San Francisco Fed President Mary Daly speaks with Yahoo Finance [Transcript]

·21-min read

Mary Daly, president of the Federal Reserve Bank of San Francisco, joined Yahoo Finance to discuss the Fed's process of slowing its monetary accommodation to the U.S. economy.

Below is a transcript of her appearance, taped on Nov. 23 and aired on Nov. 24.


BRIAN CHEUNG: Welcome to Yahoo Finance Presents. I'm Brian Cheung, thrilled to be joined today by Federal Reserve Bank of San Francisco President Mary Daly. President Daly. How are you?

MARY DALY: I'm terrific. Thank you for having me. And Happy Thanksgiving!

BRIAN CHEUNG: Happy Thanksgiving as well. Want to get this big news item out of the way. Your colleague Jay Powell renominated for a second term as Fed chair and Lael Brainard for the vice chair spot. Just wondering if you have any thoughts on that news that broke this week?

MARY DALY: Well, I'm super excited for both of them. I think it's really an acknowledgement of the long service that both Jay Powell and Lael Brainard have given to the Federal Reserve. And, you know, if you look back in how Chair Powell has navigated through the pandemic, and actually navigate us through crafting a new framework, he really combines listening to people, being able to speak effectively in plain English, and being able to craft policy that works for every American. And Lael Brainard— Governor Brainard has been part of those conversations, part of those discussions. And so these are two terrific choices, and I look forward to working with them if the Senate approves them.

BRIAN CHEUNG: Now, as a secondary question from that, also have to get this out of the way: there was some reporting about you being considered for a Board seat, but you declining. Just wondering if you have any comment on that?

MARY DALY: Well, I think for all your listeners, I have a terrific job here in the 12th district. And I serve all the members of the nine western states. But also — and I think this is little known about Fed presidents perhaps, is that we are crafting national policy. So when I walk across the threshold, even though I'm not in DC, I am thinking of every American in every location throughout the United States. And so I'm just eager to serve in those roles and be part of these important discussions as we navigate, you know, out of the pandemic and into our new future.

BRIAN CHEUNG: Well, let's dive into those important conversations, the macro story right now in Fed policy, a lot of chatter about the Fed’s tapering process, which began this month. So you were buying about $120 billion a month in assets, the pace of slowing that down is going to be about by $15 billion per month, which the math would put us stopping that whole asset purchase program by the middle of next year. Your colleagues have already started talking about maybe speeding up that process. What do you think?

MARY DALY: Well, I certainly see a case to be made for speeding it up. We have two important data points that are going to come in before the next meeting, and will really inform my take, our deliberations, and certainly my thoughts. Those are another report on the labor market — another jobs report — and also another report for the CPI. And if things continue to do what they've been doing, then I would completely support an accelerated pace of tapering. Because what tapering is about, really you have to go back to what is asset purchasing doing, it's adding accommodation to the economy. It continues to add accommodation. I think with the level of growth, the rate of growth we have, the really positive jobs numbers and obviously, the eye-popping and too high inflation, then adding support to an already robustly-growing economy just isn't what we want to do. We’d want to start bringing that support down and think about how to get the economy to its self-sustaining position. So absolutely. But it's premature to call that today in my mind, because we have not seen those two reports. While I'm looking at those data carefully and looking forward to the deliberations in December.

BRIAN CHEUNG: So what would you need to see specifically in those two reports that you described to kind of go along with the story that maybe the economy doesn't need as much accommodation as you're putting in right now? Would that look like a hot print on inflation, and also a hot print on jobs? That way you feel confident that even if you speed it up, it's not going to disrupt the labor market recovery? What's the kind of conditions that you're looking for in both of those things?

MARY DALY: I would not call it a hot print, I would like to see something that is not an unwinding of the reports we've gotten. So right now, we got a labor market report that said: we revised up some of the jobs numbers from earlier months. And it looks like the jobs market is really continuing to fire on all the cylinders for hiring. The inflation numbers: after coming down for a few months on the monthly basis, the CPI monthly numbers were high again. And so if that continues, then those are the things that would say, looks like we need faster tapering. And don't forget, fourth quarter growth looks like it's going to come in faster than many had forecast originally. And so all of those things suggest that underlying momentum is really strong. You know, the retail sales numbers, the spending data that came out just a few weeks ago, really reminds us that demand is not our problem. Right now supply is our problem. And so for that reason, adding further accommodation to an economy that has a demand and supply imbalance, to me, it would be hard to make a case that we shouldn't do that, to just sort of accelerate the pace of tapering. But again, let's say I'm open to it, but I'm not definitive until I see those prints and until I deliberate with my colleagues.

BRIAN CHEUNG: Now, I want to dive later on into the supply and demand side of things. But to kind of stay on the policy side of things, just wondering if there's a mechanical link between slowing asset purchases and inflation. Because this is a talking point we're starting to hear more. But would accelerating the process to bring asset purchases to an end — let's say earlier than right now — would that do anything to immediately alleviate those rising price pressures that people are seeing at their stores?

MARY DALY: Not likely. So the problem with — or the issue with monetary policy is that it works with a lag. And so even when we're, you know, taking the accommodation away, or even when we would tighten policy, it takes 12 to 18 months to really have that show through. And right now, the inflation numbers that we're seeing are really about supply-demand imbalances and bottlenecks. And so, things that move those numbers are things like releasing strategic oil reserves, or increasing the hours that the port works, or improving the transportation networks, these are the things that are really going to matter. The thing that is often in the background, but is probably the most important thing, is getting COVID behind us. Because when you look across the globe, the key reason we have so many imbalances is because there's so much episodic downtime on the part of suppliers, whether they're distributors or the actual builders of goods. They just can't keep their factories running, or their distribution networks running, at full capacity, because we still have a health crisis. So those are all the factors that will have the more immediate effect on inflation. The issue with tapering is really about: do we think the underlying momentum of the economy is sufficiently strong. And we've achieved or are moving towards achieving our price stability and full employment goals so that we can dial back and eliminate the additional accommodation we're adding and move to a more normalization of policy and let the economy run on its own. I mean, that's the perfect world for the Fed is that the economy runs on its own self-sustainingly, but we have to get it there.

BRIAN CHEUNG: Well, you bring up the normalization of policy, and that's naturally going to lend itself to a discussion of the timing of a rate liftoff, you're still holding rates at near zero. When can you see the first rate liftoff happening, especially given kind of what you said about maybe needing to remove or rather slow the accommodation that you're putting in maybe a little bit faster than as was set right now?

MARY DALY: Sure. Well, the first thing that I want to say is that these things aren't inextricably linked. So asset purchases and the rate increase are different decisions. And what I am thinking, though, is that you look at the data, and you’ve got spending and strengthening of the economy, GDP growth, and a strong employment market, and inflation that's above, currently, our price stability goals. And it looks like an economy that's really firing on many, many cylinders. But I'm balancing that against the fact that a lot of the factors that are boosting the high reads on inflation are related to COVID and will hopefully unwind as COVID gets behind us. And then of course, I think of those 4 million-plus workers who have been sidelined during the pandemic and can't really be declared never coming back yet. I think that's premature. So I have a sense of patience, that we need to think through this, look through the first and second quarter of next year to see what the data bring us. But I'm very open and in fact, leaning towards, that we’ll want to raise rates from the zero lower bound at the end of next year. That's my modal outlook, that the economy will have sufficient strength. But again, you know, think of a neutral rate of 2.3, 2.5%. We're just lifting off, you know, say we lift off and raised a couple times next year, we still have a lot of accommodation that we're giving the economy. That's not about restricting the economy, it's just withdrawing the level of accommodation we're offering it as it gets its own legs under it, which I think it clearly is.

BRIAN CHEUNG: So and this is an interesting point that you bring up ahead of a few weeks from now in mid-December, your next FOMC meeting, where you'll have to put in a dot on that chart. And I understand that we're a few weeks out, you want to see those data prints, but so for right now, though, your model forecast is for one rate hike through the end of next year?

MARY DALY: I'm really leaning towards looking at those next two prints, basically. So I don't want to be tied down to a particular number because I want to be, and am as a person, data dependent. And so what I really am trying to convey is that, relative to where we were just even six months ago, eight months ago, the economy has more momentum, it looks like it needs less of our support than I thought it did back then. And so I'm pulling forward my gradual offset, or gradual reduction of accommodation to the economy. So it wouldn't surprise me at all if it's one or two at the latter part of next year, but I have a couple of data prints in front of me and also the deliberations with my colleagues to really think about this.

BRIAN CHEUNG: Okay, so big picture question here. You were mentioning earlier the timing of tapers not supposed to be any sort of direct signal on the timing of liftoff. But at the same time, it does kind of seem to be the case that if you were able to wrap up your asset purchase program earlier, that would signal an earlier start time for the beginning of liftoff, at least that might be one interpretation from the markets. How difficult is it to communicate what you were just saying about these things aren't linked, when markets and maybe Fed watchers are saying, well, there is kind of a staggering by which this process has to happen?

MARY DALY: Well, sure. I mean, I think it's natural to say, because we have been — we have said repeatedly that we want our policy tools to be aligned. So it would be in conflict, if you think of it to be adding accommodation with asset purchases and raising the interest rate. I mean, there might be a case to be made for it. But for us, it seems incongruent, right. So as soon as we finish asset purchases, then markets and other Fed watchers say, ‘Well, now you can raise the rate.’ And that's true, we definitely have that optionality. But I don't think it's as hard to communicate, as you might fear. I think Chair Powell, and this is one of the things I'll really give him credit for, he has been able to consistently convey to market participants, but also households and businesses, what the Fed is looking to do and why. And do that in a way that I think has been demonstrated by — this has been a relatively smooth transition. I mean, we smoothly took to rate cuts in 2019, we smoothly managed the pandemic. And so far, we've smoothly announced tapering of asset purchases, and even the acceleration, the possibility of acceleration. You haven't seen the sort of confusion that sometimes can be held in markets. So I'm very confident we can convey this. And I think the most important thing is: continue to convey what we're looking at, what our reaction function is. And then markets and the Fed are all watching the same data and saying, OK, that's what the likely path of policy is going to be.

BRIAN CHEUNG: So let's talk about the price stability side of your mandate now. Inflation is something that households are talking about right now. I spoke with your colleague in Richmond, Tom Barkin. It was interesting because in our long conversation, he never used the T-word. He never said the word "transitory" in the entire time that we spoke. How useful is transitory as a word to describe the dynamics at play here, or are Fed officials trying to put that on a mantle in retirement for right now?

MARY DALY: You know, what I would say is this: the reason we use particular words or trying to convey things is to be effective communicators. And the first principle of effective communication is if people aren’t getting it, don't speak more loudly and more emphatically. Actually think about another way to say it that conveys your meaning. So what I'm saying is this — because I think when I put it this way, people seem to understand what I'm talking about more easily. We're really talking about inflation reads and prints that are affected by the disruptions that are particular to COVID. And those are different than things that get into the underlying psychology of people or are a part of the underlying dynamics of the economy. And the reason that distinction is so important is: if you're forecasting inflation going forward, you want to be able to parse out the ones that are COVID-related. Because as COVID gets under control, you would expect those things to subside. And it's really easy to be head-faked. And just think the high prints are what you're going to see forever, unless you ratchet back the economy. But that would be premature. And if we do that, we could leave millions of Americans on the sideline and ratchet back the economy in a time when the COVID-related factors are causing inflation to come down a bit. So that's why this is so important. It's really not about transitory or persistent. It's really about — if you really get down to it, it's about which ones are related to COVID and supply chain bottlenecks and fiscal stimulus that gave people more money to spend at a time when supply wasn't there to respond. And how much of it is going to be regular part of our dynamics or our psychology that the Fed has to take into account. So, bottom line is we're thinking about this because people are lining up at the gas stations and grocery stores and paying more. But they're also people lining up looking for jobs, and they don't have them yet.

BRIAN CHEUNG: So I want to talk about the COVID-related disruptions that you were just outlining there. That's been a big factor for the port bottlenecks that we've seen, which are in your district. Wondering if you’ve engaged with the ports of LA and Long Beach, are there any signs that those pressures from COVID-related shutdowns are going to alleviate at any point in time?

MARY DALY: Well, I think that we're hearing the same thing you're reading and hearing, is that these are lasting for longer than we hoped. And part of it is, I just mentioned this the other day in a speech I gave in August, the port in Vietnam had to shut down because of COVID. But that has ripple effects throughout the supply chain distribution network. And so, I think everyone's hopeful. We're certainly — The ports are open, the ports are busy. But then: do you have the trucks in place? Do the trucking networks work? And all of these things matter. And so I think most of my contacts are telling me that they're looking at the second half of next year for these resolutions, for some more normalcy. But we're seeing positive signs and green shoots, as people like to call them. I think that the world is getting more in balance. But we're not there yet by any means. And hopefully COVID will stay at the levels it is now and not surge in, which would only make these bottlenecks worse. So good news and bad news on these fronts in terms of its persistence, but I don't — more persistent doesn't mean forever. And I think that's the key message our port contacts keep telling us, and our distribution networks and even suppliers of goods and services. More persistent than we wanted doesn't mean forever.

BRIAN CHEUNG: Labor market. There's over 4 million people out compared to pre-pandemic levels. How confident are you that we can get them all back?

MARY DALY: Well, the longer it goes without them coming back — people are inertial, if you will, all humans are kind of inertial, we don't like change. And so the fixed cost of adjusting is harder and rises over time. But I'm still confident that Americans want to work, that people need money to feed their families, they want to build careers. And I think about women in particular right now, who have reported that they've been out. Moms, they're out because they're worried that they can't manage their job demands and take care of their kids. And so child vaccinations really can be the game changer we're looking for. When parents can send their kids to the school and believe that that child will stay in school during the day and not be quarantined for two weeks, that will give moms and dads who care for their kids, more reassurance that they can re-engage in the labor market. So I think it's far too early to count people out. Even retired people. People say they're retired and then they come back. We saw this in the great aftermath of the Great Recession. And you're even seeing it now as the flows from retirement to work are increasing among 55 and older workers. And I think these are all positive signs that suggest it's a fluid labor market right now. Not as smooth as we'd like. But way too early to count these people out and say that they're never coming back and a sustainably growing economy wouldn't attract them.

BRIAN CHEUNG: When we get that next jobs report, what's going to be more important: the headline payrolls add that shows who's returning to the labor force? Or wage growth, which might show not only the ability of people to get paid more, but perhaps the stickiness of possible inflationary pressures?

MARY DALY: Sure, so I am looking at both. I'm looking at the headline payroll numbers, I'm looking at the unemployment rate, I'm also looking at the labor force participation rate. Because one of the big safety valves on future inflation, wages is how many people are coming back. And if we're not having people come back right now, then that's going to be another thing that would be in my input process for forecasting future wage inflation. The prints on wage inflation have been high, higher than we've normally seen. But I haven't seen anything that would suggest yet this sort of vicious wage-price spiral that would suggest it deeply in people's psychology. I just don't see that mechanism forming right now. So I’m watching all of those data, but I don't think even a high wage growth print would suggest that we know more about whether this will be persistent. Because it's always hard for people to remember — everybody, for all of us to remember — is inflation is about continually rising prices, not just prices that have risen and stay there. And so wages might rise and stay there. But will they continue to rise as we go forward? That I think we're less confident about.

BRIAN CHEUNG: Yeah, big difference between levels and rates of change, people can’t seem to remember that. But last question here just to wrap up here. Your job involves engaging with people in your district. When you run into someone on the street in Oakland, especially the Californian right now, they're talking about oil prices, they're worried about rising prices at the store, they might be out of a job, one of those 4.2 million people that are still out of the labor force compared to pre-pandemic levels. What is the biggest thing that's on the mind of someone in the 12th district right now? And what do you tell them?

MARY DALY: So you nailed it, honestly. So I could go — I walk in my neighborhood around. And I went to a Walgreens the other day, and a woman was buying and she couldn't afford the goods that were in her basket that she had bought maybe a month or two ago. And she had to do that uncomfortable thing of taking things out of the basket so that she could afford the bundle with the cash that she had. And so I see that, and then I walk out and I see, in this case, a couple of men who are 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 that the labor market is as strong as it was before we went into the pandemic. Because they were fully employed and had regularly paying jobs, and now they're scraping together odd jobs because employers say, ‘yes you’re hired.’ But if a firm doesn't have any demand because people don't want to wear masks in the store, they get shut down, or they have to curb their activity, then the worker has to pay for that. There's no earnings or employment or hour stability. So I see both things every day when I walk out into my neighborhood. And it just reminds me why the Federal Reserve has a dual mandate. And in this case, the dual mandate is balancing those two things: making sure that we deliver both price stability and full employment. And I see in Oakland, what I’d probably see anywhere in the United States. Both matter and both are here.

BRIAN CHEUNG: All right, a wide ranging conversation right there. Federal Reserve Bank of San Francisco President Mary Daly, thanks so much for stopping on Yahoo Finance today. And Happy Thanksgiving to you and your family.

MARY DALY: Happy Thanksgiving to you. Thank you.

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