaker 2: interest rates.
Speaker 3: You know, I don't think that if you unpack the
Speaker 3: inflation data you really see signs of that. It's true
Speaker 3: that headline inflation is printing at that level, but you
Speaker 3: have to take apart that inflation and ask how much
Speaker 3: of it is the effect of tariffs passing through the
Speaker 3: goods prices that we expect to be a one time
Speaker 3: price level adjustment and not a consistent run up in inflation.
Speaker 3: And if you unpack the data, what you see is
Speaker 3: you don't see inflation running up in services or housing,
Speaker 3: and importantly, you don't see it's reading into inflation expectations
Speaker 3: that would be the thing that would continue to run
Speaker 3: up inflation going forward. We also see a labor market
Speaker 3: that's softening, in wage growth that is moderating, so you're
Speaker 3: really not going to see a lot of pressure coming on.
Speaker 1: The cost side of labor.
Speaker 3: So I put those things together, and we don't want
Speaker 3: to make the mistake of holding on too long for
Speaker 3: rates only to find out we injure the economy.
Speaker 2: President any can we just pick up on the cost
Speaker 2: of labor. I think this is really important right now, clearly,
Speaker 2: and it's hard to dispute this. It's in the data.
Speaker 2: We've had a massive step down and pay rolls growth.
Speaker 2: What's behind that is a little bit more confusing. Is
Speaker 2: it demand? Is it cyclical, is it structural? Is it
Speaker 2: something else like immigration? What's your talent right now? What
Speaker 2: can you point to that helps telling you it's one
Speaker 2: thing over the other.
Speaker 3: Yes, you look at prices in this case, the price
Speaker 3: of labor as wages. If it was simply about supply
Speaker 3: and firms were still scrambling to find workers to fill
Speaker 3: what was jobs that were supported by the previous immigrants,
Speaker 3: you would find wages going up as they bid for
Speaker 3: workers to try to fill those jobs.
Speaker 1: But that's actually not what you see.
Speaker 3: You see wage growth slowing even in sectors where immigration
Speaker 3: played a larger role.
Speaker 1: And so that to me says it's.
Speaker 3: A demand shock, a negative demand shock along with just
Speaker 3: a coincidental negative supply shock, so you lost workers, but
Speaker 3: you lost jobs at the same time, or you had
Speaker 3: job growth slowing, and what we're seeing now does that
Speaker 3: continue to net out right? What if the supply of
Speaker 3: workers doesn't keep going down but the demand for workers
Speaker 3: does well, then we'd end up with a rise in unemployment.
Speaker 1: So have to keep squarely focused on those types of things.
Speaker 3: We're definitely in a low firing, low hiring period and
Speaker 3: interrogating that labor market, continuing to watch the information, see
Speaker 3: what firms do next.
Speaker 1: That's going to be the important part.
Speaker 4: And it's something that a lot of people have said,
Speaker 4: really is the case shape the idea that, particularly on
Speaker 4: the lower end, you have not seen wages keep pace
Speaker 4: with the rest of the income spheres.
Speaker 1: I just wonder, though, how much we.
Speaker 4: Are seeing a massive amount of inflation and acid prisis
Speaker 4: and how that feeds into what you're looking at, especially
Speaker 4: at a time that may rhyme with the nineteen nineties,
Speaker 4: and we know what happened after the nineteen nineties. How
Speaker 4: much do you weigh that?
Speaker 1: How much do you have to pay attention?
Speaker 3: Well, you know one of the things that you do,
Speaker 3: so financial market conditions are one input into our decision making,
Speaker 3: one of many inputs. You know, we have two goals,
Speaker 3: price stability, full employment. We're trying to think about what
Speaker 3: inputs affect those two variables, those two goals. But what
Speaker 3: I look at is if you look under the valuations,
Speaker 3: you know, people are really talking about one of two things.
Speaker 3: This is going to be a transformative technology. AI is
Speaker 3: going to change the world to be like electricity or
Speaker 3: the steam engine.
Speaker 1: And then the people who are a little more skeptical.
Speaker 3: Are saying it's going to be a business as usual technology.
Speaker 3: You think of computers in the Internet. The thing that's
Speaker 3: true about both of those is they're both productive. You
Speaker 3: get productivity from both of those. They both help with growth,
Speaker 3: they both help the pie and the expand And so
Speaker 3: we're not talking about a bunch of ideas with no backing.
Speaker 3: We're talking about, you know, equity investors, not highly leveraged
Speaker 3: going in and making banking bets really on whether it's
Speaker 3: going to be transformative or business as usual. But everybody
Speaker 3: agrees on one thing, it will change productivity.
Speaker 4: At the same time, President Daily some people would suggest
Speaker 4: that yes, you will see stocks continue to go up
Speaker 4: in the face of another rate cut, But at the
Speaker 4: same time, the transmission mechanism of the additional cuts are
Speaker 4: slower to take place. It's less efficient in terms of
Speaker 4: the pass through just based on how much lending there is,
Speaker 4: whether it's in the private lending sphere or beyond. How
Speaker 4: do you measure these things at a confusing moment?
Speaker 3: Well, you know, I guess this argument that we've somehow
Speaker 3: lost our power monetary policy doesn't transmit. I simply don't
Speaker 3: see it in the information. If you go out and
Speaker 3: you look at what happened when inflation was running really,
Speaker 3: really high, we raised rates pretty aggressively, and mortgage interest
Speaker 3: rates rose rapidly. Car rates rose rapidly, and the economy slowed.
Speaker 3: Inflation came down. Right now, what I'm seeing is we
Speaker 3: adjust rates, mortgage interest rates come down, not one for one,
Speaker 3: that's not how it works. Usually is less than one
Speaker 3: for one, but they come down. You see a little
Speaker 3: more activity in the housing market, you see a little
Speaker 3: more activity in the borrowing market more generally, and you
Speaker 3: see that dynamic work. So I guess the most important
Speaker 3: thing is just to remember that montary policy acts with
Speaker 3: a lag, and right now we're making decisions not just
Speaker 3: for what's going to happen next week, but what's going
Speaker 3: to happen in the next six months to a year.
Speaker 3: So that's how we have to think about it with
Speaker 3: our forecasts, and then how we adjust policy as those
Speaker 3: forecasts evolve.
Speaker 4: How frustrating has it been not to get government data?
Speaker 3: You know, I really want the information, the fullest amount
Speaker 3: of information we can possibly get. But one of the
Speaker 3: things that I think maybe underestimated in public about what
Speaker 3: the FED does is we're regularly relying on government provided
Speaker 3: data that's the gold standard of data in the world.
Speaker 3: We're also relying on private sector surveys which have been
Speaker 3: collected for many, many years, and we can correlate them
Speaker 3: with the government collected data over time and know exactly
Speaker 3: how they relate to one another. And then of course
Speaker 3: there's really no replacement, especially at inflection points in the economy,
Speaker 3: for talking to businesses, workers, communities, and consumers, asking people
Speaker 3: what they're really doing.
Speaker 1: And then you know, I.
Speaker 3: Like to do this, go to the parking lots of
Speaker 3: your favorite retail stores and look at how many cars
Speaker 3: are in the parking lot and what people are buying.
Speaker 3: That tells you a lot, you know, airports are are full.
Speaker 3: People are out there. You can go to you know,
Speaker 3: go to a sporting event or a concert, see how
Speaker 3: many people are there. What you see as an economy
Speaker 3: that is slower than it was, consumers that are not
Speaker 3: they're more picky about what they spend on, but they're
Speaker 3: still out there participating in the economy. And that's how
Speaker 3: we get the information we need to make the right
Speaker 3: decisions that are according to our mandates, but mostly for
Speaker 3: the American people presidentially.
Speaker 4: You've been working with the FED or on the FED
Speaker 4: Committee for a long long time on these in these debates,
Speaker 4: have you ever seen it more divided than it is
Speaker 4: right now?
Speaker 1: On the FMC? He knows, of course.
Speaker 3: I mean look at that, if you look at the
Speaker 3: transcripts and the meeting minutes, and you know it's helpful.
Speaker 3: Go back and look at the nineteen nineties debates, and
Speaker 3: go back and look at the commentary around the nineteen seventies.
Speaker 3: You know, it is a misnomber to think people always
Speaker 3: agree the right way to think about it. In my judgment,
Speaker 3: this has been my experience, is that the debate we
Speaker 3: have I wouldn't even call a division. I would call
Speaker 3: it differences. Of opinion that are really healthy in a
Speaker 3: debate about trying to make policy in an uncertain time.
Speaker 1: With no truth. We don't have truth.
Speaker 3: We have forecasts, we have our best estimates. We have
Speaker 3: taking the evidence and then taking it again and looking
Speaker 3: through it with different lenses. I see that as a
Speaker 3: strength of the committee, a strength of the Federal Reserve,
Speaker 3: and importantly is it is delivering the best possible decisions
Speaker 3: we can make. So I have seen this many times before,
Speaker 3: and I think it's always at inflection points that you
Speaker 3: see the broadest amount of dis agreement, and it's exactly
Speaker 3: what I hope people would want from a committee making
Speaker 3: decisions on inflation and full employment. It really does help
Speaker 3: us make sure that we're doing the best we possibly can.
Speaker 2: So you're happy to confirm on the records you have
Speaker 2: not seen Governor Maron and President Smith in a fight
Speaker 2: in the sea day meeting. Can we confirm that President
Speaker 2: Daily today that hasn't happened.
Speaker 3: You always try, and yet I'm not a rookie.
Speaker 1: Marry Daily, thank you.
Speaker 2: That's always good to see you.