Yahoo Finance Presents: Federal Reserve Bank of San Francisco President Mary C. Daly
Yahoo Finance reporter Brian Cheung sits down with Federal Reserve Bank of San Francisco President Mary Daly for an exclusive Yahoo Finance presentation. The long-range conversation includes a discussion of President Biden's nominations for top jobs at the Fed, as well as economic concerns over inflation, supply chain and COVID.
BRIAN CHEUNG: Welcome to Yahoo Finance Presents. I am Brian Cheung. I am thrilled to have the support of the President of the Federal Reserve Bank of San Francisco, Mary Daly, today. President Daly, how are you?
MARY C. DALY: I'm great. Thanks for the invitation. And happy Thanksgiving in advance.
BRIAN CHEUNG: Happy Thanksgiving too. I want to get this big news out of the way. Her colleague J. Powell has been appointed chairman of the Fed for a second term and Lael Brainard has been named vice chairman. I just wonder if you have any thoughts on the news that went out this week.
MARY C. DALY: Well, I'm really looking forward to both of them. I think it really is a recognition of the long service that both J. Powell and Lael Brainard have rendered to the Federal Reserve. And when you look back on how Chairman Powell navigated the pandemic and actually navigated us through the development of a new framework, he really combines listening to people, the ability to speak effectively in plain English, and the ability to develop guidelines that are suitable for all American. And Lael Brainard was ... Governor Brainard was part of these conversations, part of these discussions. And so these are two great options. And I look forward to working with them when the Senate approves them.
BRIAN CHEUNG: Well, as a side question, that has to be put out of the way as well. There have been some reports of you being considered for a board seat, but you declined. I just wonder if you have a comment on that.
MARY C. DALY: Well, for all of your listeners, I think I have a great job here in the 12th district. And I serve all members of the nine western states. But also, and I think little is known about presidents, is perhaps that we design national policies. So when I cross the threshold I think of every American in every place in the United States, even if I'm not in DC. And that's why I'm just excited to take on these roles and be part of these important discussions as we navigate out of the pandemic and into our new future.
BRIAN CHEUNG: Well, let's dive into this important conversation, the current macro story on Fed policy. Much talk about the Fed's tapering process that began this month. So they were buying about $ 120 billion in assets every month. The pace of the slowdown will be about $ 15 billion per month, which would arithmetically lead us to halt the entire asset purchase program by the middle of next year. Your colleagues have already started talking about maybe speeding up this process. What do you think?
MARY C. DALY: Well, I definitely see arguments for an acceleration. We have two important data points that will come in before the next meeting. And I think we will really share our thoughts and certainly my thoughts. This is another report on the labor market, another job report and also another report for the CPI. And if things carry on as they did, I would wholeheartedly support accelerated rejuvenation.
Because what tapering is all about, you have to go back to what Asset Buying is doing. It adds housing to the economy. It continues to add accommodations. I think with the level of growth, the growth rate that we have, the really positive employment figures and of course the breathtaking and excessive inflation, then it is simply not what we want to do to support an economy that is already robustly growing.
We want to start by dismantling this support and thinking about how we can get the economy into a self-sustaining position. So absolutely. But I think it is premature to mention it today because we have not seen those two reports. But I'm looking at these dates carefully and looking forward to the deliberations in December.
BRIAN CHEUNG: So what would you have to see specifically in these two reports that you described to add to the story that the economy may not need as much housing as you are putting in right now? Would that be hot pressure on inflation and hot pressure on jobs too? That way, you can rest assured that even if you speed it up, the labor market recovery will not be disturbed? What are the conditions that you are looking for in both things?
MARY C. DALY: I wouldn't call it "hot pressure". I would like to see something that is not a settlement of the reports we have received. So right now we have a job report that says we've revised up some of the job numbers from previous months. And it looks like the job market really continues to burn on all cylinders to make recruitment.
The inflation numbers, after having been down for a few months on a monthly basis, were back in the monthly CPI numbers. And if this continues, these are the things that would say we need a faster taper. And don't forget, fourth quarter growth seems to be coming faster than many had originally forecast.
So, all of these things suggest that the underlying dynamic is really strong. The retail sales and spend numbers that were released just a few weeks ago really remind us that demand is not our problem. At the moment, supply is our problem. Because of this, it would be hard for me to argue that we shouldn't be doing this to speed up the pace of tapering. But let's see. I am open to this, but I am not final until I see these prints, until I think about it with my colleagues.
BRIAN CHEUNG: Now I would like to go into the supply and demand side later. But to stay on the political side of things, just ask yourself if there is a mechanical link between slowed asset purchases and inflation, as this is a topic of conversation we're hearing more and more. But would speeding up the process to end asset purchases, say, earlier than now do something to help ease immediately the mounting price pressures people are seeing on their stores?
MARY C. DALY: Not likely. So the problem with - or the problem with - monetary policy is that it has a lag. And even if we took the shelter away or even tightened the policy, it would take 12 to 18 months for that to really take hold. And right now, the inflation numbers we're seeing are really about supply and demand imbalances and bottlenecks. And so are things that move these numbers, things like releasing strategic oil reserves or increasing port working hours or improving transportation networks. Those are the things that are going to really matter.
What is often in the background, but probably the most important thing, is getting COVID behind us. Because when you look at the whole world, the main reason behind so many imbalances is that there is so much episodic downtime on the part of suppliers, whether they are distributors or the actual manufacturers of goods, they just can't get their factories on Keep running or their distribution networks in full swing because we are still having a health crisis.
So these are all the factors that will directly affect inflation. Tapering is really about whether we think the underlying dynamism of the economy is strong enough and we have met our price stability and full employment goals or are getting closer so that we can fall back and eliminate the extra precautions we have? Would you like to normalize politics more and let the economy run alone? I mean, the perfect world for the Fed is for the economy to be self-sustaining, but we have to get it there.
BRIAN CHEUNG: Well, you are bringing up the normalization of politics, and that lends itself, of course, to a discussion about when to raise interest rates. They're still keeping interest rates close to zero. When can you see the first bounce happen, especially given what you said you might need to remove - or rather, maybe slow down the customization you are building in a little faster than it is now set?
MARY C. DALY: Sure. Well, first of all I want to say that these things are not inextricably linked. So buying assets and raising interest rates are different decisions. What I think, however, is that you look at the data and you have spending and strength in the economy, GDP growth and a strong labor market and inflation that is currently above our price stability targets. And it looks like an economy that is really firing on many, many cylinders.
But I weigh this against the fact that many of the factors driving high inflation rates are related to COVID and will hopefully resolve when COVID is behind us. And then of course I think of the over four million workers who were sidelined during the pandemic and cannot really be explained that they will never return. I think that is premature.
So I have a feeling of patience that we need to think this through, go through the first and second quarters of next year to see what the data brings us. But I am very open and tend to hike rates from the zero floor by the end of next year. That is my modal view that the economy will be strong enough.
But think of a neutral interest rate of 2.3%, 2.5% here too. We're taking off right now - let's say we take off and raise a couple of times next year, we still have a lot of accommodations that we are making available to the economy. It's not about restricting the economy. It just takes back the level of accommodation we offer it as it gets its own legs which I clearly believe it does.
BRIAN CHEUNG: Well - and that's an interesting point that you make a few weeks ago in mid-December, your next FOMC meeting, where you have to put a point in this table. And I heard we're gone a few more weeks, you want to see those data prints. But for the moment, does your modal forecast include a tariff increase by the end of next year?
MARY C. DALY: Basically, I tend to look at the next two prints. So I don't want to be tied to a specific number because as a person I want to and am dependent on data. So what I'm really trying to get across is that the economy has more momentum compared to what we were six months ago, eight months ago.
It looks like it needs less of our support than I thought at the time. And so I prefer my gradual equalization or gradual reduction in adjustment to the economy. So I wouldn't be surprised if it turns out to be a year or two by the end of next year. But I have a few data prints in front of me and also the deliberations with my colleagues to really think about it.
BRIAN CHEUNG: OK, so a big question here. You mentioned earlier that the timing of the taper is not intended to be a direct signal of when to take off. But at the same time it seems that if you could complete your asset purchase program sooner, it would signal an earlier start time for the withdrawal to begin, at least this could be an interpretation of. be the markets. How difficult is it to communicate what you just said about these things when the markets, and maybe the Fed watchers, are saying, well, there is some kind of shake through which this process is going to have to happen?
MARY C. DALY: Well, sure. I mean, I think it is natural to say because we have said repeatedly that we want to coordinate our policy instruments. So it would be contradicting to think of adding housing and raising the interest rate with asset purchases. I mean it might be an argument for it, but to us it seems incongruent.
So once we finish the asset purchases, the markets and other Fed watchers will say, well, now you can raise the rate, and it is true. We definitely have that option. But I think it's not as difficult to communicate as you might fear. I think Chairman Powell - and that's one of the things I really pay tribute to him for - has been able to consistently convey to market participants, as well as households and businesses, what the Fed wants to do, and why, and do it one way who I think demonstrated this - this was a relatively smooth transition.
I mean, we are moving smoothly and we made two rate cuts in 2019. We mastered the pandemic without a hitch. And so far we have smoothly announced the asset purchases reduction and even acceleration, the possibility of acceleration. You have not yet seen the kind of confusion that sometimes reigns in markets. So I am very confident that we can convey this. And I think the most important thing is to keep conveying what we see, what our response function is. And then the markets and the Fed all watch the same data and say, oh, OK, that's the likely path of policy.
BRIAN CHEUNG: Now let's talk about the price stability side of your mandate. Inflation is something households are talking about right now. I spoke to your colleague in Richmond, Tom Barkin. It was interesting because he never used the T-word in our long conversation. He never said the word "ephemeral" in the entire time we have spoken. How useful is "temporary" as a word to describe the dynamic at play here, or are Fed officials trying to turn this on its head and retract it for now?
MARY C. DALY: You know, I'd say the reason we use certain words or try to get things across is to be effective communicators. And the first principle of effective communication is that people understand, not speak louder and more forceful, but think of a different way of saying it that conveys your meaning. So I'm saying this because I think when I put it that way, people seem easier to understand what I'm talking about.
We are really talking about inflation reads and prints affected by the disruptions specific to COVID, and these are different from things that go into the underlying psychology of the people or part of the underlying dynamics of the economy. And the reason the distinction is so important is that if you are forecasting future inflation you want to be able to analyze those that are COVID-related as you would expect these things to subside if you did COVID gets under control.
And it's really easy to fake your head and just think that the high pressures are what you'll see forever if you don't turn the economy back, but that would be premature. And if we do that, we could leave millions of Americans on the sidelines and turn the economy back to a time when COVID-related factors are causing inflation to drop a bit.
That is why it is so important. It's really not about ephemeral or persistent. If you really get into it, is it about which ones have to do with COVID? It's supply chain bottlenecks and fiscal incentives that gave people more money to spend when the offer wasn't there to respond. And how much of that will be a regular part of our dynamics or psychology that the Fed needs to consider? The bottom line is that we think about it because people are queuing at gas stations and grocery stores and paying more, but there are also people who are looking for jobs and don't have them yet.
BRIAN CHEUNG: So I want to talk about the COVID-related disruptions that you just outlined there. That was an important factor in the port bottlenecks we saw in your district.
MARY C. DALY: Absolutely.
BRIAN CHEUNG: I wonder if you've looked at the LA and Long Beach ports. Are there any signs that a COVID-related shutdown will ease this pressure at some point?
MARY C. DALY: Well I think we hear the same thing you read and hear that these are taking longer than we hoped. And part of it is - you know, I mentioned that the other day in a speech I gave. In August, a port in Vietnam had to be closed due to COVID, but that affects the entire distribution network of the supply chain.
And that's why I think everyone is hopeful. We are sure - the ports are open. The ports are occupied. But then you have ... do you have the trucks in place? Are the truck networks working? And all of these things are important. And so I think most of my contacts tell me that in the second half of next year they are looking for these resolutions for something more normal.
But we see positive signs. Green shoots, as people like to call them, I think the world is getting more and more unbalanced, but we are still a long way from our goal. And hopefully COVID will stay at current levels and not rise, which would only make these bottlenecks worse. So good news and bad news on these fronts in terms of their persistence, but I don't - more persistent doesn't mean forever. And I think that is the core message that our port contacts, our distribution networks and even the suppliers of goods and services tell us over and over again. More persistent than we wanted doesn't mean forever.
BRIAN CHEUNG: Labor market - there are over four million people compared to pre-pandemic levels. How confident are you that we will get them all back?
MARY C. DALY: Well, the longer it takes to get back, the lazy people are, if you will. All people are kind of lazy. We don't like change. And so the fixed costs of customization are more difficult and increase over time. But I'm still confident that Americans want to work, that people need money to support their families. You want to have a career.
I am thinking of women who have reported being out, mothers. They are outside because they worry that they will not be able to cope with their job demands and that they will not be able to look after their children. And so, the child vaccinations could really be the turning point we are looking for if parents can send their children to school and believe that child will stay in school during the day and not be quarantined for two weeks. This gives mothers and fathers who look after their children more security that they can get back into the labor market.
I think it's way too early to count people, even retirees. You know, people say they retire and then they come back. We saw this in the big ones - the aftermath of the Great Recession. And we are seeing it even now as the flows for retirement into work are rising among workers 55 and older. And I think these are all positive signs that suggest that the job market is flowing right now. Not as fluent as we'd like it to be, but way too early to count these people and say they'll never come back and that we, a sustainably growing economy, wouldn't attract them.
BRIAN CHEUNG: When we get the next job report, what will be more important? The payroll headline ad showing who is returning to the workforce or wage growth, showing not only people's ability to earn more, but perhaps the severity of potential inflationary pressures?
MARY C. DALY: Sure. So I look at both of them. I look at the headlines on the payroll. I look at the unemployment rate. I also look at the labor force participation rate because one of the big safety valves to future wage inflation is how many people come back. And if people don't come back now, that would be another thing I would incorporate into my input process for predicting future wage inflation.
The traces of wage inflation have been high, higher than we normally see, but I have not yet seen anything to suggest such a vicious wage price spiral that suggests it is deeply anchored in people's psychology. I just don't see that this mechanism is just forming. So if you look at all of this data, I don't think that even pressure with high wage growth would suggest that we know more about whether this will last.
Because it's always hard for people to remember that inflation is about ever-increasing prices, not just prices that have gone up and will stay there. And so wages could go up and stay there, but will they keep going up in the future? I think we're less sure of that.
BRIAN CHEUNG: Yes, there is a big difference between level and rate of change. People don't remember that. But--
MARY C. DALY: It's hard.
BRIAN CHEUNG: - last question here. Last question here just to finish off. Part of your job is to work with people in your district. When you meet someone on the street in Oakland, especially the Californian right now. They talk about oil prices. They are afraid of rising prices in the store. You could be unemployed, one of the 4.2 million people still inactive compared to pre-pandemic levels. What comes to mind most of all to someone in the 12th district and what do you tell them?
MARY C. DALY: So you honestly said it. So I could go - I actually - I walk around my neighborhood. And I went to a Walgreens the other day. And a woman was buying and she couldn't afford the goods in her basket, which she had bought maybe a month or two ago. And she had to do the awkward thing of taking things out of the basket so she could afford the bundle of cash she had.
And that's how I see it, and then I go out and see, in this case, a couple of men doing odd jobs because they're picking up - that's the kind of work they can do. And if you ask them, they don't feel the job market is as strong as it was before the pandemic because they were fully employed and regularly had paid jobs.
And now they're scraping up odd jobs because employers say yes, you're employed. But if a company has no demand because people in the store don't want to wear masks, they close, or they have to cut back on their activities, then the worker has to pay for it. There is neither income nor employment for our stability.
So I see both of them every day when I go to my neighborhood. And it just reminds me of why the Federal Reserve has a dual mandate. And in this case the dual mandate balances those two things and ensures that we guarantee both price stability and full employment. And I see in Oakland what I probably see all over the United States. Both are important and both are here.
BRIAN CHEUNG: All right, a long discussion. Mary Daly, President of the Federal Reserve Bank of San Francisco, thank you for dropping by Yahoo Finance today. And happy Thanksgiving to you and your family.
MARY C. DALY: Happy Thanksgiving to you. Thanks very much.
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