Mary Daly on Why Alaska Is a Leading Indicator for the US Economy

23:12And so I can go and see to that point, are people nervous? Are they optimistic? Are they cautiously optimistic? Today, I see concerns, but when you really push them, and this is true across the 12th district, people are cautiously optimistic. Some cities have more cranes than others, but everybody's got a crane. When we last had you on the podcast when you were coming through New York City, we talked a little bit about AI and you represent the home of the most advanced AI models in the world. When you're out here talking to many of these sort of old school industries, do you talk to them or hear anything about tech diffusion, like the implementation of these?

23:49And is there anything interesting that you've picked up on that? Absolutely. Let me start with the most interesting thing I picked up and I'll expand it to the other things. I want to give a shout out to the small businesses. So small businesses that can be remote across Alaska, it's hard for them physically to reach marketplaces that are not in their immediate area. They often have limited workforce availability in some of these places or just small businesses in general. You're dealing with rising costs. And so you want to keep your portfolio of labor small. And they turn to AI to do things that augment their output because they're augmenting their skills.

24:26So they can save time. You can write a marketing plan by asking one of the AI models, here's my inputs. Can you write a marketing plan? And already you're ahead. Can you write me a pitch deck? Can you tell me the five best marketplaces in the United States for the products I want to sell? All of this makes it better. And it's not limited to just that kind of marketing and growth sales. It's actually also about can I do things differently. So we were talking to a small manufacturing firm, not in Alaska, but I'm hearing the same things here, that said we're able to use AI to do first drafts of plans based on the 30-year history of all plans we've ever made to create this one small part that someone asked me to machine.

25:08So those are the kinds of things that I'm starting to see spread. Then if you're a larger business here in Alaska, you want to use AI just like any other company in the nation to make sure you're not falling behind and get a competitive edge, right? These tools are helpful, and it's not just about reading your emails faster or writing a draft of something. It's about really thinking about your core business. What can I do with AI that helps me save time? and helps me augment my existing workforce when we have often a workforce shortage. How are you thinking about AI generally? And one of the reasons I ask this is because one of our frequent guests, Neil Dutta, was writing a guest piece in our newsletter today, and he was talking about how there's pressure on the housing market, there's pressure on consumers, and then you have this third big trend in the U.S.

25:58economy, which is this massive investment boom in AI. And in some sense, it feels like the AI investment boom is very, very divorced from the health of the consumer and other things going on in the economy. How are you factoring that into, I guess, monetary policy and how you feel about things more generally? Well, it's very true that the AI investment boom doesn't look like the – just look at stock market prices and valuations, right? If you look at the companies that are invested in AI development, they look different than our AI support. They look different than the companies that are doing mainline manufacturing.

26:33I mean, this is a fact. But I don't see that as a competing interest. I see that as that's a structural development that's just going to keep going. And then on the other side, you have the cyclical aspects of the economy. And people do feel stressed. They've been dealing with high inflation. And it's coming down, of course, which is great news. But still, the price level is higher. They're dealing now with job security issues. Like maybe even if it's not true that they'll lose their job or layoffs around the corner, they're nervous. And they say they're nervous. And so you sense that I'm not sure about the future kind of component.

27:09I don't see those two things as competing as much as we have to manage in monetary policy the cyclical dynamics. And it's very good in many ways that there's something coming down the pipe that could be useful. The question I have right now is, are companies deploying the technology and diffusing it at a more rapid rate that offsets some of the concerns they had about tight labor market? And I am seeing a little bit of that. But mostly what I'm seeing is, how are we going to go forward faster, better, cheaper? How are we going to up our game and not raise our costs? In fact, how are we going to get costs down?

27:43And AI becomes something they can try. And a year ago when we talked or whenever, maybe it was only six months ago when we talked, we were doing these CEO roundtables as part of our emerging tech economic research network. So we do a lot of these across all business types. And they were saying, we're not doing it in front office operations. We're not doing it in our main product lines. We're only going to do back office. Now it's moving to the front. Oh, that's interesting. And that tells you something's changing. Yeah. One of the things that I asked somebody why, and they said, it's just a lot easier to do it than you think.

28:14And we can discipline the models ourselves. We can prevent hallucination by checking. So now they feel more comfortable. I feel like the change in model quality in the last six months is really remarkable. It is remarkable. And like many of the concerns about hallucinations, they still exist, but they seem much less of a problem today than even six months ago when you were playing with the most advanced models. That being said, you talked about here's this potential productivity enhancer. And you said, I don't – coming down the pike or I forget exactly the term. Companies still trying it. And as of today, it doesn't feel like, OK, we've seen some great product, general economy-wide productivity gains.

28:51However, what we do see is very high electricity prices, maybe data centers playing some role. There's still, per the ISM, continual shortages of electronic components or these very intense capital demands at a time when AI hasn't delivered economy-wide productivity gains. Could there be an element where there's like a crowding out element right now or like this productivity from all that investment that hasn't paid off yet? You know, there's always going to be this discontinuity, put it in a time economist term, but there's always going to be this discontinuity where you're waiting for the proceeds of a technology you're investing in.

29:30Those take time. And the needs of that technology, especially something as power intensive as AI, at a time when we're also trying to modernize the power grid because some of it just hasn't been maintained across the United States. So we have a number of power company CEOs on our boards and councils, and they're always telling us it takes so long to get a transformer because there's bottlenecks. Now they're worrying about tariffs on transformers and are the components of transformers. Then they're competing with data center needs and companies that say, I'll just build my own power to support this.

30:02And so that's just a marketplace that was developed for a much smaller footprint in power and now has to ramp up. That's going to take time. And the proceeds from AI technology are just nascent. We're just not seeing them come through in productivity. Some of the easy wins that a company might have done probably are behind us. Or, you know, you think, okay, do I need two copy editors or one? Well, if I have one copy editor in AI, I'm okay. But those are easy wins, right? The real transformational type of productivity things are for things we haven't even really thought of yet. You know, I always use this example of thinking about the original iPhone or smartphone against the BlackBerry.

30:42So when it came out, I'm like, this is just a fancier BlackBerry. And then ultimately, of course, I was totally wrong. This was a much more just transformational technology because we develop things on that technology. I still miss the BlackBerry. Me too. I will openly admit it. I never had one. I type so well on the BlackBerry. Yeah, I used to file stories just on the BlackBerry. I could type entire epic novels on BlackBerry, and I've got the thumb problem of the thumbs meet in the middle. I'm on a mini. It's not working. Okay. So just going back to the vibes more generally, one thing that's already come up multiple times in this conversation is the idea that if you ask people what they think about the economy, they say, like, oh, it's not great.

31:22If you ask them what they think about their own personal economic situations, they say they're fine. And to the point about the tariffs earlier, businesses will say we're very worried, but on the other hand, they don't seem to be changing their actual activity just yet. What's your thesis or your theory for why we keep getting that disconnect? So this is not an uncommon disconnect, by the way. People have been historically, and not all the time, of course, but when they have concerns about the national economic progress, they will tell you in poor sentiment. And when there's a lot of transition, right, just think of the transformations we're going through.

32:01We're trying to bring down inflation, which has been tiring, trying to think about bringing manufacturing and other things back to the United States, thinking about deploying a workforce that's domestically driven. Those are big transformations at a time when people are looking at some of their neighbors and saying, I see Joe buying less things. He didn't get a new car this year. He always gets a new car. That's a lot of pressure. But their own personal situation, they're still able to go to the grocery. They can buy something for their kids. They can invest in repairing their home or going on a vacation.

32:34And so they feel okay. And they also feel personally secure in their job. But they're worried about the broader labor market. And I think that's natural. And my theory is that when there's so much change, people get worried. It doesn't matter if they think the change is even good. They just get worried. And they're worried that we're standing on – one person put it this way. I'm worried we're standing on a precipitous cliff. I love the view because I'm looking out. I'm fine. But, you know, anything can happen. And so I think that anything can happen piece makes them nervous, which is one of the reasons, another reason to come out and talk to people is when they talk to people, I say, here's what we're doing.

33:10And here's how we would handle something if we did look a bit tippy in the economy. And that helps.

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35:18That's public.com. automated purchase approvals. They deliver everything you need to achieve your goals. It's not easy to stand out from the crowd. Simplify how you stock up to get ahead. Go to amazonbusiness.com for support. So you just gave a speech here in Alaska right before recording this episode, and you said something interesting in your speech. I'm forgetting that but something about things are different, but they're not that different or that in the past, this is not the first time people have felt periods of change. It's not the first time that central banks have had to deal with an uncertain outlook.

35:52Yeah, that's right. That's what it was. That basically, yes, things are very uncertain, but this is the story of central banking. It is indeed the story of central banking. If you were going to write a novel or do a whole other podcast on central banking - There's never been a time where it's like, oh, we know what's going on. We know what the future looks like. Exactly. I mean, just let's think of my time at the Fed so far. So we had 9-11. That was pretty uncomfortably uncertain and traumatic at the same time. Then we had the global financial crisis. That is a tremendous period of uncertainty that lasted a number of years.

36:25Then there was the pandemic. That was not a very certain or clear time in our history. And so now we have uncertainty, but it is not something that we are unpracticed at. So I think that's why the important point to reinsure people on is we don't wait for clarity before we act. Because if we did wait for clarity before we act, we would be constantly behind. One thing that does seem to be new, at least in my lifetime, possibly not if you were alive in the 1970s, but political pressure on the Fed. And we've certainly seen some instances of that coming from President Trump, who has not been shy about saying what he would like to see in terms of interest rates.

37:07How are you dealing with that? You know, we do have many periods in our history where there's been pressure to move the interest rate because, of course, that would be part of the way the president or the administration or Congress would like to see the Fed go. But that's why the Fed is independent because ultimately Congress gave us the monetary policy responsibilities so that we could make decisions that go past any particular administration, that are independent of political activities or political plans. So those are good things about the Fed. And ultimately, if you take a job at the Federal Reserve, and especially if you're in leadership of the Federal Reserve, Federal Reserve Bank president or governor, you have to almost like tap a stone when you take the job.

37:52It's part of your oath, basically, that you're going to make monetary policy that serves all Americans and in a way that is not influenced by political leanings one way or another. So I make the same decisions using the same information, using the same models and sources. Of course, the models and sources change depending on the kind of condition we're in in the economy. But the process, we talked about process a moment ago, the process remains the same. Be curious. Figure out as much as you possibly can. Always learn. Then take a decision that you think is right, that we collectively think is right for the nation and the outlook.

38:30and then have enough humility that you can ask the question, did we make the right decision? And what more do we need to learn to make a better one? And I think that always works. And that's immune to political pressure because ultimately, I get up every day knowing that my work serves Americans. That's who I work for. And that's what we do. You made this point about how like, if you wait for the clear evidence, it may be too late, especially with the respect to the labor market. Once it slips, history says it tends to fall. Last week, it was the Fed meeting where there was no rate move. And then Friday, we got a jobs report that was not only disappointing, significant revisions.

39:10And revisions are a common thing. And Tracy has been writing a lot about this, and we've done some episodes. Response rates to public surveys have gone down. There are concerns about whether we need a fresh jolt of investment. But these are the main instruments, right, that you are looking at when you're piloting the plan, et cetera. Is this making it harder? Do you have concerns about that the quality of your visibility into the data is suboptimal right now? I'm going to put it slightly differently than main instruments. I think they're key instruments. But we've been broadening our portfolio of instruments for monitoring for really since the GFC, since the global financial crisis.

39:49Because what you learn in the global financial crisis is you're not going to get enough information, just looking at these main series to really know what's going on. Then we had to do that, of course, in the pandemic. And we got all these real-time series. We were using open table data. The foot traffic. Yes. How many people were going out? Is it transit traffic, et cetera? So what I would offer is this. There's two things that I think about. We are revered, have been revered across the globe for our data collection and our data continuity and our data integrity. Those three things are important to any nation that's trying to follow things, and not just the Federal Reserve, but to policymakers across the board, including states and localities, to businesses who need to know what does the economy look like so they can put it into their sales projections.

40:37And so making sure that we're investing enough in that information, making sure we know how important it is, I think is an essential goal. On the other side, I'm not simply relying on those pieces of information. And importantly, since we're in a turning point right now, kind of a transition point, it feels like a turning point where the economy is slowing, inflation is coming down because of restrictive interest rates, and we're trying to achieve that soft landing, that the data are always volatile. They're volatile on any turning point, whether we're turning from a downturn into an expansion, you miss the job growth.

41:13when you come down, you tend to miss the job loss or the net losses. So that's something I'm always familiar with at this point. I've been doing this for a while. I know that's going to happen. The magnitude of the changes is pretty severe on Friday from the week before. Is that survey response? Is that seasonal adjustments because things are different? Or is that something else going on? I trust the BLS will unpack that and give us some answer about that. But ultimately, on the response rates, you know, I say that when I ask people, would you respond to a public survey, they've lost a little confidence in public institutions, maybe a lot of confidence in public institutions.

41:50And so the real call to action here for me is it is part, you know, the Federal Reserve is not all public institutions, but we should do our part to demonstrate to people and to talk to people, go to the critics and say, what is it that you're not trusting? And then tell our story. Maybe they have things that they're going to bring that we should listen to and basically lean into this idea that we do this work for them and that we want them to trust that we're doing it for them. Can you talk a little bit more about the alternative data sources that are available to you? Because I hear this a lot, this idea that, okay, well, payroll seems to have a revision problem at the moment.

42:28Maybe there are other indicators we could look at. Or if a larger chunk of CPI prices are being imputed or estimated than they were previously. Maybe there's something else we can look at. What exactly are these data sources? What is most valuable to you right now? So there's privately collected data. We talked about foot traffic and things, but there's the ADP employment data. You can think about that. There's the prices project. You can look at those data. Importantly, though, I think it's not just getting other sources of data. It's learning. So say that a lot of the CPI prices are imputed, then we need to bring our best statistical minds to think about if I take the ones that aren't imputed and I look at how correlated they are with underlying inflation over time, what do I learn?

43:10Are they a good signal? Is there a messaging challenge here, though? I think people are very used to, at this point, the idea of the Fed sees the non-farm payrolls number, the Fed sees CPI obviously isn't your preferred inflation measure, but PCE or whatever, if you're looking at other things, or maybe if you're at turning points in the economy and so other indicators become more important at that particular amount of time, how do you communicate how you're factoring in that data into your monetary policy decisions? Because not everyone is going to be looking at the same things as you. We talk about what we do.

43:46And part of talking about what we do is to say we have history and models that tell us a little bit about how the economy works. We have the incoming information and we have all the periods of time when the information has been volatile and we can understand the underlying trends. And then we have the people we talk to. 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.

44:21Because 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. That was the thing that was out of whack. The rapid job growth from the month before is what 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, okay, that makes more sense. Even if the direction, I mean, even if the magnitude is vastly different than anything I probably think will go forward, I think the direction of change is accurate.

45:00Okay. So there's the slowing. And as you indicated, some number, who knows, rate cuts are probably coming in the future. Obviously, there are businesses, when you read them in the ISM surveys, I was like, we need rate relief. There are people who want to buy a house. We want rate relief. President Trump, obviously, maybe in part due to interest payments on the debt, wants to see lower rates. That being said, even as the market's priced in some cuts in the near-term future, there's been a significant steepening of the yield curve. Long-end rates haven't come down that much. So it's not obvious to me that even if you delivered cuts, that all these homeowners or businesses or the president would get the type of rate relief that they actually want.

45:41I'm curious, what would it take, in your view, to get meaningful change at the long end of the curve, which is where there's a lot of sensitivity? I love that question because I think it's hard to remind people on a regular basis that we are not the only game in town at the Federal Reserve. We don't control, we're not yield curve targeters, so we're not controlling all the things that would move the yield curve. What moves along into the yield curve is, of course, Fed policy, inflation expectations. Those have been well anchored, so I don't think that's driving them. Geopolitical risks, how we're viewed as a trading country or a reserve currency, what our debt looks like going forward in projections, and how we think we're going to manage all of that together, right?

46:25So right now, it looks like the markets are just reacting to all of the risk. We have rising debt. We have geopolitical risk. We're not sure how our trading partners like us right now. And then all of this could be burdensome and mostly can push up the real rate of interest over time, right? The natural rate of interest or the neutral rate of interest. And so you're seeing that. And ultimately, the Fed can adjust policy in the short end in a way that's meant to balance the goals, but we can't control all the aspects of the yield curve. I know because I've heard Chairman Powell and others say a million times, we don't comment on fiscal policy.

47:01That's not our business. Nonetheless, I'm going to - Right. Yeah, I know. But when you describe those various factors that push the long end up or keep it elevated, could it be that it will be hard to get those back down to more desirable levels without some more substantial fiscal consolidation? Well, let me say this. Cuts. Let me say this. Yeah, let me say this. We were having these conversations about the rising neutral rate of interest before the election, before the administration changed. And so I think we should look to what are the fundamental factors in our economy that are changing the neutral rate of interest, not just in the US, but in the globe.

47:42The interest rates are not set nationally. I mean, we've set interest rates nationally, but interest rates are global. If you remember prior to the pandemic, interest rates, and after the GFC, interest rates, the real rate of interest was just falling. Inflation was below most countries' targets, and it was the sluggish growth. Inflation expectations are falling. How are we going to manage this stagnation that's going to come from this secular stagnation? Then, of course, inflation rises in almost every country, and we're talking about the real interest rate going up, not down. And so we're looking at a place where it settles now at the neutral rate in nominal terms, settling around three or higher, not at 2.5.

48:25So that's a pretty big increase in the rate of interest, the neutral rate of interest. And frankly, the direction seems to be pushing it up, not pulling it down. And I think that's where I try to explain to people the most is that interest rate cuts, if you think we're going back to pre-pandemic levels of interest rates that were considered neutral, I don't think that's likely to happen. And that's commercial real estate folks are really attuned to this, and they knew that a year and a half ago. Markets knew that a year ago. But I think we're still working on businesses and consumers to recognize those were not days we're likely to return to, at least in the near term.

49:05You've said that you think the time for rate cuts is nevertheless coming. And I take the point that maybe rates aren't going back to where they were pre-pandemic, but certainly we are talking about cuts. Market is expecting cuts. What are you waiting to see before you get absolute certainty that actually this is the moment where we need to act? Well, I'm really not waiting to see anything as much as I'm looking to collect the information that shows that what I believe is happening is happening. So it's not like I'm waiting to see something and I'm going to go, aha, it worked. I mean, it's happening.

49:39We got to get on it. It's really about, we just keep confirmation? Yeah, the confirmation, the evidence. So let's take the labor market, for example. So in advance of the July meeting, we do this all the time, but since we just had the July meeting, let's talk about it. So in advance of the July meeting, we were hearing, we think the labor market's softening. So I'm asking the question, is it weakening? Softening is what we would expect. Weakening is a different signal. So you take the entire dashboard of labor market indicators and you ask, what's happening to the ones that lead? Initial claims for unemployment insurance are a leading indicator.

50:14They predict where the labor market's heading. They've been stable. You unpack and you look at all the states, you get their initial claims data. There's really no red flag states. There's only two that are showing a lot of pickup, D.C., an area, and Michigan. Those are the two places. Otherwise, most of them look pretty stable. You think about, okay, what about job finding rates, not just in aggregate, but by duration of unemployment? When the labor market's really weakening, people push out in duration. It's harder to find a job. But then you see those job finding rates really decline for out durations.

50:47You're not seeing that. So those are wage growth isn't stumbling. You're just not seeing those things. And so for me, it was about, okay, we're seeing a signal that this might be softening to weakening, but we don't know yet. So then you go back, leave the interest rate where it is because inflation is still printing above target, and you have some more time. But the first labor market report we get has a bit of a tick up in unemployment. And you get those jobs numbers. I will say maybe because your listeners will be interested in it, it's not a good time to look at levels. It's really not a good time to look at employment rate.

51:19I mean, you know, employment rates. Employment level. Employment level. Like how much job growth do we have? Because we've had this very large swing in how many immigrants are in the labor force. The labor force went from people I'd estimate at 150 is the trend growth we need to have so that unemployment doesn't rise. Now it's in the 70s, maybe the 60s. That's a big change. So I look at rates, unemployment rate, job finding rate, quit rate. Yeah, this is what Powell said as well. Like, look at the unemployment rate. Yeah, you look at rates. And the unemployment rate is a good thing to look at.

51:48But it will lag deterioration in the labor market. So you have to look at those other ones as well. So I'd look at initial claims for unemployment insurance because people have to go in and file. It's a good administrative record. And then I'd look at quits rates, job finding rates, those types of things. And there, I didn't see signs of weakness. But you can't wait forever. And at this point, the piece of information I'm also getting is that there are very few signs that tariff-based inflation in the goods sector is spilling over to the other sectors. And inflation expectations are stable at the medium and longer end.

52:22There's not much of a case for persistence at that point. So then you think, well, if we really want to get the soft landing and give people what they deserve, which is lower inflation, 2 % price stability inflation, and a labor market that still sustainably works, well, we've got to start recalibrating policy. This is like a really stupid question. I feel like it's one of the things I should know or have researched before I came. But is there much sensitivity here in Alaska to the changes in immigration policy? Do you hear that from business? Yes. I actually realize I don't know anything about the role of immigrant labor way up here.

52:58So you hear this a lot in all communities, but so far people have said it's not really biting us. And the reason is, and they use that term, biting us, and here's what's the reason. So then you ask why. Because you use a lot of immigrant labor, why isn't it biting? And it's because labor demand is slowing. So we're losing members of the labor force at the same time labor demand is slowing, which is, I would offer, one of the reasons we're still seeing the balance in the labor market that we have, because those workers are not coming or they're leaving, and the domestic labor supply is consistent with the labor demand that's out there.

53:33But firms tell me on a regular basis that if they were growing like they were a year ago, they would have a shortage. One thing I've been thinking about a lot recently is the idea of whether or not starting points kind of matters. So for the past few years, one of the big things that's happened is the U.S. economy has surprised to the upside over and over again. And U.S. exceptionalism has really been the theme. And so I'm curious if those years of unexpected growth, if that gives you more wriggle room or more runway, perhaps, in terms of having to cut. Do you feel like the starting point matters?

54:12If you're starting lower, would you be in more of a hurry? That's a really good Good question. So let me walk through how I think about it. I'll just walk through how I think about it. So yes, you have to take contextualization around it, right? Where you start matters. But right now, I don't think we're in that place where it actually is relevant. Here's why. Two years ago, if we had a hot labor market and it seems it was even frothy and inflation's printing at 5%, well, then that's a very different economy in terms of where we are than today. But right now we have an economy that's really resilient.

54:48It has proven its resiliency. But we're also very close to getting to a point of maximum employment and price stability. So then if you have shocks to the economy and you're in this balance, well then, and you've got interest rates that are restrictive, you end up being more vulnerable. So it is true that the economy has outperformed everyone's expectations over the past several years. That's just a fact. And I think that bodes well for the momentum and the resilience of our economy collectively to weather shocks. But now, as we get the labor markets in balance, we're starting to see some softening.

55:26We're starting to see some sentiment. We have been seeing sentiment come down. And then on top of it, inflation is close to our target and interest rates are still restrictive. That leaves us more vulnerable. Think back to 2019. 2019, we cut rates twice. And we did that in part because we had all these headwinds coming from overseas. So we weren't in a precarious place, but we were accommodating to the headwinds. We were trying to support the economy against those headwinds to ensure we didn't tip over. I see today as very similar. The only difference, and it's an important difference. It's a very important difference.

55:58Inflation is not 1.8. Inflation is higher and expected to go higher, at least temporarily, on the basis of tariffs. And so it's always more challenging, and this will be a communications challenge, if we are lowering the interest rate in the face of rising inflation. Then the burden is on us to explain that we're not seeing persistence and to offer what is true, that if it turns out to be persistence built, we will turn around and raise the interest rate. I do notice that everyone's talking about short-term price pressures, but no one's using the term transitory anymore. Is that... Black word?

56:37I don't even know what you're talking about.

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58:48Simplify how you stock up to get ahead. Go to amazonbusiness.com for support. Going back to the spring, as you said, it sort of looks like the tariffs aren't creating spillover. But there was this idea that it's not just the tariffs per se and the question of whether tariffs would be an inflationary driver, but also just like policy volatility, the second derivative of tariffs, et cetera. And I don't know. I'm just going to state my opinion. I don't think we will ever have something under this administration of tariff certainty. I think these are going to be moving numbers for a long time. That's just my personal opinion.

59:21But on the other hand, it does feel like the range of possible outcomes has narrowed. We've gotten deals and it feels like the range of possible outcomes is less wide than it was in April. Has that been a factor in your thinking? Okay, tariffs are going to happen, but does it feel to you like we have more certainty over what the trade picture will look like today than we had in early April? Absolutely. I think when the tariff announcements on Liberation Day were very high, it wasn't clear that countries wouldn't reciprocate and tariff us or that they would... There's been no retaliation. No retaliation that they wouldn't actually, that they would go to the negotiating table.

59:56And so all of that's happened. And then on top of it, it wasn't clear how firms would respond. Would firms just sit on the sidelines and wait for it all to be over? Or would they continue to participate in their economy and in their growth? And so there was this period for the first three or four weeks after the original announcement where firms are like, I got to wait because I don't know. And in fact, some firms were not even bringing the ships had sailed. They were already outside the port. They weren't taking delivery on the goods because they wanted to wait and see. But now one of my contacts said, uncertainty is the new normal.

1:00:28We expect uncertainty for the next four years or three and a half years. And so we're just going to live with it. And when you live with it, you don't change the fact that you want to grow and you want to hire and you want to do these things, but you do make more careful decisions because you don't know what could happen. But if you wait for the uncertainty to clear, this is what he said, if you wait for the uncertainty to clear, you will find that four years later you've lost your business. So we're not doing it. So one of the things you've emphasized in your career is the importance of Fed communication and the messaging.

1:01:02And I just want to go back to the central bank independence idea because one of the concerns I would argue right now is that, sure, individual Fed presidents, Fed governors might emphasize that the central bank is in fact independent. But perhaps there's an optics problem if in a month or so the Fed decides to lower rates while the president has been relentlessly posting on Truth Social about the need to lower interest rates. A lot of people would say, well, you know, that's the kind of thing that you might see in an emerging market or something like that. How do you manage that particular optics problem.

1:01:42You explain why you made the decision. Ultimately, if we just put the decision out, we just raised a flagpole saying interest rates have been cut 25 basis point, I think we'd be very vulnerable to what you just said because then optics dominate reality. But what you do instead, the remedy for that is be very open about how you're making the decision, how you're balancing the trade-offs. I mean, we're definitely in a trade-off space, right? Because we're not in the divine coincidence. The divine coincidence is a lovely place for central bankers to be. They wish they could live there all the time where one interest rate solves both goals, not where we are.

1:02:15If we lower the interest rate, it takes some of the downward pressure off inflation, but we'll still get there. But we're supporting the labor market. If we completely support the labor market with no attention to inflation, we're likely to see it shoot up again. So not perhaps as high as it was before, but definitely there. So those are trade offs. We have to explain to the American people, we're making decisions under trade offs, and we're lowering the policy rate because we don't want to break the labor market in an effort to give you a little bit lower inflation a little bit faster. I think that's the burden on us.

1:02:46That's our responsibility, and we have to do better at it. So here's another question that I'm curious about over the length of your career. Do you feel like the stock market is more important to the economy than maybe it was 20 years ago? And people look at financial conditions, and there's many things that go into that, but one of them is just asset prices, which for many Americans who have some exposure to the stock market, it's just unbelievably fantastic time. And you were sort of, again, at ground zero of the companies that have driven, helped many people retire comfortably in America, the companies in your district.

1:03:20But when you think about like the sort of flywheel and momentum of the economy, does the sort of stock market component of financial conditions and the wealth effect perhaps, is it more important to the economy than say it was when you started in central banking? Only from the standpoint that more people are accessing the stock market, but still not the majority of people, right? More people have it than have a 401k or have some kind of an index fund that they're investing in. But it's not so universal that it's a main driver. What I have noticed is that since the stock market rebounded, you know, is that a lot of people who thought they were going to return to work from the 55 and older went back into retirement, or taking care of grandchildren.

1:04:03Because there was a lot of ideas. You know, that is a very sensitive group of people. And if you've retired and then you see your stock market valuations fall, your 401k fall, you think, oh, maybe I should do something. The rising stock market is contributing to labor market tightness. Well, if that was the main group we were relying on. But I think that is something interesting. I mean, what's really contributing to the lower labor force is immigration and the fact that we have a baby boom aging into retirement. But I think the stock market is more interesting from that point. I think really what's even more interesting to me is the fact that you have to look at a variety of things.

1:04:38You have to look from how banks are doing, how private equity is doing, how the stock market is doing, what does it all tell you. And so we are broadening how we calculate financial conditions. You can't just look at the interest rates. When I first started at the Fed, when we were talking to our boards and councils, we had a little chart of interest rates. It had the 30-year, the 10-year, the two-year treasury, and it had a mortgage interest rate. Now you have to talk about financial conditions writ large. Are they tighter? Are they softer? What is more accommodating? What is it? And I think that's a change in the marketplace that's meant we all have to be very knowledgeable about the entirety of the forces that affect financial conditions.

1:05:17Since you mentioned baby boomers, this is something I've been thinking about a lot. And it's not really, I doubt it's a question that's particularly relevant for the short-term path of monetary policy. But when we got that jobs report last week, the only two – there were two sectors that drove the job gains and it was like healthcare and social – some sort of social assistance. So very similar things. It's clearly that this aging population is itself going to be a sustained source of labor demand probably for month after month even in a possible recession, right? Like this seems like mechanical.

1:05:47When you look out at the long term and you think about the American economy, how much concern do you have? I don't know if you'd call it a crowding out effect or something that like the productive base of the economy, more and more of it will have to go to in some way, especially given the sort of demographic pyramid such as it is, in some way support seniors. We're all going to be working in nursing homes. Yeah. Well, this has been something that we know is coming for 30 years. I started my career, I started writing my dissertation on aging and taking care of people and how does that change the economy and what do we have to do and how does it change growth and output and potential.

1:06:26And one of the things you can see is if you lose workers, then they go into retirement, you're going to constrain labor supply, labor growth, but you're also going to tip the pyramid of what we have to produce and what we have to take care of. And so that's happening. You can see healthcare is growing, et cetera. Education now, just in state budgets, if you look at state budgets, there's a battle between do we take care of our older citizens or do we invest in education? And it sounds, you know, it's dire sounding, but honestly, that's the trade-offs. We're a nation now who has a very, an aging population with increasing needs and the younger population and even the economic productive capacity has to support that.

1:07:06So the answer to that is you have to grow the economy and you have to be strategic enough and this is not the Fed's job, but this is something that I think many Americans are trying to do, many governments are trying to do, national and state and local. How do you create an economy that can support those and still support the citizenry that is in their working age and their families? Well, you're going to use technology, of course, and you're going to think about making more strategic decisions about what do we need to do to ensure that we have a diverse economy, et cetera. The concentration in education and healthcare and other things that we've been seeing, that's not new.

1:07:45I mean, that has been going on. People were talking about that a couple of years ago or a year ago. What's interesting is how durable will that be, right? Healthcare makes good jobs and it helps the economy because it puts resources. They earn a living, they come back, they buy things if they want to be in healthcare. But we don't have enough people currently interested in healthcare to support that if it keeps on growing. I think that's another challenge that you're seeing. And hospitals across the country are trying to manage that. Since Joe asked you a wealth effect from stocks question, I'm going to ask a very similar question in relation to crypto, because this is actually something that has changed quite a bit since we last spoke to you.

1:08:23I mean, crypto prices are still going up. The industry seems to be expanding. The administration is clearly very, very crypto friendly. Are we at the point where crypto perhaps matters from monetary policy, either from a sentiment perspective, that wealth effect perspective, or from a financial stability perspective, which of course, you know, as San Francisco Fed president, that's under your mandate as well. So the way I think about crypto and the conversations about stablecoins and other things. So let's separate crypto from stablecoins for an example. We put in a big umbrella and people think it's the same, but it's actually very different.

1:08:59So a stablecoin is another way to fund yourself so you can trade, right? I can do a cross-border transaction. I don't have to wait. I don't have to do currency changes. And so those things are just about a technology or an innovation that smooths out the exchange, particularly across borders. The crypto is an asset. It's a digital asset. So you can invest in it and it can grow, but it can also decline. And I think there's appetite for other kinds of assets to invest in. You don't have to invest in a mainline blue chip company. You can invest in this and you can get some gains. So the question for me is always, how do we incorporate that, maybe it's enthusiasm and also that risk into our assessment of how loose or tighter financial conditions and how vulnerable is the economy to financial stability concerns?

1:09:52So you're right to ask, you know, is it big enough now that we would look at it? I think it is big enough we would look at it. It's not that it's big today, so it's material. It's that it's big and growing. It's getting bigger every time. Yeah, the direction of travel. The direction of travel. I feel a little bit like back in the 90s, you could see people doing some, well, maybe really the 2000s after the dot-coms. You saw people doing internet purchases. And we would collect retail statistics on how many things were bought on the internet. And people would regularly say, that's not big enough.

1:10:22Don't worry about it. But, you know, you have to look ahead, right? It might not be big enough today, but you don't have time to practice and develop metrics and practice your evaluations and learn from that if you wait until it's giant. So I think absolutely we have to think about it right now and assess it as part of what we do. And the good news is we are assessing it. And I don't see special particular risks to this. And I think Congress is doing what Congress is supposed to do, looking over the parameters and saying, what's a stable coin process that can work? How do we ring fence these types of things?

1:10:53That's what you want. But that doesn't have those powers. We're implementing our policy that in the economy we have and our elected officials are deciding the parameters of those exchanges. I think I actually just have one more question, and it's very sort of straight down the middle macro. But there's this obvious slowing in some areas, etc. You've described the state of the interest rate setting as still in restrictive territory, at least modestly restrictive. Yet inflation is still durably above target, not massively the way it was a couple of years ago. Why is that? It takes time. Once inflation gets up, it takes time to bring it down.

1:11:33And the reason you would adjust policy before you totally get there, let's put tariffs aside for a minute. Let's just think about the regular dynamics of the economy. If you wait to see the whites of the eyes of 2 % inflation, you will be too late because policy tightness today is not just a reflection of where interest rates are today. It's a reflection of where interest rates have been over the last 12 to 18 months. And they've been modestly restrictive. So they're gradually slowing the economy and gradually bringing inflation down. And the thing we had been waiting for, at least I'd been waiting for for a long time, was for this to start showing through to the housing sector.

1:12:06And it has been in the last several months. And so that's a really big and important sector that has to have inflation come down for us to achieve our 2 % goal. So if you started extrapolating services, inflation, excluding housing, is coming down. Housing's coming down. The goods sector without the tariffs was coming down. And so you get all of those things, and that's pushing you to 2%. We have to adjust policy before we get there. Because remember, anything we do, if we left it exactly where it is, has another effect for another 12 to 18 months. Who knows what exactly the lags of monetary policy are?

1:12:39The only thing people can agree with is it has a lag. Just in terms of the importance of speed here, if you got confirmation of significant weakening in the labor market, could a 50 basis point cut be on the table? Well, you know, in central banking, and this is true at the Fed, but I think other central banks as well, you never want to rule out a tool simply because we haven't used it before. And we did use our tools in an aggressive way. But one shouldn't take that to mean I think that's the likely outcome. But I do think we should think of all of our tools and all of our meetings as being available to us at all times.

1:13:14Because the job isn't pick a tool that's exactly the one that everybody expects you to use. The job is restore price stability and do it without tripping up the labor market and leaving people with lower inflation but no jobs. I actually have one last question. This happens a lot. But the dollar, you know, you look at a lot of charts since April 2nd. There's been a bottom but then they jump back up. We haven't seen that with the dollar. And I'm curious, you know, people are concerned about political continuity and stability and institutional stability in the United States. And the attacks on the Fed are real, even if the fact that it doesn't change how you do your day-to-day job.

1:13:55And dollar weakness could itself be inflationary because we do have an import bill, et cetera. I'm just sort of curious, like, how you think about the sort of, I guess, maybe medium term when you're thinking about, OK, you have to hit your mandate. These things are really outside of your control. Completely outside of our control. Completely our control. But like how do you think about them in terms of hitting your mandate at a time when, yeah, there are these sort of like factors that affect macro that seem outside of your control? Well, you know, if you take the – just take the idea that we import things.

1:14:26If the cost of those imports goes up, either because the dollar is weaker – we don't make dollar policy, just want to say that. We take the dollar as outside of our world. It's just another input to our equation. But if you have a weaker dollar and you're paying then more to import things, or you have tariffs, so you're paying more to import things, well, then that's just going to raise the rate of inflation. So put upward pressure on inflation. So then the Fed has to think, OK, what are the things creating upward pressure on inflation? And what are the things creating downward pressure on inflation?

1:14:56And how do we navigate that to get to 2 % inflation? That's the job regardless of whether you always have things that are pushing inflation up and pulling inflation down. Our job is to net those things and say what's left. And whatever's left, we use the interest rate to achieve. I'm sorry, I have one last question. I knew this was going to happen. At some point, Chairman Powell is going to be replaced. I don't know if the president will try to fire him, but his term will expire and a new nominee will come up. From the perspective of a regional Fed president, what is an important quality of the chairman in terms of being successful and working with the rest of the FOMC?

1:15:37I think you could be a regional Fed president. You could be anyone who works in the Federal Reserve system. You could simply be a citizen of the United States, someone who cares deeply about how the country goes. And the requirements are always the same. You put other people first above your own self. You think about decisions that serve the American people, and you do that without flinching if the criticism comes. as long as you're doing and you're using your committee and you're getting to a judgment that you think is best for the American people. That's an important quality. And the other important quality is to listen.

1:16:10The diversity of the inputs we get from all types of people, businesses, communities, markets, that's important. The disagreements or differences of lens that people put on things and say, well, I don't see the world like that. Any leader, no matter what they're leading, has to be able to listen to be successful. That's my personal belief. You have to listen. You have to know what, you know, you put your best ideas out there. You have to be willing to listen to criticisms or support. And then you have to turn around and ask people, let's use this disagreement to our advantage as opposed to using it as a way to divide.

1:16:46And I think that's historically what have made the most successful Fed chairs. But honestly, it makes a successful committee member. We all have to go in with the idea that this is not about us. This is about the people we serve. We know who those are, the American people. Joe we should run for Fed chairs all we do is listen that's basically it but then you do have to decide yeah alright we're not that good at that alright Mary Daly thank you so much for coming back on All Thoughts my complete pleasure and I'm so glad we did it in Alaska I'm so thrilled that we get to travel to Alaska thank you

1:17:31Joe, that was a real treat of a conversation, being able to interview the San Francisco Fed president for over an hour in Alaska, of all places. But I do really like how she summarized the idea of the state as like this really good microcosm at the moment of all these different cross currents in the U.S. economy, particularly tariffs, inflation, housing, immigration. And I also liked how she explained that the important thing about running a regional district is kind of knowing which states are more useful to look at for leading indicators versus others at different times. I hadn't thought about that before.

1:18:11No, it's really interesting. And that was obviously a real treat. This whole trip is a real treat. To get to come to Alaska, which we had never been to, to learn about new economies and so forth. also to just get that much time with a member of the FOMC, a regional Fed president, because yes, there's always uncertainty, right? But we have a lot of uncertainty these days. And there's so many short-term and long-term questions that are super interesting to me, whether it's the demographic things, whether it's the diffusion of AI, but also just what is going on over the last few months with the impact of the tariffs on economic activity.

1:18:48We have both short-term and long-term questions right now that are very big. Well, that was another thing that stood out to me, the idea that the revisions in the most recent jobs report weren't in themselves like that surprising because they actually confirmed what people had been expressing in sentiment surveys for like some months now, right? And so for Mary, it was sort of like, oh, actually, the aberration is that this wasn't showing up in the jobs numbers, the official jobs numbers sooner. Yeah, that's interesting because I remember like those ISM, for example, reports from April and May.

1:19:24They did not show the employment sub-indices in particular were bad. So it does sort of – yeah, the revisions, although people don't love seeing, oh, this data was wrong, it certainly fits more with the broader story. It makes things a little bit more cogent. So it's interesting to hear that. You know the other thing I liked about that conversation? You didn't mention whales once. Now I've reminded you. So, okay, listeners, steal yourself for Joe inserting a lot of whale and Moby Dick commentary into the next few episodes. Is the soft landing the fed Moby Dick? No, I don't think so. It's a moral thing to pursue.

1:20:05Okay, shall we leave it there? Let's leave it there. This has been another episode of the Odd Thoughts Podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, Mary Daly. She's at MaryDailyEcon. Follow our producers, Kerman Rodriguez at KermanArmond, Dashiell Bennett at Dashbot, and Kale Brooks at KaleBrooks. For more OddLots content, go to Bloomberg.com slash OddLots. We have a daily newsletter and all of our episodes. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we go on field trips to Alaska, then please leave us a positive review on your favorite podcast platform.

1:20:44And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening. For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy. Giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting.

1:21:21EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. Climate action takes center stage this November. On November 4th, Bloomberg Green comes to Sao Paulo, uniting leaders from business, finance, government, academia, and NGOs. Ahead of COP30 in Brazil, they'll engage in bold conversations on how to turn climate goals into real solutions, presenting sponsors Hitachi Energy and Zurich, supporting sponsors Amazon and Schneider Electric. Learn more at bloomberglive.com slash green underscore COP30.