San Francisco Fed President Mary Daly speaks with Yahoo Finance [Transcript]
Mary Daly, president of the Federal Reserve Bank of San Francisco, joined Yahoo Finance to discuss her outlook on inflation and the central bank's response.
Below is a transcript of her appearance, aired live on April 21.
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BRIAN CHEUNG: Welcome to Yahoo Finance live. I am Brian Cheung live here at the Federal Reserve Bank of San Francisco alongside the president of the San Francisco Fed Mary Daly. Good morning. How are you?
MARY DALY: Good morning. I'm terrific. Thanks for having me.
BRIAN CHEUNG: We were hoping to do this outside originally but a bit of a rainy day here in San Francisco. Karl the Fog I think is coming above us. Hey, I want to begin our conversation. Obviously, the Federal Reserve very much in focus right now because of the high inflation that Americans are experiencing right now. So the Fed has obviously made it clear that it needs to move faster to move on that front. How fast does the Fed have to move on interest rates to address that issue?
MARY DALY: Well, I like to think of it as expeditiously marching towards neutral. It's clear the economy doesn't need the accommodation we're providing. And so in order not to tip the economy over by reacting abruptly, we need to take a measured pace. But that measured pace still gets us up to the neutral rate, which I put at about 2.5% by the end of the year.
BRIAN CHEUNG: So for Americans that maybe don't know what the neutral rate is, when you say 2.5%. Again, current rates right now are between 0.25% to 0.50%. That suggests you've got a far ways to go. So what's the time horizon for that? How aggressively does the Fed have to get to that point?
MARY DALY: Well, if you think about it, we have to get to 2.5 if we aim for that. And I'm part of a committee. So we haven't deliberated on all of that yet, but that's my view, get to 2.5 by the end of the year. Then you need to make up that difference of two percentage points over the course of the remaining meetings. And so we will likely be taking a 50 basis point increase in a couple of the meetings, also starting our balance sheet reduction program. And those things are appropriate policy because Americans want relief from inflation and we will do our part which is to bring demand back in balance to the extent we can with supply.
BRIAN CHEUNG: You spoke yesterday and mentioned that inflation is likely to come back to the 2% target that the Fed has — this year. So that means that this hiking cycle is going to go beyond 2022. So when you say neutral, 2.5%, how far does the Fed need to go perhaps above that, to make sure that these inflationary pressures can come down?
MARY DALY: Sure, I think that's an open question. Because a couple of factors — not just the Fed — are going to be impacting inflation this year as well. So we have to watch out for those. One is, we hope that COVID will be receding and then we'll get supply chains, more in balance with where they usually are. We still have disruptions in China closing down cities. In those lock downs, those disrupt supply chains, which ultimately impact that low supply that’s bumping against high demand. So that should resolve. The fiscal stimulus also, that fiscal agents gave to citizens so that they could weather the storm of pandemic, that's rolling off. So those things will bring demand back into balance, as well. And then we of course, raise the interest rate. So I'm watching over this year to see how much our move to neutral restraints the economy along with the repair supply chains and the fiscal roll off, and then how restrictive we might need to be. So that's an open question and one that I don't want to get prematurely to before we see the data.
BRIAN CHEUNG: Your colleague in St. Louis mentioning the possibility of maybe even doing interest rate bumps in increments larger than half percent at a time. Is that something that you can see on the table?
MARY DALY: What I'm seeing is, really to assure the American people that we're going to get inflation back down, we're going to aim for our target. That is something that, in my judgment, gets to neutral by the end of the year to get on a good path for that. Then, the tactics about: is it 50, is it 25, is it 75? Those are things that I’ll deliberate with my colleagues. But my own starting point is we don't want to go so quickly or so abruptly that we surprise Americans and make them have to adjust quickly. Because they're already bearing the burdens of high inflation. Why make them sort of have to adjust to rapidly rising interest rates when we already see the rate path that we've talked about being priced into financial markets. So the main thing that I want your listeners to hear is that even when we talk about the path, it gets adjusted into financial markets, and that is tapping on the brakes of the economy already.
BRIAN CHEUNG: Well, and that's a tightrope, right? Because if you raise interest rates too fast, get too aggressive, that might tilt the economy into recession. We see up the yield curve, perhaps, signaling the risk of that. So what is the risk that you see today — ahead of the next meeting May 4 — for the Fed actually tilting us into a recession because of abruptly raising rates?
MARY DALY: So that's not my modal outlook. My modal outlook is we'll have what we consider a smooth landing, and we're already seeing adjustments in financial markets. Again: tap on the brakes. Mortgage interest rates being a good example. And those things will start to percolate through the economy. We’ll then take these measured increases — 50 basis point increase in all likelihood — in the coming meeting, from my judgment. You know, I have to wait for my colleagues of course. And balance sheet reductions. And then we continue to march forward to this neutral rate. Those things— the economy is so strong, the labor market is so strong, growth is good, sentiment is good, both in businesses and consumers. There isn't a sign that the economy is going to tip into recession simply because we're removing accommodation. It's demonstrated they can self sustain
BRIAN CHEUNG: The track record of the Fed achieving a soft landing is a little, a little spotty.
MARY DALY: I wouldn't agree with that. But we can look the data. We don't have to rely on my judgment here. So Alan Blinder, Princeton professor, former Vice Chair of the Federal Reserve has a study we looked at the last 11 hiking cycles, which is when the Fed moves off an accommodative stance to a tighter stance of policy. And he found that seven out of the 11 were smooth landings with no recession or a very modest couple of quarters of negative growth. So the odds are a little bit in our favor that this can be done. But that's nothing to be complacent about. We have to be intentional, and communication with American households and businesses is the critical tool we need to use.
BRIAN CHEUNG: Threading the needle, certainly with inflation at 8.5% as of the last CPI print. Some commentary that we have seen after that report suggested maybe that's the peak. Do you see that as the case?
MARY DALY: I think its a fraught-with-peril exercise to forecast the peak in inflation. China's still dealing with COVID. Many other places in the globe are dealing with COVID. We have the war in Ukraine. I mean, the supply chain bottlenecks are a critical component of the inflation you see. So what we need to do now is try to get demand back in balance with that, and then really work to make sure COVID is behind us, and that we manage the supply chain bottlenecks coming from the war.
BRIAN CHEUNG: So you mentioned labor markets earlier. Your commentary yesterday, you said that labor markets look frothy right now. Workers might be looking at that commentary and saying well, “things are pretty good for me. I have a lot of options. Wages are going up.” Now, of course inflation adjusted is a little bit of a different story. But what do you mean when you say labor markets are frothy?
MARY DALY: What I mean by frothy is that they're producing an inflationary push on wages. That's actually not good for workers. Because what I'm hearing when I'm out, especially among low or moderate wage workers, is that they feel like their cost of living is rising more rapidly than their wage increases. And so their real well-being is falling. That's a frothy labor market that — maybe it's just an auction environment, but it's not building, you know, solid gains in incomes in real terms, you know, inflation adjusted. So that's why we have a dual mandate: full employment and price stability. I said it this way, and I really believe this: high inflation is bad for workers as not having a job. So we really need to get both in balance.
BRIAN CHEUNG: Does that suggest that you see a wage price spiral beginning?
MARY DALY: I do not see a wage price spiral beginning. A wage price spiral is one where people's expectations of the future is just completely built in. And what I see now is — we did a survey where we went out and talked to our contacts. We have a public series of roundtables on inflation. What we heard is that businesses feel like the end is coming and how much they can pass on to consumers. And the consumers or workers are saying, you know, they want a more balanced economy. So those two sentiments do not suggest we have a wage price spiral. It suggests that we need to move out of the accommodative stance and back to a neutral one.
BRIAN CHEUNG: And you've done extensive research on kind of the wage wedge into inflation. I'm wondering, when you see trends like unionization, right, you're seeing a lot of these big tech companies seeing laborers, you know, kind of be empowered to want to come to the table with their employers. How important do you think that trend is to what we're seeing in labor market dynamics, because some of that is a function of the macro it seems like as well.
MARY DALY: Absolutely. So we do know that workers had lost most of their bargaining power. And that was true for decades. Now with the hot labor market, a really strong labor market, workers are finding voice. But you know, what I hear when I talk to worker groups? They're looking for working conditions as much as pay. Pay is not a sufficient number for workers. They want to have good break time, safe conditions, a work-=life balance, some predictability, those are the things that workers want as well. So it's both the wage growth and the incomes but it's also these working conditions.
BRIAN CHEUNG: So I want to go back into the nuances of monetary policy and talk about the balance sheet. You mentioned that earlier, some conversation in the meeting minutes for the last meeting that was in March kind of kicked off the process of the mechanics of how you might want to shrink your $9 trillion in holdings. The talk was about $95 billion of reduction a month. You would ramp up to that at some point, that was one of the policy options that you have yet to decide on. Could you see is that the way you want to go about this? Would you want the Fed to go faster in terms of rolling down the balance sheet?
MARY DALY: Well, I'm gonna back up from a specific number right now, because I really think it's important to get first principles in place. So the way I start, for me, is where's the economy now? Relative to the last time we did this, which is our historical experience after the Great Recession, we were in a much better place. So that tells me we can go earlier relative to the rate hikes and we can also go faster. But we want to make sure that whatever speed we choose, allows it to be a good one. If there's upside risk to the economy, and it grows faster than we expect, or if there are downside risks to the economy. So we want a balance sheet program that's doable through a variety of circumstances so that we can use the Fed funds rate rather than the balance sheet as a tool of calibration. The Fed funds rate is the one we have the most experience with. Tt's the one people understand is the one that has the most precision with adjusting policy.
BRIAN CHEUNG: So it seems like everyone on the FOMC right now is a hawk, because directionally interest rates are going to be going up, but when you talk about just kind of comparative policy here, it seems like there's a lot of range as we saw from the last range of dot plots on how fast the Fed needs to move here. How difficult is that to message right now? Because forward guidance is such an important part of that policy, but this is an environment that we haven't seen before.
MARY DALY: Well, honestly, I see that the communication is all coalesced around a simple thing. Americans are expecting inflation to go up. Inflation is too high. We need to get inflation back down to our price stability goal. We'll do that over time to make sure that we don't tip the economy into recession by acting too aggressively, but to also assure Americans that they will not have to wake up every morning thinking about inflation. But I think there's also a correlation, a coalescing around the idea that the labor market is in a really strong position. That doesn't mean that workers won’t come back eventually who were sidelined more permanently after the pandemic, but it does mean that every worker today who wants a job probably has multiple opportunities, not just one.
BRIAN CHEUNG: Big picture question here, just kind of on the Fed. The San Francisco Fed’s unique research here. A lot of work being done on the climate change implications of the economy going forward. Tell us a little bit more about the San Francisco Fed’s interest and that type of research. There's been some in Congress who have argued, is this in the Feds remit? Is this kind of something they should be doing?
MARY DALY: Well, thank you for the question, because it's a really good opportunity to talk about what we do. But importantly, what we don't do. So we are not climate scientists. We are not climate policymakers. We don't have any levers that affect climate, weather climate risks ahead of us. What we do have though, is an obligation to the American people to achieve our policy goals of full employment, price stability, and also our core responsibilities of a stable and sound payment system and a stable and sound financial system. In order to do those core responsibilities, we have to understand how a changing climate affects the economy, how it affects financial institutions, how it affects insurers, and so we're students. We're students of the economy and whether the economy is changing because of trade policy or geopolitical risk or climate. We have to understand that in order to fulfill our responsibility, so that's what we do. Our people are all working on those things. How does weather and emerging patterns change how economic activity is allocated and how where people can work and where people can live?
BRIAN CHEUNG: Now, I think when it comes to people that are still learning about the Fed, trying to figure out what is the responsibilities of the Fed within those contexts. There's been a lot of questions about the structure of the Fed as well. Senator Toomey suggesting that maybe the Federal Reserve System and the structure of it needs to be changed. How do you feel the reality of the San Francisco Fed specifically is important to the constituents and the people and the businesses and the contacts that you engage with on a daily basis here?
MARY DALY: One of the things that I like about the original founders of the Fed when they put it together is this recognition that the United States is a big and vast place. And there are many regional differences. And we also have this recognition, I think, from the original founding, that having a DC-focused place maybe isn't the way to include every American. And if we really have a full employment mandate and a price stability mandate and a payment system and financial system responsibilities, we have to know what the different regions are bringing. You know, the Atlanta Fed region is a very different region than the San Francisco region. There's different challenges. There's different observations, and there's just different things we can bring to the deliberations for monetary policy or even how we supervise and manage the banking system along with other regulators. And these are important things. I really think the founding authors of the Federal Reserve System had that in mind that there's regional differences as an asset, but then we have to have representation from the different regions.
BRIAN CHEUNG: And then time for one last question. You're just to come around full circle to the issue of the day, which is inflation. For the people who are just kind of wondering when should we expect inflation to come back down? When can we expect to be able to go to the store and see price increases that aren't at the levels that we're seeing right now? What's the message to them?
MARY DALY: So the message to them and the message I give to everybody we talk to is: we are on our responsibilities, we're removing accommodation, the plan is to get something close to neutral by the end of the year, at least from my vantage point. And if we do that, then we should see inflation pressures ease. Will they get to 2%? Not in my judgment. That's not my modal outlook. That'd be great f they did, but I don't think we're ever going to get there that quickly because of the supply chain disruptions that we continue to face. But we are going to get there and so I'm looking into next year for getting closer to our 2% goal. But this year, for inflation to get off these high levels of you know, breaching 8% and back down to something that feels a lot more manageable. And that's the commitment I've made to the policy work that we do.
BRIAN CHEUNG: All right. San Francisco Fed President Mary Daly, live from the San Francisco Fed again, it's great to see you in person.
MARY DALY: Appreciate it. Thank you.
