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

Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.

Speaker 2 (00:18):
Hello and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Alloway and Joe. I don't know about you,
but when I think about Alaska, I think about snow glaciers,
gold oil pipelines, northern exposure, small planes, and the twelfth
District of the Federal Reserve System of Banks.

Speaker 3 (00:40):
Just literally the exact list that I think in that
precise order.

Speaker 4 (00:45):
What a coincidence. I can't believe it.

Speaker 2 (00:48):
All right, Well, we are in fact here in Alaska,
in Anchorage to be specific, and it's a really interesting
time to be taking a fuel trip to the very
very northern state because Alaska actually has a lot of
relevance to our current period.

Speaker 3 (01:03):
So, you know, we used to talk about how like
Arizona is a very odd lossy staff. Oh yeah, and
I still think, but this is a very odd lots
state because there are so many specific things that we
hear about here, whether it's a demographic shift, oil obviously, logistics,
bgistics is huge. It's you just feel the presidence of
the various train and plane hubs and ship hubs here

(01:24):
in Alaska. So is in housing, which has a very
difficult housing environment here too, So it is a very
meaty area for us to do a coverage.

Speaker 2 (01:33):
Absolutely, and we do, in fact have the perfect guests
to talk all about it. We are going to be
speaking with Mary daily. She is, of course, the San
Francisco Fed President and therefore the president of the twelfth district,
and Alaska is in that district, and she's here on
a trip and she's going to talk to us for
quite a while. So Mary, welcome to the show.

Speaker 5 (01:52):
Thank you so much.

Speaker 6 (01:53):
I'm delighted to be here, and I'm so delighted that
we're in Alaska together.

Speaker 4 (01:56):
I was going to ask how often do you actually
come here?

Speaker 5 (01:58):
I come regularly, But it's not just me.

Speaker 6 (02:01):
Members of my team economists, our engagement officer, it's our
public engagement officers they come to. Ultimately, we're trying to
source information from all of our states, so we go
to all the states in our district, there's nine of them,
and we ask questions of all of them about how
they're living in the economy. What are the things that
concern them, what are the opportunities, what are the challenges?

Speaker 3 (02:20):
So big picture, how's the Alaska economy right now? Or
what constitutes the Alaska economy.

Speaker 6 (02:26):
Actually, well, let me tell you something I learned the
first time I came to Alaska. It isn't an economy,
it's a series of economies.

Speaker 5 (02:33):
Right.

Speaker 6 (02:33):
If you go to the more remote areas that you
can only say accessed by airplane, you can eat, there
are no roads. They live in a cash list economy
that's subsistence. That looks very different than Anchorage, where you're
using your digital wallet to pay for things locally. That
more familiar to the lower forty eight. And so really,
when you think of Alaska, you have to think of economies, communities,

(02:54):
and you have to imagine that the leaders here in
the population here has to come together to sure that
all the decisions they make serve the variety of needs
they have.

Speaker 5 (03:04):
I think that's what makes it so rich.

Speaker 6 (03:06):
It really is at the forefront of so many things
that can affect the national economy that it's a really
great place to learn.

Speaker 2 (03:13):
Is Alaska of particular relevance at this particular moment in
time when you know, uncertainty is the word of the day.
We do have tariffs going on, Inflation is still a
lingering concern, and Alaska, of course doesn't already have a
high cost of living.

Speaker 6 (03:27):
So you know, think about Alaska as right now a
leading indicator. They're sitting in the perfect storm, if you will,
of all the things going on in our economy. They
have a higher price level, and they've suffered even more
from rising inflation. They are thinking hard about how do
they import and how do they do this given the tariffs.
They are a recipient of a tremendous amount of federal

(03:48):
spending related to strategic defense and the military capacity and
even things like satellites. So they are right there and
so coming here and seeing how they're dealing with it. One,
it tells me how resilient our economy is more generally
to these different changes. And two, it provides me a
leading indication of how businesses in communities they're right there

(04:09):
on the forefront, are going to respond to this. And
I can use that information to look on the lower
forty eight, especially my states, and ask what are we
seeing there, So it gives me early insight into the
changes and how they're likely to affect the economy.

Speaker 4 (04:22):
Joe Mary just did the intro better than I did.

Speaker 3 (04:24):
I think resilient and scrappy feels like one of those
things where like every town in the world or every
city likes to describe their residents as such, but this
is like the first place I've been where I one
hundred percent believe it, And when hearing the stories of
people who've been here multiple generations, is like, okay, you actually,
I actually fully buy that. But it's interesting. So one

(04:45):
of the there's a lot to go down. But we've
heard about declining population levels, particularly in Anchorage, and it's
interesting to me because the San Francisco fad President, so
you have part of your district is wrestling with population decline,
and then also San Francisco itself this massive housing constrained
destination for labor right people want to go to make
their fortunes and a different kind of gold rush. But

(05:06):
talk to us about, like, you know, your perception of
the economic challenges in a place where there's a lot
of out migration, where it's difficult to say, keep young
people around.

Speaker 5 (05:16):
It's very difficult. Alaska is not unique there.

Speaker 6 (05:18):
You can look outside of my district to work the
code and other places and go to these rural communities
and they'll say, we want to keep our people and
it's hard to do it right. But What is particularly
true in Alaska is there's several things going on all
at once, and ultimately, when people decide to stay in
a place or come to a place, they want an

(05:39):
ecosystem of things that are important to their ability to thrive.
They want to have work, and not just work they
start when they're twenty two, but work that they can
grow into and maybe change into as they age. They
want to have housing opportunities so that if they want
to raise a family or if they just want to
own a home, they have that. At this point, there's
even trouble getting property, even if you're just leasing it,

(06:01):
so there's those types of pressure, so that's taking that risk.
And then if you're trying to build a family, there's
the schooling issues of population outflows mean that fewer schools
are available, So then the equation starts to break down.
And what really has to happen is they have to
believe that they can stay because something more prosperous will occur,

(06:22):
or that they really like the outdoors and being part
of this beauty. And I think that equations not penciling
it out like it was, because ultimately, if people don't
have jobs or place to live or see a bright
future for their career and their family. Then they will
feel forced to go elsewhere. And I think that's where
the state leadership, and this Anchorage leadership, and all the

(06:42):
business leaders I meet with, that's their fundamental concern. One
person put it this way, how do we attract people?
That's important, but how do we maintain them? How do
we retain the interest in us when our economy is
not doing as well as some competing economies in the
lower forty eight.

Speaker 2 (06:58):
Well, on that note, can talk a little bit maybe
about the cost of living in Alaska, because this is
another thing that is, you know, somewhat unique. There are
higher prices for just simple things like groceries. Housing might
be constrained in a way that you wouldn't like necessarily
think about for a place as big as Alaska. But
this comes up quite a lot, and I'm very curious

(07:19):
how you're thinking about inflationary pressures on Alaska specifically, given
that over the past few years inflation was a concern
for all of the states, but I imagine it was
an extra concern here in this particular one.

Speaker 6 (07:32):
Absolutely, you start with this just the recognition that almost
everything costs more in Alaska, why, Well, you have to
import a lot of the things that we take for granted,
you know, whether it's healthcare products or things that you
can use for your buildings, or simple groceries and shoes

(07:54):
and other things. Now we import a lot of that
stuff to the broader US, but the shipping costs to
come all the way up to Alaska and then distribution
across the Greater Alaskan region is very challenging. There's transportation
costs that if you only take that alone, really drive
up the prices. That's already a higher price level, and
then you add to it a higher inflation rate. Well,

(08:14):
then the pain that anyone might feel in the Lower
forty eight that's just magnified in Alaska. You put with
that the fact that in the twenty years ago, wages
in Alaska used to be higher than wages in the
Lower forty eight, but that gap is shrunk over the
last twenty years, and so now the wage levels are
roughly the same and the prices are a lot higher,

(08:37):
and inflation is driving those up more and things aren't
getting cheaper to import into Alaska. And I think that's
why people say, you know, it's just when I try
to build a property. I'm a builder, and now I
have to pay higher costs to ship things in, and
if I get tariffs on top of that on the
basic inputs, that just doesn't pencil out anymore.

Speaker 5 (08:55):
And that's the equation they're dealing with.

Speaker 6 (08:57):
It's just more expensive, it's harder, it's cold here, or
it's remote in many places, and all of those put
challenges that ultimately raise costs.

Speaker 3 (09:05):
Probably, like the biggest question right now in the sort
of for the whole US is the degree to which
tariffs will be inflationary, the degree to which they'll be
passed on to consumers or absorbed by whoever. What specifically
are you hearing from businesses about what they can do
and the actual impact of tariffs on their operations.

Speaker 6 (09:24):
Sure, I'll start with Alaska since we're here and I've
been meeting with businesses since I came, but I'll go
broaden it if you don't mind. So on the Alaska
we're hearing very similar things to what we hear in
the lower forty eight. We're hearing that they want to
pass it along to consumers because it's challenging to deal with,
but that consumers are exhausted, you know, that's a phrase

(09:45):
I hear a lot. Consumers are exhausted. I just don't
know how much they can do. They're already trading down.
If they used to go to one retailer, they're moving
to the next level down, showing up in the dollar
stores to try to find ways to make ends meet,
or they're just foregoing things that they might do in
the past. Those things put pressure on firms to say, well,
if I raise my prices, I'm going to lose my

(10:06):
sales and I have to pencil that equation out. So
I see more of them eating it into their profits
and then just hoping that they can either collectively go
to Washington and get an exception for whatever they're trying
to import or use, or they can weather the one
off terraf increase and then move to a more normal
So things, you know, in construction, you're hearing things like, well,

(10:28):
we move from steel framing to lumber framing wood framing
because steel was tariff and now we're looking for alternatives
that we can make here or have lower import costs.

Speaker 2 (10:38):
So items like a serious trade off going from steel
to lumber framing.

Speaker 6 (10:42):
Well, you know what's remarkable, and this is remarkable and
I think Alaska does this in ways that are even
more innovative than other places I've seen. Is construction and engineers.
They know how to build things and they know how
to make them durable. So you give them a set
of materials. It's almost like when you do those cooking
and they give you a box of things and they
say to the people, make something delicious. That's what construction

(11:04):
people and engineers are good about. They say, here's my
box of things. I'm going to make a house that's durable,
can last the cold climate, can be built on the permafrost.

Speaker 5 (11:13):
I'm going to figure it out.

Speaker 6 (11:14):
And I don't count them out because they're very good
at this, and it ultimately leads to the innovation that's
needed to deal with the higher costs. The problem is
it's happening all at once, and it makes it really
hard to innovate fast enough to offset the costs. So
I'm hearing passed through, but I'm not seeing a lot
of it. You saw this in the published data, spreading
it out past Alaska published data is coming out. Goods

(11:35):
price inflation is going up. It's not spilling over into
services inflation, either in housing or in services. You know,
what I think of as supercore services X housing. That's
good news, and the best sense from history and from
what's happening right now is that there won't be much
of an impasis so far to spill over that would
get into a persistent inflation problem. You can't count it out,

(11:57):
of course, but I don't think there's a lot of
evidence incurring.

Speaker 2 (12:01):
I have a bunch more tariff questions. But since you
mentioned history just then, one thing I'm really curious about.

Speaker 4 (12:07):
Is there anything we.

Speaker 2 (12:08):
Can learn about how inflation expectations work from the Alaskan experience.
So this is a state where the higher cost of
living has been top of mind. When you start to
see those idiosyncratic developments in terms of prices, when people
are talking about something like tariffs, do you see expectations
for future rates of inflation ramp up faster here than

(12:28):
perhaps elsewhere in the US.

Speaker 6 (12:30):
So there's not a lot of good data on state
wide inflation expectations. So we have to rely on talking
with people. And when I talk with people, they worry more,
but they don't there's a difference inflation expectations. The way
you can measure it is am I asking for a
higher wage am I going in and saying I can't
keep up I need a higher wage. And we don't
really see a difference here in Alaska than we do

(12:51):
in the lower forty eight. We just see that when
inflation gets derising fast and the labor markets tight, then
individual say I'm going to go ask my firm, and
the firms are more willing to give it. But now
that the labor market has softened, people aren't that interested
in going in and saying I want more money. It
also is consistent with them thinking that the tariffs are

(13:12):
a one off. The best way I know to think
about inflation expectations and kind of gather that type of
information is look at short term inflation expectations versus medium
and longer run inflation expectations. So all I can do
is ask I'll ask is that question, and I haven't
seen anything different than the published data for the nation,
which is short term arising, medium and longer run. They
still believe that we can get inflation down to two percent.

(13:34):
That suggests to me they think it's a one off.
Tariffs go up, you pay for them, and it's all
about managing the increased costs rather than thinking this is
just another run of inflation.

Speaker 3 (14:00):
Maybe it's a process question, but you know, obviously when
it comes to the dual mandate, there's a lot of
good government data. Actually we should talk about data quality too.
But I'm curious, like, what is the additional thing that
you get out of these trips other I mean, it's
good to have anecdotes, it's good to make face to
face as their regional Fed president, But when you think

(14:21):
about incorporating your process or how it may even affect
future votes on interest rate decisions, what do these trips
add to official sources of the data.

Speaker 6 (14:30):
Yeah, sure, absolutely, So the most important thing is that
I learned about how the economy actually works. It's very
difficult to know how tariffs will affect an economy if
you don't know how it works. It's very difficult to
know how inflation will affect the economy, or if the
housing crisis that they talk about is really larger than
the housing challenges you see in other places, or it's

(14:53):
the same. And importantly, it's not just a trip to
Alaska that informs that. It's a trip to a variety
of places that we and that's why regional Fed presidents
are out a lot because we're trying to collect the information.
That's one big reason to learn about it. You know,
when I take a tour of you know, a port,
or a manufacturing plant or a drilling facility, I'm learning
how those things work together so that I can better

(15:15):
understand how the economy will perform when they face a shock.
It's not all about the price of oil. It's about
how many workers do they have, what's the drilling, where
the bits? What are you working on? Where do you
get your things? So that's piece one. Piece two is
data are almost entirely backward looking. They tell you about
what happened last week, last month, last year, but you

(15:37):
can't make policy on backward looking data. So it tells
you where we are in level terms, but it doesn't
tell you where you're going. And so getting to talk
with people and actually ask them questions like this. I
asked this question all the time now, So you feel
really uncertain. I'm sure that's worrisome. Are you changing your
behavior because of it? And the first question is always yes,
we're very uncertain, and the second one has been we're

(15:59):
not changing our behavior entirely. So I'm continuing to invest,
but I'm not necessarily taking on riskier projects. I want
a good ROI if I'm going to keep going. So
I think that's another reason to come. And then the
third reason to come, and this is really important and
I think underappreciated, is the Federal Reserve Act created twelve

(16:19):
reserve banks and a board of governors and did so
if you go back and look at the original documents
to recognize that you can't make policy that serves a
nation if you only are in DC. But that gives
us a responsibility as reserve bank presidents to represent the
people who were serving in terms of learning about them
and bringing their collected information to help us make national policy.

Speaker 5 (16:40):
So that's what we do.

Speaker 6 (16:41):
And when we come, people feel like we are doing
the work on their behalf, and trust goes up. And
when trust goes up, as I've said many times and
many of my colleagues have, trust is one of our
most important tools because if people believe we can achieve
price stability and full employment, then they behave as if
we can achieve price stability and full employment, and that's

(17:02):
a virtuous cycle that actually delivers it faster.

Speaker 2 (17:06):
This was going to be my next question, actually, and
again it's kind of a process question. But if your
job is to represent the twelfth district, and the twelfth
district has diverse states in it, and Alaska perhaps in
many ways is an outlier, how do you actually judge
I guess, or how do you make sure that you're
representing different interests? Perhaps different states might be at different

(17:28):
places in the economic cycle, and you're dealing with basically
an interest rate that tends to be a single, one
size fits all interest rate, a pretty blunt tool in
many ways, how do you balance that?

Speaker 6 (17:40):
That's a great question, and I'll say it this way.
Representing the economies and the voices of the people doesn't
mean we're Transactually balancing the interest rates hurts you, it
helps you. Because we can't make national policy for any
particular region, not the twelfth district, not the first district,
not a state. And that's just part of the constraints

(18:01):
of our job. Right we have a dual mandate for
the nation. So you're aggregating up the data. But then
it's a mistake to think that if you have the
aggregate statistics, you know how the economy is faring. There
are many places where let's take tariffs in federal spending,
cuts and oil and gas drilling, read deregulation, that's happening
all in Alaska. So Alaska becomes the leading indicator in

(18:23):
many ways for how this is affecting the economy. So
if I see it here, I can then expect to
see at other places in some time periods. That would
not be true. Alaska would not be a leading indicator.
It would lag the economic performance of the country or
any economic changes. So you know your states and your
economy is well enough, and all my colleagues know their
states and economy is well enough that they know where

(18:46):
we are in the business cycle or the sequencing of things,
to know what states are leading, what states are following,
and then what states are being most impacted or less impacted,
so we can make better policy. The other way I
put it together is an interesting thing about how a
very diverse district is. You start to learn how similar
people are. Everybody wants the same thing. They want inflation

(19:06):
to be at target. They want to have economy that's
sustainably thriving, that sustainably available. They want to be rationally
inattentive to inflation and whether the economy is going to
be pushed into a recession. They just don't want to
think about it. And that's a universal truth. It doesn't
matter if I'm in Alaska, Hawaii, or Nevada, it doesn't matter.
Idaho feels the same way as California in that goal,

(19:30):
in that sense, and so I can go and see
to that point. Are people nervous? Are they optimistic? Are
they cautiously optimistic?

Speaker 5 (19:39):
Today?

Speaker 6 (19:40):
I see concerns, but when you really push them, and
this is true across the twelfth District, people are cautiously optimistic.
Some cities have more cranes than others, but everybody's got
a crane.

Speaker 3 (19:50):
When we last had you on the podcast, when You're
coming through in 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 talk 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 and is there anything
interesting that you've picked up on that?

Speaker 5 (20:10):
Absolutely?

Speaker 6 (20:10):
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 promote 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.

(20:32):
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 so they can save time. They can
do 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

(20:54):
me a pitch deck? Can you write me can you
tell me the five best marketplaces in the United States
for the products I want to set? All of this
makes it better, and it's not limited to that 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

(21:17):
use AI to do first drafts of plans based on
the thirty year history of all plans we've ever made
to create this one small part that someone asked me
to machine. So 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

(21:38):
you're not falling behind to get a competitive edge rights
These tools are helpful, and it's not just about reading
your emails faster or writing a draft to 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.

Speaker 2 (21:59):
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 US economy,
which is this massive investment boom in AI. And in

(22:20):
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.

Speaker 6 (22:33):
Well, it's very true that the AI investment boom does
it look like the you 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
are AI support. They look different than the companies that
are doing mainline manufacturing. I mean, this is a fact,
but I don't see that as a competing interest. I

(22:56):
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 levels higher. They're dealing now with job security
issues like whether they're maybe even if they're not, it's

(23:17):
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.

Speaker 5 (23:27):
I don't see those two things as competing.

Speaker 6 (23:29):
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.

Speaker 5 (23:36):
The pipe that could be useful.

Speaker 6 (23:38):
The question I have right now is our 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 in fact,

(24:00):
how were we going to get cost down? And AI
becomes something they can try. And you know a year
ago when we talked or whenever that maybe it was
only six months ago when we talked, we were doing
these CEO round tables 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 in

(24:21):
our main product lines. We're only going to do back office.
Now it's moving to the front. Oh, if Matt tells
you something's changing. One of the things that I asked
somebody why and they said, it's just a lot easier
to do it than you think, and we can discipline
the models ourselves. We can prevent the nation by checking.
So now they feel more comfortable.

Speaker 3 (24:38):
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 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.

(25:01):
Companies still trying it as of today. It doesn't feel like, Okay,
we've seen some great product general economy wide productivity gains. However,
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. So are these very intense,

(25:24):
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 disproductivity from all that investment that hasn't paid off yet.

Speaker 6 (25:38):
You know, there's always going to be this discontinuity put
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. Those 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

(25:59):
maintained across the 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 and saying I'll just
build my own power to support this. And so that's

(26:21):
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, which is not seeing them come through
in productivity. Some of the easy wins that a company
might have done probably are behind us. Or do you
think okay, do I need two copy editors or one. Well,

(26:43):
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. I always use this example of thinking
about the original iPhone or smartphone against a BlackBerry. So
when it came out, I'm like, this is just a
fancy or BlackBerry, and then ultimately, of course I was

(27:05):
totally wrong. This was a much more just transformational technology
because we developed things on that technology.

Speaker 2 (27:14):
I still miss the BlackBerry me too.

Speaker 5 (27:17):
I tied so well on the.

Speaker 2 (27:19):
I used to file stories just on the BlackBerry.

Speaker 6 (27:21):
I could type entire epic novels on a BlackBerry. And
I've got the thumb problem of the thumbs meet in
the middle.

Speaker 5 (27:28):
I'm on a Mini.

Speaker 2 (27:29):
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. If 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, we'll say,

(27:51):
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?

Speaker 6 (28:02):
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 to think of the transformations
we're going through. We're trying to bring down inflation, which
has been tiring, trying to think about bringing manufacturing and

(28:26):
other things back to the United States, think 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, oh, 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. And
so with their own personal situation, they'll still being able

(28:46):
to go to the grocery, they can buy something for
their kids, they can invest in repairing their home or
going on a vacation, and 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

(29:07):
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 clip. I love
the view because I'm looking out. I'm fine, but you know,
anything can happen. Yeah, 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

(29:27):
what we're doing it, and here's how we would handle
something if we did look a bit tippy in the economy,
and that helps.

Speaker 3 (29:50):
So you just gave a speech here in Alaska right
before we're recording this episode, and you said something interesting
in your speech. I'm forgetting that doorg, 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 have change.

Speaker 2 (30:05):
It's not the first time that central banks have had
to deal with Yeah, that's right, certain.

Speaker 3 (30:09):
That's right, that's what it was. That basically, yes, things
are very uncertain, but this is the story of central banking.

Speaker 6 (30:15):
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.

Speaker 3 (30:20):
But there's never been a time where it's like, oh,
we know what's going on, We've got this something that
we know what the future.

Speaker 5 (30:24):
Looks like exactly.

Speaker 6 (30:25):
I mean, just let's think of my time at the
FED so far, so we had nine to eleven that
was pretty uncomfortably uncertain in 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.
Then there was the pandemic that was not a very certain,

(30:46):
very 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 read sure people on is we don't wait for
clarity before where we act, because if we did wait
for clarity before we act, we would be constantly behind.

Speaker 2 (31:05):
One thing that does seem to be new, at least
in my lifetime, possibly not if you were alive in
the nineteen seventies, 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. How are
you dealing with that?

Speaker 6 (31:26):
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

(31:47):
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, actually if you're in
leadership of the Federal Reserve, Federal Reserve Bank, president or
a governor, you have to almost like tap a stone

(32:08):
when you take the job. It'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

(32:29):
depending on the kind of condition we're 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, and then
have enough humility that you can't ask the question did

(32:51):
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 ultimate I get up every day knowing that my
work serves Americans. That's who I work for, and that's
what we do.

Speaker 3 (33:07):
You made this point about how like if you know,
if you wait for the clear evidence and maybe 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 job support that was not
only disappointing significant revisions and revisions are a common thing.

(33:30):
But and Tracy's 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, you know, we
need a fresh jolt of investment. But these are the
main instruments, right that you are looking at when you're
piloting the planet, et cetera. Is this making it harder?

Speaker 2 (33:46):
Like?

Speaker 3 (33:46):
Do you have concerns about that the quality of your
visibility into the data is suboptimal? Right now?

Speaker 6 (33:53):
You know, 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, because what you
learned 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

(34:14):
do that, of course in the pandemic, and we got
all these real time series we were using open table
data traffic, yes, how many people were going out? Or
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.

(34:38):
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,
and so making sure that we're investing enough in those
that information, making sure we know how important it is,

(35:01):
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
by a transition point, it feels like a turning point
where the economy is slowing, inflation's coming down because they're
restrictive interest rates, and we're trying to achieve that soft
landing that the data are always volatile. They're volatile on

(35:24):
any turning point. Whether we're turning from a downturn into
an expansion, you miss the job growth. When you come down,
you tend to miss the job loss or the net losses.
So that's something I'm always I'm 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?

(35:46):
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
you know, 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. And so

(36:07):
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.

Speaker 5 (36:23):
Maybe they have.

Speaker 6 (36:24):
Things that they are 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.

Speaker 2 (36:35):
Can you talk a little bit more about the alternative
data sources that.

Speaker 4 (36:38):
Are available to you.

Speaker 2 (36:39):
Because I hear this a lot, This idea that okay, well,
payrolls seems to have a revision problem at the moment.
Maybe there are other indicators we could look at, or
if a larger chunk of CPI prices are being imputed
or estimated then they were previously. Maybe there's something else
we can look at. What exactly are these data sources?
It's like, what is most valuable to you right now?

Speaker 6 (36:59):
So there's private collective 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

(37:21):
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?

Speaker 5 (37:27):
Are they a good signal?

Speaker 4 (37:28):
Is there a messaging challenge here? Though?

Speaker 2 (37:31):
If I think people are very used to at this point,
the idea of the FED sees the non farm payrolls
number a FED sees CFPI 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

(37:52):
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.

Speaker 6 (38:01):
We talk about what we do, and 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

(38:22):
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.

Speaker 5 (38:36):
Is what you hear from people.

Speaker 6 (38:37):
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 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

(38:59):
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.

Speaker 3 (39:17):
Okay, So there's this 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,
like we need rate relief. There are people who want
to buy house, we want rate relief. President Trump, obviously,
maybe in part due to interest payments on the debt,

(39:37):
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 this significant steepening of the old 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. I'm curious,

(39:59):
what would it take in your view to get meaningful
change at the long end of the curve, which is
where a lot of where there's a lot of sensitivity.

Speaker 6 (40:08):
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 the long end of the yield curve is
course fed policy, inflation expectations. Those have been well anchored,
so I don't think that's driving them. Geopolitical risks, how

(40:32):
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 So, 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

(40:53):
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.

Speaker 5 (41:01):
And so you're seeing.

Speaker 6 (41:02):
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.

Speaker 3 (41:13):
I know, because I've heard German Powell and others say
a million times, we don't comment on fiscal policy. That's
not our business. Nonetheless, I'm right, Yeah, 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.

Speaker 5 (41:36):
Well, let me say this. Let me say this, Yeah,
let me say this.

Speaker 6 (41:41):
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. This is the interest rates are not set nationally.

(42:02):
I mean we've said 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 were we going to manage this stagnation is going

(42:22):
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 t zero point five. So that's a pretty

(42:43):
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 we're considered neutral,
I don't think that's likely to happen, and that's commercial

(43:05):
real estate. Folks are really attuned to this, and they
knew that a year and a half ago. Markets are
knew that a year ago. But I think we're still
working on businesses and consumers to recognize those were not
those are not days we're likely to return to, at
least in the near term.

Speaker 2 (43:22):
You'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 like, 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.

Speaker 6 (43:41):
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. We've got
to get on it. It's really about we just keep confirming, Yeah,
the confirmation the evidence. So let's take the labor market

(44:03):
for example. So in advance of the July meeting. We
do this all the time, but you know, 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 softening. So I'm asking the question,
isn't weakening.

Speaker 5 (44:17):
No, softening is what we do expect.

Speaker 6 (44:19):
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 leading indicator. They 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

(44:40):
a lot of pickup DC 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 an 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

(45:01):
job finding rates really decline for out durations. You'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

(45:22):
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. I mean,
you know, I'm not employment rates, employment level, like how
much job growth do we have because we've had this
very wellharsh swing in how many immigrants are in the

(45:46):
labor force. The labor force went from people would estimated
when fifty is the trend growth we need to have.
So the unemployment doesn't rise now it's in the seventies,
maybe the sixties.

Speaker 5 (45:54):
That's a big change. So I look at rates, unemployment rate,
job finding rate, quit rate.

Speaker 2 (45:59):
Although this is what all said as well, like look
at the unemployment rate.

Speaker 6 (46:01):
Yeah, look at you look at rates and the unemployment
rate is a good thing to look at, but it
will lag deterioration in the labor markets. So you have
to look at those other ones as well. So I
look at initial claims for unemployment insurance because people have
to go in FIO, it's a.

Speaker 5 (46:13):
Good administrative record.

Speaker 6 (46:15):
And then I 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 inflation tariff based inflation in
the good sector is spilling over to the other sectors,
and inflation expectations are stable at the medium a longer end.

(46:39):
There'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, two percent price stability inflation, and
a labor market that still sustainably works, well we've got
to start recalibrating policy.

Speaker 3 (46:56):
You just like a really stupid question. I feel like
that's one of these things I should 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, well, like what I don't I
actually realized I don't know anything about like the role
of immigrant labor wales.

Speaker 6 (47:14):
So 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
did 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

(47:35):
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 then the domestic labor
supply is consistent with the labor demand that's out there.
But firms tell me on a regular basis that if
they were growing like they were a year ago, they
would have a shortage.

Speaker 2 (47:57):
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 US economy has surprised to
the upside over and over again, and US exceptionalism has
really been the theme. And so I'm curious if those
years of unexpected growth, if that gives you more wriggle

(48:20):
room or more runway perhaps in terms of having to cut.

Speaker 4 (48:26):
Do you feel like.

Speaker 2 (48:27):
The starting point matters, if you were starting lower, would
you be in more of a hurry.

Speaker 5 (48:32):
That's a really good question.

Speaker 6 (48:33):
So let me let me think through, let me walk
through health, take your time think about it. I'll just
walk through how I think about it. So, yes, you
have to take contextualization around it. Right, you know, where
you start matters, But right now I don't think we're
in that place where it's actually is relevant.

Speaker 5 (48:50):
Here's why.

Speaker 6 (48:51):
Two years ago, if we had a hot labor market
and tims it was even frothy, and inflation's printing it,
you know, five percent, well then that's a very different
acomy in terms of where we are than today. But
right now we have an economy that's really resilient. It
has proven its resiliency, but we're also very close to
getting to a point of maximum employment and price stability.

(49:14):
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 be 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 modes well for the momentum and
the resilience of our economy collectively to weather shocks. But

(49:39):
now as we get the labor markets in balance, we're
starting to see some softening, We're starting to see some sentiment.
We have been seeing sentiment come down, and then on
top of it, inflation's close to our target and interest
rates are still restrictive. That leaves us more vulnerable. Think
back to twenty nineteen. Twenty nineteen, we cut rates twice,
and we did that in part because we had all

(49:59):
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 the supportant difference it's a very
important difference. Inflation's not one point eight. Inflation is higher

(50:19):
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

(50:40):
it turns out to be persistence built, we will turn
around and raise the interest rate.

Speaker 2 (50:46):
I do notice that everyone's talking about short term price pressures,
but no one's using the term transitory anymore.

Speaker 4 (50:52):
Is that what word?

Speaker 6 (50:54):
I don't even know what you're talking about.

Speaker 3 (51:12):
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 sort of like
the second derivative of tariffs, et cetera. And I don't know.
I'm just going to stay in my opinion. I don't
think we will ever have something under this administration of

(51:34):
tariff certainty. You know, I think these are going to
be moving numbers for a long time. That's just my
personal opinion. But on the other hand, it does feel
like the range of possible outcomes has narrowed. We've gotten deals,
and you know, it feels like the range of possible
outcomes is less wide than it was in April. Has
it been a factor in you're thinking, you know, okay,
tariffs aren't going to happen, But does it feel to

(51:55):
you like we have more certainty over what the trade
picture will look like today than we had an early Absolutely.

Speaker 6 (52:01):
I think when the tariff announcements on Liberation Day were
very high. It wasn't clear that countries wouldn't reciprocate in
tariff us, or that they would and no retaliation, that
they wouldn't, that they wouldn't actually that they would go
to the negotiating table, and so all of that's happened,
and then on top of it, it wasn't clear how
firms would respond, would reforms just sit on the sidelines

(52:21):
and wait for it all to be over, or would
they continue to participate in their economy and 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,
to some firms were not even bringing the ships at sail.
They were already outside the port. They weren't taking delivery
on the goods because they wanted to wait and see.

(52:42):
But now one of my contacts said, uncertainty is the
new normal. We expect uncertainty for the next four years
and three and a half years, and so we're just
going to live with it.

Speaker 5 (52:54):
And when you live with it, you don't.

Speaker 6 (52:56):
Change the fact that you want to grow and you
want to hire, and you want to do these things.
But you do, you do make more careful decisions because
you don't know what could happen. But if you wait
for the uncertainty 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.

Speaker 5 (53:14):
So we're not doing it.

Speaker 2 (53:15):
So one of the things you've emphasized in your career
is the importance of FED communication and the messaging. And
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,

(53:37):
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?

Speaker 5 (54:01):
You explain why you made the decision.

Speaker 6 (54:03):
Ultimately, if we just put the decision out, which is
raised a flagpole saying interest rates have been cut twenty
five basis point, I think we'd be very vulnerable to
what you just said, because then optics dominate reality.

Speaker 5 (54:14):
But which you do instead.

Speaker 6 (54:16):
The remedy for that is be very open about how
you're making the decision, how you're balancing the trade offs.
And we were 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 if
we lower the interest rate, take some of the downward

(54:37):
pressure off inflation, but we'll still get there.

Speaker 5 (54:39):
But we're supporting the labor market.

Speaker 6 (54:41):
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 how 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.

(55:03):
I think that's the burden on us. That's our responsibility.

Speaker 5 (55:05):
We have to do better at it.

Speaker 3 (55:07):
See 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 twenty years ago. And you know, 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 of the stock market
is just unbelievably fantastic time. And you're sort of again

(55:30):
at ground zero of the companies that have driven helped
many people retire comfortably in America out of the companies
in your district. But when you think about like the
sort of flywheel and momentum of the economy, does this
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.

Speaker 6 (55:51):
Only from the standpoint that more people are accessing the
stock market, but still not the majority of people. Right,
More people have it, then have it four oh one k,
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 is that a lot of people who

(56:16):
thought they were going to return to work from the
fifty five and older went back into retirement or taking
care of grand children because 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 evaluations fall, your four oh one K fall, you think, oh,
maybe I should do something.

Speaker 3 (56:32):
But the rising stock market is contributing to labor market tightness.

Speaker 6 (56:35):
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 forces, 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. You have to look from how

(56:58):
banks are doing, how private equities do, how the stock
market's doing.

Speaker 5 (57:02):
What does it all tell you?

Speaker 6 (57:03):
And so we are broadening how we calculate financial conditions.
You can't just look at the interest rates. I used
to when I first started at the FED, when we
were talking to our boards and councils, we had a
little chart of interest rates, had the thirty year, the
ten year, the two year treasury, and had a mortgage
interest rate. Now you have to talk about financial conditions
at large. Are they tighter, they are they softer? What

(57:25):
is more accommodating?

Speaker 5 (57:26):
What is it?

Speaker 6 (57:27):
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.

Speaker 3 (57:36):
Since you mentioned baby boomers, there's 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 job support
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.
Is clearly that this aging population is itself going to

(57:59):
be a sustained source of labor demand, probably for a
month after month, even in a possible recession. Right like
this seems like mechanical. When 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 do in some way, especially

(58:21):
given the sort of demographic pyramids such as it is,
in some way support seniors.

Speaker 4 (58:26):
We're all going to be working in nursing homes.

Speaker 6 (58:28):
Yeah, well, this has been something that we know is
coming for thirty years. I started my career, I started
writing my dissertation on aging and taking care of people
and how does it change the economy and what do
we have to do and how does it change growth
and output and potential. And one of the things you
can see is if you lose workers then they go

(58:49):
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, etc. 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,

(59:11):
but honestly, that's the trade offs. We're a nation now
who has a very un aging population with increasing needs
and the younger population and even the economic productive capacity
has to support that. So the answer to that is
you have to grow the economy and you have to
be strategic enough. And it's not the Fed's job, but

(59:31):
this is something that I think many Americans are trying
to do. Many governments are trying to do a 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 literal families. Well, you're
going to use technology, of course, and you're going to
think about, you know, making more strategic decisions about what

(59:54):
do we need to do to ensure that we have
a diverse economy, etc. The concentration in education and healthcare
and other things that we've been seeing that's not new.
I mean, thats been going on. People were talking about
that a couple of years ago or a year ago.
What's interesting is.

Speaker 5 (01:00:10):
How durable will that be? Right?

Speaker 6 (01:00:12):
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.

Speaker 5 (01:00:19):
But we don't have enough.

Speaker 6 (01:00:20):
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.

Speaker 2 (01:00:30):
Since Joe asked you a wealth effect from Stock's 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. I mean,
crypto prices are still going up, the industry seems to
be expanding, The administration.

Speaker 4 (01:00:47):
Is clearly very very crypto friendly.

Speaker 2 (01:00:49):
Are we at the point where crypto perhaps matters from
monetary policy, either from a sentiment perspective, that wealth effect perspective,
or from a finance stability perspective, which, of course you
know as San Francisco FED President, that's under your mandate
as well.

Speaker 6 (01:01:06):
So the way I think about crypto and the conversations
about stable coins and other things, so let's separate crypto
from stable coins. For an it we put in a
big umbrella and people think it's the same, specifically very different.
So a stable coin is another way to fund yourself.
So you can do 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

(01:01:27):
things are just about a technology or an innovation that
smooths out these change particularly across borders. The crypto is
an asset. This is just 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

(01:01:49):
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 lose or tighter financial conditions and how
vulnerable is the economy to financial stability concerns. So you're

(01:02:11):
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.

Speaker 4 (01:02:21):
So the direction of travel, direction of.

Speaker 6 (01:02:23):
Travel, I feel a little bit like back in the
nineties you could see people doing some well maybe really
the two thousands after the Dot comes, you saw people
doing Internet purchases, and we would collect retail statistics on
how many things were brought on the Internet, and people
would regularly say, that's not big enough, don't.

Speaker 2 (01:02:41):
Worry about it.

Speaker 6 (01:02:41):
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 till it's a 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

(01:03:03):
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? That'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.

Speaker 3 (01:03:23):
I think I actually just have one more question, and
it's very sort of straight down in the middle macro.
But you know there's this obviously, you know, slowing in
some areas, et cetera. You've described the state of the
interest rates setting is still in restrictive territorial least modestly restrictive.
Yet inflation is still durably above target, not massively the

(01:03:45):
way it was a couple of years ago.

Speaker 6 (01:03:47):
Why is that it takes time? Once inflation gets up,
it takes time to bring it down. And you know
the reason you would adjust policy before you totally get there.
Let's put terras aside from it, and let's just think
about the regular dynamics of the economy. If you wait
to see the whites of the eyes of two percent inflation,
you will be too late. Because policy tightness today is
not just a reflection of where interest rates are today.

(01:04:09):
It's a reflection of where our interest rates have been
over the last twelve to eighteen months. And they've been
modestly restrictive, so they're gradually selling the economy and gradually
bringing inflation down.

Speaker 5 (01:04:19):
And the thing we'd been waiting.

Speaker 6 (01:04:20):
For, at least I had been waiting for for a
long time, was for this to start showing through the
housing sector, and 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 two percent goal. So if you started extrapolating services,
inflation excluding housing is coming down. Housing's coming down, The

(01:04:41):
goods sector without the tariffs was coming down, and so
you get all of those things, and that's pushing you
to two percent. We have to adjust policy before we
get there, because remember, anything we do, if we left
exactly where it is, that's another effect for another twelve
to eighteen months. Who knows what exactly the lags of
monetary policy are The only thing people can agree with
is as a lack.

Speaker 2 (01:05:02):
Just in terms of the importance of speed. Here, if
you got confirmation of significant weakening in the labor market,
could a fifty basis point cut beyond the table?

Speaker 6 (01:05:12):
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 me, and 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

(01:05:32):
us at all times. Because 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.

Speaker 3 (01:05:47):
I actually have one. This happens a lot, but the dollar.
You know, you look at a lot of charts in
April second and there's been the 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

(01:06:09):
the fact that it doesn't change how you do your
day to day job, and 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, Okay, you have to hit your mandate, these
things that are really outside of your control, completely outside
of our our control, But like, how do you think

(01:06:31):
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.

Speaker 6 (01:06:39):
Well, you know, if you take the just take the
idea that we import things, if the cost of those
imports goes up either because the dollar is weaker, we
don't make dollar policy just going to say that we
take the dollars outside of our world is just another
input to our equation. But if you have a weaker
dollar and you're paying them more to import things, or

(01:07:00):
you have tariffs so you're paying more to import things,
well then that's just going to raise the rate of
inflation to put upward pressure on inflation. So then the
Fed has to think, Okay, what are the things creating
upward pressure on inflation, and what are the things creating
downward pressure on inflation, and how do we navigate that
to get to two percent inflation. That's the job, regardless
of whether you always have things that are pushing inflation

(01:07:22):
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.

Speaker 3 (01:07:32):
And I'm sorry, I I knew this was going to happen.
At some point, Chairman Paula 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 like being successful and working with the rest of

(01:07:55):
the f YMC.

Speaker 6 (01:07:56):
You know, I think you could be a regional Fed president.
You could be anyone who works at the Federal Reserve
in the Federal Reserve system. You could simply be a
citizen of the United States. So 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

(01:08:16):
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. The 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

(01:08:40):
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 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
this disagreement to our advantage as opposed to using it

(01:09:02):
as a way to divide. And I think that's the
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.

Speaker 5 (01:09:16):
We know who those are, the American people.

Speaker 2 (01:09:19):
Joe, we should run for FED chairs. All we do
is listen basically, but.

Speaker 5 (01:09:24):
Then you do have to decide, Yeah, all.

Speaker 2 (01:09:26):
Right, all right, we're not that good at that, all right,
Mary Daily, Thank you so much for coming back on
all lots.

Speaker 5 (01:09:31):
My complete pleasure. And I'm so glad we did it
in Alaska.

Speaker 3 (01:09:34):
Yeah that we get to travel to Alaska.

Speaker 7 (01:09:37):
Thank you, Joe.

Speaker 2 (01:09:51):
That was a real treat of a conversation, being able
to interview the San Francisco FED president for over an
hour in Alaska.

Speaker 4 (01:09:58):
Of all places.

Speaker 2 (01:10:00):
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 US economy,
particularly tariffs, inflation, housing, immigration. And I also liked how
she explained that the important thing about running a regional

(01:10:20):
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.

Speaker 3 (01:10:30):
No, 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 FMC,
a regional FED president. Because yes, there's always uncertainty, right,
but we have a lot of uncertainty these days, and

(01:10:52):
there's so many short term and long term questions that
are super interesting to me. Whether it's the sort of
demographic things, whether it's the diffusion of but also just
like what is going on over the last few months
with the impact of the tariffs on economic activity, Like,
we have both short term and long term questions right
now that are very big.

Speaker 2 (01:11:11):
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

(01:11:33):
this wasn't showing up in the job's numbers, the official
jobs numbers sooner.

Speaker 3 (01:11:37):
Yeah, it's interesting because I remember like those ism for example,
reports from April and May. Yeah, they did not show
the employment subje they were very bad. But this employment
subm in the season particular were bad, So it does
sort of yeah, the revisions. Although no one people don't
love seeing Oh this data is wrong, it certainly fits
more with the broader story. It makes things a little

(01:11:59):
bit more or kojin. So it's interesting to hear that.

Speaker 2 (01:12:02):
You know, the other thing I liked about that conversation
you didn't mention Wales.

Speaker 4 (01:12:06):
Once you've now I've reminded you.

Speaker 2 (01:12:09):
So okay, listeners, steal yourself for Joe inserting a lot
of whale and moby Dick commentary into the next few episodes.

Speaker 3 (01:12:18):
Is the soft landing? No, I don't think so. It's
a it's a moral thing to persis.

Speaker 4 (01:12:24):
Okay, shall we leave it there.

Speaker 3 (01:12:25):
Let's leave it there.

Speaker 2 (01:12:26):
This has been another episode of The Odd Lots Podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway
and I'm Joe Wisenthal.

Speaker 3 (01:12:32):
You can follow me at The Stalwart. Follow our guest
Mary Daily, She's at Mary Daily Econ. Follow our producers
Kerman Rodriguez at Kerman armand dash El Bennett at Dashbot
and Cal Brooks at cal Brooks. More odd Lots content,
go to Bloomberg dot com slash odd lots or the
daily newsletter and all of our episodes and you can
chat about all of these topics twenty four to seven
in our discord Discord dot gg slash od lots.

Speaker 2 (01:12:55):
And if you enjoy od loots, if you like it
when we go on field trips to Alaska, then please
leave us a positive review on your favorite podcast platform.
And remember, if you are a Bloomberg subscriber, you can
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Joe Weisenthal

Tracy Alloway

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}Mary Daly on Why Alaska Is a Leading Indicator for the US Economy