A Trip to Alaska With San Fran Fed President Mary Daly

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1:24Your ads will show up during the shows the people are actually watching. And measurement tools show you what's working the hardest. Gain the edge with Amazon ads. Bloomberg Audio Studios. Podcasts, radio, news. Seconds away. The question is not if they'll cut interest rates. The question is by how much? The answer to your question, John, is a quarter percentage point cut as expected. But Fed officials also see two more cuts this year in October and December. It's Wednesday, September 17th. The Federal Open Market Committee has just wrapped up their most recent meeting in Washington, D.C. And after two days of analyzing and debating and forecasting, the committee voted to cut interest rates by 25 basis points.

2:11I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. While the unemployment rate remains low, it has edged up. Job gains have slowed. Yeah, it's the first time the Fed has cut in over a year, move coming after months of debate. And on the one hand, the labor market is slowing. But on the other hand, we're still trying to figure out what the impact of the tariffs is on prices. And consumer spending is still going strong. Right. You could make a convincing case for deeper cuts, but you could also make a case for even raising benchmark rates at this point.

2:46And we don't tend to get a lot of these types of Fed meetings where the outcome is, you know, so debatable. So we have to ask, how did the central bank actually make the decision to cut? To do that, let's back up six weeks to the beginning of August and head north. In fact, we are going 3 ,000 miles north.

3:12I added to my collection of flies for fly fishing yesterday. I am slightly obsessed with fishing lures. I don't even fish. I don't know why. I like to fish. That's Mary Daly, president of the Federal Reserve Bank of San Francisco. So here's why I get these flies. I go to places all over that have fly fishing, and then I buy a fly that's specific to their area to remind you. It's sort of geeky, but it reminds me that everybody fishes, but that you have to have a local knowledge to fish well. Yeah, you have to have the fly that's in season for that particular location. And it kind of is why you go to the places to visit to learn more about it.

3:51economy. You sort of have to, you can understand it, but you don't know it until you have the locality. So you don't do it well. Daly oversees the 12th district of the Fed. It's the largest of the districts and includes the nine most Western U.S. states, plus the most Northern, the last frontier, the Great Land, the Sourdough State. I am talking about Alaska, obviously. In early August, Mary Daly visited Anchorage, the largest city and biggest port in Alaska. It was actually her third visit to the state this year, and she's on a mission of sorts. An expedition? Sure. She's on a northern expedition to try to find answers to the questions that everyone, all Fed officials, everyone else are trying to constantly puzzle out right now.

4:33What is going on with the U.S. economy? Where is it headed? I've heard that everywhere we've gone, that the city is under so much pressure. And it's hard to, what is your diagnosis about how this happened? So what was she seeing? And how did it actually inform the Fed's decision to cut rates a month later? On this special edition of the All Thoughts podcast, we are going to follow along as Daly tours her district, speaking to local business leaders like a factory that makes parts for the oil industry. And the airport. And the port itself to try to get a closer look at the giant logistics hub that is the city of Anchorage.

5:17You know, every town in the world, I think, probably likes to describe its residents as, quote, scrappy, unquote. But this really is like the first place I've been where I think that might actually be true. People in Alaska really do seem scrappy. They have to be to get along up here. We really are on the edge of this vast wilderness. In fact, one thing we learned is that people up here love to compare the size of their state to how many Texases it would fit in. Which, to be fair, Texans love to do that stuff as well. Yeah, the answer is two and a half, by the way. Alaska is the size of two and a half Texases.

5:53OK, so everyone knows Alaska is big, but until you visit, it's hard to really appreciate just how big. The only way to get from Anchorage, which is the largest city, to Juneau, which is the capital, is a two-hour plane ride. And if you want to haul supplies from a place like Fairbanks, which is in the interior, to the oil fields on the North Slope, that is a 10-hour drive on what is mostly a dirt road with one gas station on the way. It's really isolated. There's not even a railroad that takes you to the lower 48 or even to Canada. And there are mountains that basically cut off huge sections of the state from each other.

6:32But as we learned during our visit, Alaska is still dealing with all the same issues that the rest of the U.S. faces. So things like inflation, unemployment, tariffs, housing shortages, logistical snarls. That's why Mary is here, to try to get a handle on the broader U.S. economy by looking at a place that at least right now is sort of ground zero for a lot of these trends. Is to collect information. So we collect information not only on the wide array of data that are available, and then we have history and models. We have all of those things. And then we have conversations. Today, Mary is the guest of honor at the Anchorage Economic Development Corporation's annual gathering.

7:12The Denina Convention Center downtown is overflowing with more than 1 ,500 local business owners, politicians, civic leaders. They're here to mingle, network, talk shop, and hear Mary's thoughts on where she thinks the economy stands. As well as counting the cranes as a future-looking variable, it's so important. So I just want to thank everybody who's ever answered the Beige Book, who's ever met with us. If you like the beige book, we'll send you another one. It used to be beige, by the way. So this is the fact-finding portion of the expedition, because yes, Mary is giving a speech about what she's seeing in the economy, but she's also learning from the local businesses who are listening to her.

7:49And what I've been hearing is that the uncertainty is the word of the day. I guess it was on the bingo card. And uncertainty makes it harder for firms and households to know what they're doing next, which makes it harder for us as policymakers, Federal Reserve policymakers, to know exactly how the economy will evolve. Mary isn't a voting member of the committee this year, but as a Reserve Bank president, she still participates in all the FOMC meetings where she offers her own assessments and opinions based on what she's seeing in the economy of the 12th district right now. And so her views still do help shape the committee's decision.

8:22All the states in my district on a regular basis, as are my teams. And the reason for that is so that we can understand firsthand what you are in particularly thinking about, what you see as your opportunities, what you see as your challenges, but also how do you see the economy today? There's an interesting statistic we just heard that people feel decently, pretty good about their own situation, but pessimistic about the economy. We need to understand why. What are you seeing as you look out? Businesses are making decisions today about what they're going to do at the end of the year. We need to know what those are.

8:56We need to know how households are feeling. Are they feeling strapped? Are they feeling like they have enough disposable income? And the data alone, looking at the published data, not, you know, all the micro data, you could look at 100 series and you would never have the complete picture. I'm sure we've all heard the phrase data dependent and the Fed leans heavily on the volumes and volumes of economic statistics that get released every month when making its decisions. But sometimes you can augment that data with things you observe on the ground. Right. So just a few days before the Alaska trip, we got a jobs report that heavily revised down the employment numbers from the earlier months.

9:37It was a big surprise, huge moment for the markets, but it didn't really surprise Mary. And what was interesting about the jobs report on Friday is it better matched in the direction of change, not in the magnitude. It better matched what I've been hearing. And so a disciplining device for data that you don't know if they're really accurate is what you hear from people. Because people do not tell you, I feel really, really comfortable getting a job only to find out that the job market report is bad. What they will tell you is, boy, it looks really worrisome out there. And then you get a jobs report that doesn't look like the rapid job growth.

10:12That was the thing that was out of whack. The rapid job growth from the month before is when I said, well, really? That's not what I'm hearing. What's the gap? And we spent a lot of time digging in and unpacking that. But then when the jobs market report got revised, I was like, OK, that makes more sense. But of course, jobs aren't the only thing the Fed cares about. Its mandate is low unemployment and stable inflation. And these things seem to be operating at cross currents right now. Inflation has been above the Fed's 2 percent target for a while. And the concern is that with tariffs coming in from the Trump administration, prices are just going to go up further.

10:54So to understand the risk here, we're following Mary to the offices of Northern Solutions. It's an Alaskan company which makes components and parts for the oil industry, which is obviously big business in the state. Yeah, all the pipes and casings and spools and valves and things like that. And as you can imagine, steel is a pretty key input for a lot of these products. Since June, there's been a whopping 50 percent tariff on steel and aluminum coming from abroad. So if we compare 21 to today, it's cheaper. I see. If we compare today to 23, 24, yeah, it's more. And companies like Northern Solutions are trying to figure out just how to navigate all these new trade restrictions.

11:36It's not as easy as just, say, switching to a U.S. supplier. But if you do that and you can't get the continuity, well, then that's a cost to you that not be that fair. So it's really helpful for us to think about when we try to look at the effects of tariffs, or the effects of changes on any administration on your industry. Absolutely. I mean, the tariffs. So the tariffs balanced it. So I can go to a U.S. mill, I can go to a foreign mill, and I'm going to pay the same price now with that tariff. But it's the industry that mill's geared to, and the lead time of that steel. That's the problem. That and honestly, we have a lot of small steel mills here in this country, a lot of small ones.

12:18They're very, very specific to a certain industry. In other words, all steel isn't equal. So there's mills all around the world, steel mills all around the world. I can't use them all because of that, because of their MTRs. Not country of origin, just how well they do it. So we have a lot of steel that comes into the U.S. tubing that comes from. brought in as green tube that we heat treated in the U.S. So that MTR is generated from a U.S. heat treat facility, and now it's 21 % American, and then you avoid all the stuff on it. I see. So we talk about metals that I can use. They're all over the place, but I can't use them all.

12:59This is actually a really good example of the kind of information that makes Mary's visit so important. It's the kind of thing that you can't really learn from an economic data release. I'm going to use that. One of the things that, just to show you how we use things I've learned, is that if you think about how likely we're willing to shift all of our production from the United States or how likely is the global market on steel to be able to, if we put it all back today, I mean, you've taught me two things already, that not everybody is geared to your industry and you have to have a specific heat strategy in order to even use the materials.

13:36They have to be a certain quality. So it just means that you don't have the open marketplace that I think many people would think you have. So they would just look at the number of manufacturers and say, oh, look, you can do all of this. But you can't. There's barriers. There are barriers. Very helpful. You know, there's another big Alaskan business that's grappling with tariffs, and that is the port. Next stop, the Port of Alaska.

14:06Thank you.

14:36is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. How many vendors does it take to meet all your organization's food needs? Just one. EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor. In addition to all that variety, Easy Cater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. Easy Cater, your business tool for food.

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15:58Go to public.com and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com. Paid for by public investing. All investing involves the risk of loss, including loss of principal. Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com. Not many people have a demand for those ships anymore, so they'll decommission them. Yeah. Although I'll say Natsen in particular.

16:27So they have three ships that they rotate between. And they have... The Port of Alaska. Used to be called the Port of Anchorage, by the way. Very cool. It's a deep water port. The tides here are crazy. Here's Jim Jaeger, the port's acting director, explaining what they're having to deal with. So Port of Alaska has a variety of issues that we're not unique, except that we're unique in the combination of issues we have. So what are our challenges? For instance, we have a pretty fast current. We have a 30-foot tide flux. So between low tide and high tide. 30 foot? 30 foot. And our maximum tide flux between the lowest tide of the season and the highest tide is 40 feet.

17:08I heard it was the second biggest tide flux in the world. Yeah, it's actually, depending on, it's probably fifth or sixth. Okay. But in places where people actually do commerce, we're number two. So because of the harsh growing conditions and the short summer season in Alaska, almost all of the state's fresh food has to be imported. And the vast majority of that food arrives by boat from West Coast piers, mostly Seattle and Tacoma. And with only four ships coming in per week, Alaska's supply lines are stretched very tight. And Mary has actually experienced the downside of those stretched supply lines before.

17:44Here she is talking with Jim about it. Running out of things, we ran out of this. When I was here in May, the hotel ran out of coffee because they said the supplier hadn't gotten it in and they wouldn't get it until... In May, we lost a shift because of a mechanical. So if your timing was correct, your coffee may have been coming up. Yeah, I went down for coffee and she said, we don't have any coffee. That actually demonstrates how skinny our supply line is. That's why I wanted to talk about it. I'm not traumatized by my lack of thought, but I just was surprised at how fragile or vulnerable. We have six to ten days' worth of food in the state.

18:26So we import, depending on whose numbers you believe, between 94 and 96 percent of the food consumed in Alaska is imported. I figure we're handling three-quarters of that. So if that's coming in, we have four scheduled container ships a week, two on Sundays, two on Tuesdays. If we lose a ship, that's 25 % of the food for the next week. And it is very realistic that if you walk into the Fred Meyer Grocery Store and you go, huh, why is there no salad? That's why. And it's an interesting take. If you go down to the lower 48 and say go to Home Depot, Home Depot's lower 48 stores have a restock where they can restock an entire store in 32 hours.

19:12So if you're on the Gulf Coast and they have a hurricane, they completely sell the store out. They're set up so that they can come in, 32 hours later, they're totally restocked. Okay, now apply that model to Alaska where we have no warehousing. 32 hours means if we have an earthquake or something happens here and they empty out the store, they place the order, 32 hours to get it to Tacoma on the dock. There's then a 66 and a half hour float up to Anchorage, and that's assuming you're on the right cycle and you don't have to wait a couple of days till the next ship leaves. So it gets up here in 66 and a half hours, and then it's got to make it from Anchorage to wherever the final destination is.

19:55So if you're in midtown Anchorage, well, it'll be there this afternoon. If it's in Fairbanks, well, that's another day. So suddenly your 32-hour restock could be six, seven days. Can I ask a dumb question? But why don't we build some warehousing capacity? That was my question. I don't think it's dumb. I was going to ask you. So our basic problem is that we have a very small population spread out over a huge area. Three-quarters of a million people in the entire state, so basically a city, right? and our state is two and a half times the size of Texas. But if you really want to see it, go to Bush, Alaska.

20:33That's John Daly, an engineer who is leading a big modernization effort at the port. So go to these remote communities and then you'll really see the effect of what you're talking about. It's pronounced. Some of these communities only get three or four barges a year. Basically, milk is hugely expensive. Anything fresh is very expensive. If you go to, you know, I've worked, living here, I've worked in a lot of remote places. We're talking Kodiak or St. Paul Island or Bethel or something. Then you really see the end of the supply chain, and it's super sensitive in those locations. So it can be vulnerable here, but it's sort of fragile over there.

21:12Much more vulnerable. And we're kind of a hub. It's a hub and spoke system, so we're a hub that helps supply those areas. And if we're sensitive, they're ten times sensitive. Yeah, that makes a lot of sense. Now, just to make things even more complicated, the port also has tariffs to contend with. As the primary import hub from the entire state, you can imagine that the port thinks about this issue quite a bit. Not only could tariffs impact trade, all those ships going in and out of the harbor, stopping to refuel, so forth, but they could get the first look at how companies choose to respond to any increase in costs.

21:44It's also just as likely to push up the price of goods. Oh, yeah. So they're going to face tariffs on goods, but they're also going to face port fees on goods. And so then it's just going to be more expensive. It gets worse, though, because we have the death spiral. So we raise our tariffs. And then right now, most of the cargoes coming in are deep water vessels. But if we raise our tariffs per ton enough, at some point, some folks who are shipping things that are non-time sensitive, new cars, will go, you know, for the tariff, I'm just going to bring it up on a barge into Whittier, and I'll save the tariff.

22:21And then what happens is that then reduces our overall tonnage. We still have to make our debt payment, so we now have to increase our tariffs more. So we're getting into this spiral. Oh, food prices just went up even more. And oh, by the way, maybe you're not paying the tariff on your truck, but you are going to get it 10 days later than you thought you were. So you're getting worse cargo service also. So the impact on Alaskans is they're paying more for certain things, like food, and everything else is the cargo service is less good. Well, the normal way that all this, any kind of extra tax ships out is you either wait longer or you pay more.

23:03Yeah. That's just how it works. I mean, in any of the things, that's why I tried to put an optimistic end point on the speech is because you can, I think ultimately, you guys are very enthusiastic about what you're trying to do, but there's the other side of it which can easily demoralize people, right? It just seems like an insurmountable problem when you think of the cost structure here. But we have no option. No, exactly. So you can either back yourself in the corner with no option or you can just say, well... And be sad, right? Or you can just go forward with purpose. It's sort of common knowledge that it's expensive to live in Alaska.

23:37It just costs more to get goods and services up here. And residents understand that's part of the deal. But there are limits to just how much of a premium Alaskans are willing to pay to live here and just how much businesses can get away with when it comes to pricing. Cheryl Beckham, director of finance at the Port of Alaska, talks about this point with Mary. I'm revealing my economist background, but it just makes sense that the price would be higher here because you have all these additional costs. But you're saying the small communities think it should be like it is in the lower 48. So you have to split this difference.

24:06So there's a similar. So they understand that there's a transportation cost. But what is that market that they're willing to accept? Right. So as costs go up and fuel goes up and the, you know, the fuel tankers that bring it, they cost more. So you're probably always having a little less margin up here. Right. Right. So you do. This is the really big question. How much of the extra cost coming from the tariffs is going to be absorbed by the companies themselves, whether it's importers or the transportation businesses or middlemen like the port? And how much of the cost is going to be passed on to consumers, which would basically risk fanning inflation again.

24:45And that is a big deal for a state which already has a very high cost of living, precisely because all this stuff needs to be imported and often sent on to really remote locations within the state. And even if you're not necessarily importing foreign goods, tariffs can still push up the price of what's made domestically. The question that we're grappling with making monetary policy is there's taxes, immigration, deregulation, tariffs. And those things have different likely effects, et cetera. So one of the questions I've been asking people when we meet is, do any of those things, can you see any of those effects immediately affecting your business here?