San Francisco Fed President Mary Daly Explains the 'Hawkish Cut'

26:21Brokerage services for US listed registered securities, options and bonds in 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 slash disclosure. All right, let's talk about, I guess, more complicated things, which would be the policy outlook. So we are recording this on December 20th. We might have a potential government shutdown. That's complication number one. And then secondly, we will definitely have a new Trump administration that has some new policy ideas, including tariffs and, you know, potentially mass deportation.

26:56How are you thinking through those sort of forward-looking policy elements? And one of the reasons I ask is because Powell at the presser on Wednesday, he said there were some members of the FOMC who were starting to take that possibility into account in terms of their forecasts. Are you one of them? I am not one of them. I actually have managed through, you know, worked at the central bank here, first as an economist and now as the president since 1996. And one of the things you learn is I've been through several changes in administration. And one of the things you learn if you do that is that all administrations change.

27:33They bring in a slate of new programs. Sometimes they talk about them a lot before they even come into office. Sometimes they don't. But those new programs are always things that cause, you know, a lot of sometimes fear, exuberance, enthusiasm, whatever it is, expectations. But it's best for the central bank, in my judgment, not to engage in that kind of speculation. Let's let the administration come in and put the full slate of programs together. Now, why is that better? Well, first, in my judgment, why do I do it that way? Well, first of all, it doesn't mean we don't understand how models and data and other things work and that how different programs, whether it's tax cuts, extended deregulation, tariffs, deportations.

28:16We can look at how those things work from the research literature, from models. We can think about that. So we're well prepared to analyze it once the programs come into place. But there's usually a fairly large difference between what any administration says they would like to do and what they actually do at the end of the day when they've worked with members of Congress and, you know, the cabinet members, et cetera, to get a slate that really works for everyone. Importantly, it's also, and this is something that I speak about a lot, it's also the net-net effect of all of these. So say you cut taxes, that spurs growth, that's a positive for growth.

28:55There's deregulation, often a positive for growth. Then you put tariffs, can be a negative. And you do, you know, immigration, it can be, some people have said that's a negative, it does take potentially workers from the labor force. So you put all those things together, and what you realize quickly is it depends on the scope of the changes, the magnitude of the changes, the timing of the changes, and how those things all net out to leave the economy either with an impetus or a restraint. And it's just too early to know any of that. So instead, back to traveling around the district, we ask our contacts.

29:30And what they're telling us is they feel pretty okay about how things are likely to go. If anything, the sentiment's risen. And then the other thing they say is if you're in retail or manufacturing where you need inputs, they're just stockpiling some inventories. So if there are some early tariffs discussions, they will be prepared and then they expect it to resolve as something that's not very harsh. Speaking of sentiment, this is something I wanted to ask you actually. So one of the big stories for the past couple of years was the terrible, terrible sentiment surveys. So, you know, if you looked at something like consumer sentiment, it looked like we were already in a massive recession.

30:09People felt absolutely awful. And of course, since November, we've seen some of those surveys start to turn. People are turning more positive. The small business survey has spiked quite a bit. How much emphasis would you place on those surveys, given that there was such a big discrepancy between the hard and the soft data, you know, just a year or two ago? Is it possible we could get another discrepancy, but just going in the other direction? You know, I think it's possible, but before I really understood the discrepancy. And here's how I understood it. You could see it when you would talk to people, is they felt like inflation had raised the price level so much that they weren't able to catch up.

30:52So it had stolen something from them because it's a tax. It feels toxic to people. And they felt like they weren't going to ever catch up and that the economy might break. We might fall into a recession. So part of the sentiment turn that I've seen started in about in the middle of the summer. And it started when people thought, oh, we're actually not going to have a recession. The economy will continue on and I will be able to grow out of, you know, with my wages and my earnings, I'll be able to get ground, gain ground on what I lost and I'll be able to restore where I was before the pandemic and maybe even grow beyond that.

31:27And now with some of the changes for businesses and small businesses, our small businesses tell us that too. With some of the changes, they're somewhat hopeful that they'll be, they like the extended tax cuts, they're pretty, they're somewhat hopeful that some aspects of regulation won't be, won't feel as hard to manage. But, you know, they don't know, they're just more, they're hopeful. And so they say this too, you know, enthusiasm has to be backed with reality. And so right now they feel enthusiastic or optimistic, but they're still cautious. And that cautiousness, that spending their own money on things, that's only going to be removed when we really see how the economy and the policy changes are netting out.

32:08Let's talk about, as you mentioned, theoretical policy changes under the incoming administration. You are not one of the members who caused that to change how you're thinking about 2025, because as you said, we don't know. We don't know how it's going to net out, et cetera. you have the academic literature, but it's hard to know. But speaking of the academic literature, one thing that's commonly said is, well, a tariff is sort of a one-off increase in the price level and doesn't necessarily change. Transitory? Is it transitory, Joe? In a sense, transitory. I'm never really satisfied with that answer because, okay, that may be true that a tariff does cause a one-off increase in prices, et cetera, but doesn't change the overall trajectory.

32:49On the other hand, in theory, it creates an impetus for a structural adjustment to the economy that could be costly. If it's a spur to build more in the U.S. to avoid tariffs, then that means more spending and more investment. And as you described, one of the drivers of the sort of new higher neutral is this impulse among companies to spend. So how do you think about, again, we don't know the details, but when you hear the word tariffs and whether it's a global tariff, whether it's a tariff on some countries and not others. How do you think about potential ramifications of that? Sure. I mean, I think that's actually a terrific question because I think it highlights, first of all, that it's very challenging to make simple statements about complicated changes in policy.

33:35So an example is, you know, in the classic models, a tariff would be a one-off. You just raise it. That's a classic model that doesn't have any retaliation. It doesn't have any knock-on effects, as we would call them, where you say you tear off an intermediate input. Well, that's going to filter through the economy into the price of other goods that are produced using this intermediate input. That's unlikely to be just the one-off time. It'll filter through, and the duration of the time it takes for that to filter through is very challenging to know ex ante or in advance. So I think it just is much more complicated than you look through it.

34:11Now, standard classic textbook models would tell you to look through it. I tend not to say transitory very much. I think that's a word I wasn't using a lot before, and I'm certainly not using now. So I'm going to say one-off. You just raise it, and then it goes. But the practice of it has suggested that the economy is more complicated, and it takes some time to filter through. Now, in terms of the structural changes, I mean, that's part of why tariffs are applied oftentimes. They want a more fair playing field, our elected officials, because voters have said we want a fairer playing field. And when you put a fairer playing field in, you might see a reorganization of activity to adjust to that new fairer playing field.

34:49But that was the intention all along. And so ultimately, this is why the central bank is independent and outside of what elected officials do. It's one of the reasons. Elected officials are elected by voters to make decisions that are bettering society overall, the economy and society. And even when you don't agree with those, that's still the intention, right, that all different elected officials come out to try to do. The Fed, we only have two goals, price stability, full employment. And so we're taking the economy we have, and if there are structural changes that temporarily boost the price level on things or just more persistently do, we would have to work to make sure that that doesn't cause inflation to rise above 2 percent.

35:30and that somehow we don't end up losing our full employment, the place in full employment that we have now. So that is a healthy tension in my judgment, but it's also why the Fed is independent from, it's one of the reasons our founding fathers, they were all fathers at the time. I know we'd like to change those words sometimes, but they were all founding fathers. And it's why they did that, is it's because they wanted that tension to be there, in my judgment. So Joe and I were in San Francisco a few weeks ago. I know, I missed you, I'm sorry. I know. It would have been great to catch up. I was in some other place.

36:03Go for a Waymo, ride in a Waymo with you. I loved a Waymo. I was literally about to talk about the Waymo. Okay, I went in my first ever Waymo and it blew me away. And we met with lots of VCs who are talking about all the cool stuff they're seeing in terms of AI. You sort of have a front row seat for AI given your geographic location in San Francisco. Talk to us about how you're thinking through AI and its impact on productivity. Because obviously a lot of people expect a big productivity boost from this new technology. But, you know, like so far, I think it kind of remains something of a hypothetical, like at large scale.

36:40But what are you watching for in terms of monitoring the actual impact of AI on productivity? So we're already seeing this. And one thing that if you go back to, you know, Robert Solo, there's a famous quote that you can see productivity everywhere except in the productivity data. And you're really seeing that now. And, you know, I came to work at the Fed in 1996. And one of the first jobs I had sitting at the San Francisco Fed as an economist was to collect evidence of a burgeoning productivity boom for Chairman Greenspan. Oh, wow. It was literally, isn't that like the coolest thing? You land at the Fed, you're doing research on the labor market, and suddenly the chairman of the Fed's interested in you collecting this information.

37:19So this would have been the early 2000s when he was talking about like the big boom. This is 97, 98, you know, really before we even got there. And he was an early spotter that if people are using computers, you're not going to see it in the data just yet because what they're doing is they're buying all this equipment. But it's really the software and the change in how they did their work that was going to boost their productivity. So let me give you a cool example. Now, this didn't happen until the early 2000s, but it's still a cool example. So before we had the internet and the computers and connected networks and things, the gas meter readers had to come to your house and come up to your meter and read it and write it down in a notebook or type it into a little machine.

38:08And they were getting bitten by dogs or they couldn't get in and meters weren't getting written, read, et cetera, et cetera. With this technology, they produced cars. This happened first. The first place I ever saw this was Salt Lake City. They had trucks and the trucks had readers on them and they would communicate with your meter, which was a smart meter, and they didn't have to get out of the vehicle. And so no one's getting bitten by a dog. People are all their meters are being read. Productivity goes up. Safety goes up. And importantly, people's bills go down and are more accurate because you're not estimating them.

38:40So that was an example. And those were the kinds of examples I was giving Chairman Greenspan. And he was saying, okay, we're going to see it everywhere except in the data. And sure enough, it turned out to be right. Productivity was all over the place. And eventually, when the data got revised and we got better at figuring out what was going on, we saw that we had a computer revolution. The same thing appears to be happening with AI. And again, I want to caution people from thinking it's all about chat GPT or perplexity or any of the other models. I'm not trying to advertise models, but those are the ones that get a lot of attention.

39:13But it's not about any particular model. It's really about machine learning. It's about, you know, robotic processing, automation, just people, businesses doing things. And so we started a network called the Emerging Tech Economic Research Network at the San Francisco Fed. And we're spending a lot of time with researchers, but we're also spending a lot of time with CEOs and, you know, CIOs. And we're asking them, what are you doing? And it is astounding how many companies in the United States, probably the globe, we're focused on the United States first, are using these things. Everything from furniture companies to improve their sales to design companies to figure out how to design things faster and more accurately, idea generation.

39:56So we're seeing it everywhere. I don't think we'll see it in measured productivity right away, and you shouldn't expect to. But the impetus of change is there. And so it's not all about the Waymos or the Zoox. You have to write in the Zoox next time. But it's really about businesses thinking about how to use technology to make their teams stronger, more capable, less tedious work, get the job done. And I think that's potentially a huge benefit. It could take a decade, but it is happening. First of all, it must be fun to be the SF Fed president. I'm sure every regional Fed president thinks their region is great, but A, you have so much territory, and B, all the coolest stuff in the world is happening in your district.

40:41I agree, actually, but I shouldn't say that. So I want to actually go back to – you talked about this. And first of all, I did find that just sort of a very fascinating reminder that at the beginning of the dot-com boom, first there was just a bunch of costly spending on computers. And it took a while before businesses figured out what they were going to do with them. So when you think about the sort of lagged effects of that spending, that's interesting. Going back to when we were having the more theoretical part of the conversation and you talked about why the neutral rate might be higher, you mentioned the higher proclivity to invest.

41:13But you also mentioned there's a lot of government borrowing right now. And one of the things that the new administration says it wants to do with the incoming treasury secretary is take more seriously the deficit. I am a person, as I've hinted on the podcast before, who has a loan that is going to have to be refinanced in a couple of years. I would love to see lower rates. Setting aside what the ideal mix of deficit reduction, et cetera, if we want to get to a sort of sustainably lower band for rates, and you mentioned it's a global phenomenon, does lower deficit spending seem like one of the key components to it?

41:52You know, I don't make those fiscal decisions. I know it's not a decision, but I'm trying to like it. But ultimately, it matters. Total spending is what matters. So if the government spending goes down and it's what happens is private sector spending goes up to fill that difference, then it won't really have much effect on the interest rate. But if we get a reduction in net spending because of that, then you could. But importantly, I think this is something that usually gets lost because most countries only talk about their own country because that's what's important to them. Sovereigns across the globe are spending more money.

42:29Right. Right. And that's, you know, it's partly a response to the pandemic. And then, you know, kind of get used to it and keep going. And so I think this is a global issue. And then, of course, we still have the aging population that's working through that we have to pay for. And that's true in almost every country, industrialized country in the world. Energy transition. Energy transition. Then you got technology. That could help us. We could get more productive. But you do all these things and they end up becoming, you know, expensive changes at a time when we're already paying for the aging population.

43:01And then we keep borrowing to do it. And it's just, you know, it's a different environment that we were in prior to the pandemic. And we'll have to deal with that. So I don't know that we can give you a lot of near-term relief on your refinancing issue. But I do think these are problems that all nations are going to have to wrestle with. The nice thing about having the podcast as a platform, Joe, is that you can personally lobby the Fed for a lower refi rate. Except as we've seen, you can cut rates and it doesn't even lower the mortgage rate. Anyway, sorry, keep going. No, I just – I think ultimately they – that's another thing.

43:35We control the short-term interest rate. It filters through to other interest rates. But we live in a global economy and we live in a world where interest rates can move around for a variety of reasons, just like the stock market. And, you know, what really is important is that ultimately, if you stack up, has monetary policy been working? You can see evidence, clear evidence that not just supply-driven inflation has gone down. So the supply has improved, inflation has fallen, but the demand component has gone down and things are rebalanced. So I still think monetary policy works, but that's a different question than what rate will we settle at.

44:13And in all likelihood, it'll be higher than we saw prior to the pandemic. I just have one last question, and it's sort of a FedWatcher question. I hope you're not offended by this, but before we did the episode, I had to look up. I was like, is she a voting member or not? As I forget who is a voting member. Of course. We forget. No, I'm just kidding. I'm kidding. Um, people who are Fed watchers sometimes talk a lot about the hawk-dove meter and who's rotating in and out one year. And is this person more hawkish, more dovish? You're currently a voting member right now. How significant is it when you think about, especially now that we have the dots and people pay a lot of attention to the dots and everyone puts in a dot regardless of whether they're a voting member or not.

44:56And those seem to be influential. How important is it for the sort of average person or Fed watcher to pay close attention to who has a vote at any given time or from the perspective of a someone who rotates in and out? How much does it change, you believe, your influence on the state of policy, whether you actually formally have a vote at a given meeting or not? I've never seen an effect. This is really interesting. I've never seen an effect in my entire history working for the Fed, even when I was just staffing the FOMC and not on it. I just have never seen an effect. I mean, what is influential are ideas, arguments, evidence, thoughtfulness about where we should go and how we should get there, and being willing to interrogate and ask questions even when you're sure.

45:40I mean, ultimately, we're best with each other when we question and question and question again and be skeptical and curious and skeptical. If you come in and you say, you know, I already know the answer, you're not actually as useful as you come and say, I'm thinking about it this way or you're thinking about it differently. And we have those rigorous debates. So if that's the main thing that's beneficial about being together and being on this committee, then you can see that voting doesn't matter because you really don't pay attention to the vote that people are talking about. You pay attention to the arguments that they're making.

46:13And so I've actually never seen a difference in my tenure under any chair. I've worked for four chairs at this point. I've never seen any difference. And one of the things that also is true is that chairs are willing to take dissents. And they're willing to live with differences of opinion. And the dots are a tremendous example of that, right? You look at the dots and they are as the uncertainty of the economy is going up and it's not clear what the right answer is for next year. The dispersion in people's estimates about the forecast, the neutral rate of interest, and the policy that will be appropriate next year, they're just – they're getting more dispersed.

46:53That is a benefit. That's a feature, not a bug, as we like to say. And I think it just speaks to the idea that voting doesn't matter and the rotation is not that relevant. What's relevant is arguments and thoughts. And, you know, luckily, we have a very transparent Fed. So you can go and read people's speeches and remarks, see their interviews, hear their podcasts, hear Adla. And you can make your own determination as a citizen. I noticed in the beginning you were still talking about like working towards a soft landing. And my question is like when you actually get to say we did it because like two years ago, I don't think anyone would have expected things to shake out the way they have.

47:30Like to me, the soft landing is kind of here. You know, I think here's what I would say. I gave a speech at NYU, and the reason I'm pointing to it isn't to say, look at me, I gave a speech. It's because it was about this. So ultimately, I will judge a soft landing, and I think history will as well, if we allow people the time to catch up. So if you look at people below the 50th percentile of the wage distribution, they're still behind. If you measure the cumulative losses they had from inflation, they still need another year or so of this kind of growth of wages above inflation to get their earnings, their lives back.

48:05So for some people, you feel fine. For other people are like, I got in such a giant ditch that I'm only now getting close to seeing out of that ditch. And then they want to have some path restored. So I would say, so I actually redefine or define for people what I mean by a soft landing. It's a durable expansion that allows that to occur. So I'm not at all satisfied right now. But I just want to keep going because, you know, I grew up in the 70s. My parents had this card table and as everyone in my community did. And they would on like one Sunday out of the month, they would put bills they could pay in one stack and bills they couldn't.

48:43And over the inflation period, the bills they couldn't pay just grew. Then Volcker did the Volcker disinflation. They both lost their jobs. And now the whole family's in disarray. And I just remember that. And I think, you know, I didn't go to work at the Fed because of that. But I just remember that. And I think that's probably how so many American families are feeling right now. They're just getting kind of their feet under them. So that's what a soft landing looks like. All right, Mary Daly, San Francisco Fed president. Thank you so much for coming on All Thoughts. And I should say, Mary has her own podcast.

49:13So you should definitely check that out, too. Can I say the name? Yeah, of course. Zip Code Economies. Please join us. And you can come to any state in my district and I will travel with you. Amazing. If Hawaii is your destination state, I'm going back this year to see how the Hawaii economy is doing. I'm going to Alaska. I'm going to all the other states. I want Alaska. I've never been. Yeah, I would do Alaska. You guys can debate. I've actually been to Hawaii. So even though it sounds nice on a cold New York day right now, I would do Alaska. The cool thing about any of these states, whether you're sitting in Idaho, Utah, Alaska, Hawaii, is you're going to see – this is the thing that I loved about the 12th District.

49:48Once I moved to the 12th District to take the economist job way back in the day, they would fly me there. I would fly to the main city and drive all around. And here's what I learned, that ultimately the economies are vastly different, and yet they're all the same. They all basically have people working together, trying to build their lives, build their careers, make a business. And that's a cool thing. You see the vast difference and then you say it all comes down to the same thing. All right. Thank you so much. That was fantastic. That was amazing. Thank you so much. Thank you.

50:29Joe, that was a really fun conversation. I think if I were going to be any Fed president, it would have to be this. Hawaii, Stanford, Hawaii. Listen to Joe on this podcast, lobbying for lower mortgage rates and for the 12th Fed District. Well, and lobbying for us to take a trip to Alaska. And Alaska. And Hawaii. I'm on board with that one. Would you say the Northern Mariana Islands? Yeah. The only reason I know that, by the way, is because it was the tiebreaker round for a recent quiz that we held in Los Angeles for Bloomberg clients. Yeah. We didn't get to do it because there was no tie. But yes, we were going to ask the clients to name all of the states and regions.

51:08All nine states and three territories. I wouldn't have been able to do it. Mariana Islands, no way. But yeah, I thought that was a fantastic conversation. First of all, it was exciting. We did get that nice beat on Corp. PCE in the middle of the episode. It still feels like a very tricky moment, for sure, for the Fed, even before the effects of any Trump policies come into effect, regardless of what they are. The fact that the inflation outlook for 2025, it's still going to be a while apparently before they're sort of durably back. The fact that we have seen this sort of big increase in the ostensible neutral rate if it exists.

51:47Tricky times for the Fed. Yeah. And I think there is that tension between, you know, wanting to see how everything shakes out and also trying to be ahead of the curve to some degree. But it is interesting. It was interesting to hear her talk about like how she wasn't one of those people taking into account potential future policy. The housing question is going to be really interesting, too, right? Like, so what are the residual sources of inflation if it's no longer the labor market? Of course, you defended the beverage curve. It's an employee. It's back in balance. But this idea that and you mentioned it, you know, that housing construction has fallen.

52:23This is going to be a persistent source of economic stress, whether it shows up in the formal measures of inflation or how it doesn't. This remains a major issue. the fact that there is so much investment or at least government spending happening around the world globally, military spending, aging demographics, many, many such complications going forward. Complications. Definitely the word of the day. Let's see. So again, we're recording this on Friday, December 20th. We'll see what happens over the weekend with the government shutdown. But it does seem like there are a lot of one-offs that the central bank is potentially going to have to take into account.

52:59Absolutely. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Traci Allaway. You can follow me at Traci Allaway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our guest, Mary Daly, San Francisco Fed President. She is at Mary Daly Econ. And you can check out her podcast, Zip Code Economies. Follow our producers, Kerman Rodriguez at Kermanerman, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. Thank you to our producer, Sir Moses Andam. And for more OddLots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog, and a newsletter.

53:35And you can chat about all of these topics. Oh, including the fact, and I meant to say it, including the fact that voting doesn't matter at the Fed, which I thought was really interesting. You can talk about that in the Discord, discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we have Fed presidents on the show, then please leave us a positive review on your favorite podcast platform. And 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.

54:06Thanks for listening.

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