Emerging Technology And The Economy | Hoover Institution - Talks from the Hoover Institution

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(00:00):
[MUSIC]

>> John H. Cochrane (00:04):
Well, looks like everybody is here.
Welcome everyone, I am absolutelydelighted to welcome Mary Daly.

>> Mary C. Daly (00:11):
Thank you for having me.

Mary is the President and
CEO of the Federal Reservebank of San Francisco.
And as such,
she's part of the Federal Open MarketCommittee, which sets interest rates.
But she does a lot of otherinteresting things, too.
Her background is a labor andpublic policy economist.
She's been a visiting professorat Cornell and UC Davis,
an advisor to the CongressionalBudget Office, Library of Congress,

(00:33):
the Social Security Administration.
I won't go on, I cut allthe wonderful things in your book.

>> Mary C. Daly (00:39):
Good, thank you.

We can get going, but
I do wanna say she hosts an awardwinning podcast, Zip Code Economies.
Welcome, Mary,it's wonderful to have you here.

>> Mary C. Daly (00:47):
Thank you.

So we're gonna do some questions for a while and
then there'll be time forquestions from you at the end.
So let's start.
You're an expert on labor markets andhow monetary policy affects labor markets.
So let's start by talking aboutlabor markets and what do you see in
the intersection of emerging tech,labor markets, monetary policy, AI, go.

(01:08):
[LAUGH]>> Mary C. Daly: Okay,
that's a big question.
So let me start with just where we are inthe labor market in my perspective,
from my perspective.
Right now, and you saw this in the labormarket report that came out this morning,
the labor market remainsin a good position.
Its jobs are expanding, there's aboutone vacancy for every unemployed worker.

(01:29):
So that's a balanced labor market,that's a good thing.
That means people are still gettingjobs and firms can find workers.
So those are things thatare really important.
And against that backdrop,we're also seeing just a general trend in
the United States that firms stillwant more workers than they can find.
And they're turning to technologyto augment their workforce and

(01:51):
make their workforce,better and more productive.
And I was on the podium with the CEOof Honeywell and back in the summer and
he said, at Honeywell, they haven't leta single person go as they brought AI and
generative AI in because theydidn't have enough people to do
the work that they needed todo to expand their growth.

(02:14):
So instead they've used technologyto assist their employees,
to make them better, do things that aremore tedious or can be done by the models,
and then put their workforce to better andfaster uses and more innovative uses.
So I think right now,
when usually some people are dystopianabout the use of emerging technology.

(02:39):
I think right now, when we go out and talkto CEOs about it, they are telling us,
no, we're using it to assist workers.
And ultimately where we reallywanna go is to the unimaginable.
We don't know today what the technologywill allow us to do, and so
we're thinking about how to do that.
But first we have to practice.
And that's an important aspect of this.
It's so

(03:00):
important in my judgment to the economythat in San Francisco Fed we opened
what we call the Emerging Tech EconomicResearch Network in January of this year.
We just had David Autor come andgive a seminar and
talk to us about what's possible.
So it's academics, it's CEO roundtables,it's sourcing from technologists and
asking them where will the technologygo and what is possible.

(03:23):
So that's a short summary,not quite using ChatGPT, but
a short summary of how Ithink all of those interact.
But you can ask me a followup if I didn't get it all.
Yeah, well, we could keep going on this for the whole hour, but
there is this big debate,is AI coming to replace all of us?
We'll all be out of jobs, out of work.
The other side of it is AI is aproductivity enhancing technology like so

(03:45):
many we've had.
Some people will get substituted, butother people will become more productive.
It will lower costs for business who willexpand, so overall it'll be a good thing.
So I will put you down asa techno optimist on that.

>> Mary C. Daly (03:58):
Well, let me just tell you where I really lie.
So there's a fact that I thinkpeople don't know all the time.
You'll know it, John, andmany people will know it.
But technologies of any type,across the entire history of
technologies, have neverreduced net employment.
They do take the jobs of some and thoseworkers, if it's really working well,

(04:20):
go and find other opportunities.
But it does not reduce net employmentbecause they're generating
opportunities as well.
So between what I would callthe enthusiasts and the doomsayers,
I am in kind of in the middle whereI am optimistic about our use.
But I also recognize thattechnology is a tool.

(04:41):
It's not doing this to us andthe choices we make about how we use it,
what resources we bring to bear anddo we use it for faster, better,
cheaper, or do we use it forwhat I think many call moonshots?
Do we look to the sky and say,boy, what could be possible.
If we look to the sky and say what couldnot it doesn't have to be in the sky, but

(05:01):
if we look big, if we think big,
a lot of things are possible thatwe wouldn't even have imagined.
So I am optimistic, I guess.

So I wanna ask you about our region cuz you worry about our
region.
There's a lot of optimism versus pessimismabout California, the region, so forth.
I guess your optimism about AI wouldmake you optimistic about the future of
the Bay Area andour California region as well for
employment as well as businesses andso forth.

>> Mary C. Daly (05:30):
So interesting, one of the most common questions I get asked if
I'm in a region, from in our region,is California dead?
Is it the doom cycle?
Is it over?
And I remind people that,this has been said many, many times.
California and Silicon Valley and SanFrancisco has a way of reinventing itself,
suffered many shocks and continues to go.

(05:53):
Now, will it be as rapid as I think peopleliving in this area would like it to be?
Probably not, butall the ingredients are there.
We have very well educated people, they'reentrepreneurial, they're innovative.
We live in a beautiful place.
There's a lot of interestin collaboration.
And so I see those as key ingredients.
So I am on the path of we havea lot of potential here, and

(06:15):
it's hard to hold down potential andnot have a good thing happen.
But we're gonna have to do a lot ofthings to ensure you just don't sit in
your living room and hope for the best.
You have to work for the best.

Well, I'm kind of we have a lot of potential, but
it's really hard to get the permitsto do anything about the potential.

>> Mary C. Daly (06:33):
Yeah, fair enough, I mean-

As one who has
rehabbed a house in Palo Alto,let me tell you about that process.

>> Mary C. Daly (06:38):
Well, it's often a question of why is there such a housing
shortage, not just in California,but across the country.
And increasingly, when you go and talk tolocal leaders, what you're hearing is,
we have so many rules and things that weremeant to solve a particular problem, but
now we have a very different problem.
We don't have enough housingto house our people.

(06:58):
And that's up and down, the incomedistribution, the age distribution.
And so what's really interesting isthis is no longer a California or
a San Francisco problem.
This is a Boise, Idaho problem,I have the 12th district.
For those of you who don't knowas much about the 12th district,
it's all the intermountain states,Nevada, Utah, Arizona, Idaho,
the coastal states, and Alaska and Hawaii.

(07:21):
I can go anywhere in the nation, butcertainly in the 12th district, and
everybody's talking about housing andthey're talking about permitting.
So, John,I think you might have a roadshow.
You can go on.

[LAUGH] So employment is half of what the Fed does.
I'm interested, so how does thishave anything to do with the Fed?
And one way of putting it is I'm stillworried about people on the lower end of
the spectrum.
There's a shocking amount ofpeople who don't work at all.
And when we think about that,a lot of that is structural.

(07:54):
So we kind of separate structural lack ofemployment from business cycle lack of
employment.
And there's labor regulations, can't findhousing near your job there's bad schools.
There's all the disincentives of socialprograms, all those things that are really
hurting the people onthe lower end of the spectrum.
But the Fed, if you have a lever at allto labor markets, it's cyclical stuff.

(08:16):
You can't fight that withmore aggregate demand.
So there must be A, a little frustratingand B, how do you, how do you think about
where the Fed can do some good,where the Fed couldn't do some good?
Maybe the Fed should be yelling a littlemore about get rid of these structural
barriers.
But it's not really your job,you face labor markets all the time.
How do you deal with this?

>> Mary C. Daly (08:35):
No, it's a great question and
much of my career has been tryingto balance those two things.
So, unfortunately, maybe fortunately,I mean, I really appreciate
the way the Federal Reserve is set up andthe fact that we have narrow goals.
But I just remind us all,we have one tool, interest rates, and
we have two goals already,full employment and price stability.

(08:58):
And to solve more problems than that, wejust don't have the mandate or the tools.
So when you think about labor markets,where can we be helpful?
Well, first of all,we better get the cyclical right, right?
We better restore price stability andensure we do so
in a way that doesn't injure the labormarket unnecessarily, doesn't push it down
when it doesn't need to push down for,for inflation to get to two.

(09:22):
The other thing, though, that's beenreally important is in my career, most,
a lot of my research hasbeen done on labor markets.
And one of the aspects of my research isto consistently demonstrate that labor
force participation, the number ofpeople in our economy who participate in
the labor market is lower than inour industrialized competitors.

(09:43):
So we have a lower labor forceparticipation rate than Canada,
than England, than France.
I mean, France really.
So it's like, look, if you think aboutthese things where we have a view of
what is going on in other countries, butthe reality is we participate at lower
levels and that's in the prime workage of people's lives, 25 to 54.

(10:05):
So I think that's a problem that is notjust about people with lower skills.
It's just a problem in general about,what is.
And if we wanna grow faster,then more people have to participate.
So the other aspect of thisthat I'll mention, John,
that is really may not be as well knownis when we have a durable expansion,

(10:25):
many people who might be typed as not ableto work, they come into the labor force.
So the expansion that onlyended with the pandemic,
that was almost an 11 year expansion,the longest in our recorded history.
One of the things you saw again andagain and again is employment gaps and
labor force participation gaps betweenthose at the lowest level of the skill

(10:46):
distribution and the highest were closing.
Wage gaps were also closing,consumption gaps were closing and
income gaps were closing.
And at the end of that expansion,wealth gaps were closing.
So I think ultimately, if we'redoing our job well and we can create
the conditions that support a durableexpansion with price stability, then

(11:07):
we are participating in making and lettingmore people come into the labor force.
Now we can't control who it is orwhether that even happens, but
we can create the conditionswhere it's possible.

Yeah, and I think this is something to celebrate that maybe
the average zeitgeist doesn't have it.
That in the expansionthat ended with COVID and
I think the trend is coming back again.

>> Mary C. Daly (11:30):
Yes. >> John H. Cochrane
wonderful not just foremployment but also for wages.
Complete. >> John H. Cochrane
inequality shrank.
Yep. >> John H. Cochrane
we're doing great.
In some sense that the college educatedupper crust was doing badly [LAUGH].
But, what the heck,they can take care of themselves.
[LAUGH].

So let's talk a little bit about inflation, but
I don't wanna embarrass you too much,[LAUGH].

>> Mary C. Daly (11:53):
I'm hard to embarrass, I just get busy.

The Fed's target was 2%.
We hit 8%, something went wrong.
So I'd like,let's talk about that a little bit.
Now for example, some people talkabout other shocks, some shock hit us,
fiscal shocks, supply shocks,relative demand shock.
But the Fed doesn't really look at those.

(12:17):
Maybe you should more,let me just leave it to you.
What's the plan fornot letting this happen again?

>> Mary C. Daly (12:23):
Sure, it's a terrific question.
So let me just unpack what myview of what happened because
obviously you think about this.
Missed the target,we did not hit our target.
It's 8%, 7% and it's supposed to be 2%.
And when you think about that,it's not just a number.

(12:43):
It's a tax on all the individuals inthe economy whose wages weren't keeping
up with inflation and peopleare falling further and further behind.
So obviously we have tothink about what happened.
My own judgment aboutwhat happened is this,
that we were slow as an institutionto recognize that the supply shock,

(13:04):
which looked to be temporary,was actually more persistent.
So we do look forsupply shocks all the time John,
it's something that one of my first jobsat the fed came in 1996 was to look for
two potential supply shocks,positive supply shocks.
The labor force increased because ofwelfare reform that moved single women,

(13:26):
single moms, into the labor force,that was one job.
And how did that increasethe labor force and
thus that's a positive supplyshock in the labor market.
And the other was to look for evidencethat productivity was going to go up.
And that was a positive supplyshock from productivity so
the economy can expand more broadly.
So we have those tools and techniques andwe look at those all the time.

(13:50):
The issue was that wemisestimated that and
many other people did too.
But I'm not gonna talk about many otherpeople, I'm gonna talking about us,
that supply wouldn't come back, right?
The global supply network was somethingwe all thought was quite durable and
resilient and would rebound.

(14:12):
Demand came back with a vengeance,I'm sure you all remember that.
You were probably part of it.
We all left our homes andstarted doing things and buying things.
And so that was very robust.
And then it was additionally maderobust by the fiscal support and
the fiscal stimulus pusheddemand up even further.
And supply was just very slow to recover.
I mean, just didn't come back.

(14:32):
And part of that's becausethe pandemic continued on and
it located itself in differentcountries in different time periods.
And so, the fragility ofthe supply network was something
you can see firsthand, if China goes,locks up a factory or a port for
two weeks,the domino effect on all things.
The stacking up at the ports, becausein LA because all the goods come in at

(14:56):
once and they can't get the trucks over.
These are just things that took a long,long time to repair.
And so inflation was high.
The soul searching,I guess I think you might put it that way.
The soul searching orthe sort of post mortem or
the what the heck happened hereis really to say, okay, yeah,

(15:17):
we haven't had a pandemic in 100 years andso we missed it.
But I think a broaderlesson is not to dismiss so
quickly the idea thata supply shock might persist.
And that can go on both sides.
It can go when labor marketsare productive, when labor supply or
productivity is going up orwhen it's constrained,

(15:39):
it can go when supply chains are broken.
But I was taught in early macro,you look through a supply shock and
especially if you don't thinkit's going to be persistent.
But I think the miss wasn'tthat that model was wrong,
the miss was that it was muchmore persistent than we thought.
And then you add on the fiscal andyou have another problem.

Yes, as you know, I would emphasize that fiscal part,
especially that the pricelevel remains higher and
that the supply shock led to $5trillion of fiscal stimulus, of course,
we got inflation, but let's not fightabout fiscal versus supply shock now.
I'm very curious about your supply shockview cuz let's look forward a little.
Your optimism, boy,I'm getting excited here.

(16:22):
Your optimism about AI sounds likean optimism that we'll have a good
supply shock, letting the Fed reallydo good things on both inflation and
labor markets.

>> Mary C. Daly (16:32):
You don't know when the timing is though, that's the problem.

Yeah, and technology has always taken longer than we think.
We read about it in the newspapers say,yeah,
here come the self driving cars, [LAUGH].

>> Mary C. Daly (16:45):
Exactly, it's true.

But there are also supply shock dangers looking out there,
let's call it, whether tariffs ordeglobalization or what you wanna call it,
that sounds like a potentialnegative supply shock.
Geopolitical events couldcause horrible supply shock.
You said once in a century, that seemsto happen once every ten years now.
But something happening around Taiwanwould be a horrendous supply shock.

(17:11):
Is the Fed ready to jack up interestrates fast if that should happen again?
Where are we going?
To the extent you can say,[INAUDIBLE] [LAUGH].

>> Mary C. Daly (17:19):
Okay, so let me think through that broad question.
Okay, so the 100 years wasa reference to pandemics.

Yes. >> Mary C. Daly
we'll have another 100 yearsbefore we have a global pandemic.
I don't know but one hopes, but the supplyshocks are more routine and the question
is, well, our supply shocks, not only moreroutine, but are they more persistent?
And I think that's the questionthat we have to answer.
And I'm gonna look to some ofthe academics in the room too to help us

(17:47):
with this.
Should we expect geopolitical eventsto just drag out and disrupt?
There's also weather relatedevents that disrupt but
those tend to be short in time frame.
There's all these things that are puttingpressure on the global supply chain and
you're seeing near shoring andfriends shoring and a variety of other

(18:12):
things that have the likelihood ofin the short-term lifting prices and
in the long-term perhapsspurring how people do work.
I remember both in the pandemic andbefore in some of the trade disruptions,
what you saw was firms movingfrom one country to another,
bringing things to the USmoving them nearer.

(18:34):
So it really matters whereproduction is located.
So now let me get to the questionyou asked at the end,
which is the Fed prepared tothink about those things?
We do think about those things.
We think about supply all the time.
And we actually have many differentmeasures of supply chains and
whether they're back to normal,where the disruptions are,
what are the likelihoodsthey'll spill over onto us.

(18:56):
So that's very helpful input.
But ultimately, that it all comes downinto do you see inflation rising and
what do you do when it does?
And I think that's where we haveto be more thoughtful about.
And we've been fighting inflationfrom below our target for so
long that there was a kind of concernthat it was just gonna drag back down.

(19:20):
The gravitational pull was gonnapull it back below our target.
Now, I think there's a really importantquestion about whether we gonna be
fighting our inflation, bringing itto target from above our target.
And that's gonna be US and global.
And so I think again,I'm gonna push some of that out to you,
not just us as researchers in the Fed,but academic researchers.

(19:41):
What's the future ofneutral rate of interest,
the fighting inflation from aboveour target versus below our target?
Have we entered a new period?
That's gonna matter forour policy decisions.
Well, let me ask you, as you know,
the review of the monetarypolicy strategy is coming up and
those of you who don't followthis as obsessively as I do.

(20:04):
The Fed had a grand processof articulating a strategy,
much of it designed to combata persistent low inflation,
let's not call it deflation thing.
And so that's gonna change coming around,and I'll ask specific questions.
One is are you gonna think more in a,let's call it data dependent rather

(20:25):
than here's what we're gonna do,how are we going to react to events?
And the other one is that the laststrategy had a concept that if inflation
came out low for
a while, we'd let it run hot tobring the price level back up a bit.
Well, the price level is 20% higher thanit used to be, people are mad about it.
Would it make sense now to move toa regime where if you made a mistake on

(20:47):
the upside, to squeeze the pricelevel back a little bit?

>> Mary C. Daly (20:50):
So let me start with the first part of the question.
Well, let me just start withgenerally the framework.

Or wherever you wanna go with it.

>> Mary C. Daly (20:58):
Yeah, I'll start with the framework review.
So when we did the framework reviewfive years ago, Chair Powell said,
we're committed to doing a frameworkreview every five years.
And I just think personally that isgood practice for an institution.
You can't make a framework 30 years agoand hope that it persists for 30 years.
So I do think this practice of fiveyear review is a really healthy one.

(21:21):
So we're coming up on this period,we're gonna do the new framework review.
We have not announced the dimensionsof that framework review.
You don't take the entire whiteboard andsay, well, look at everything.
You take on certain things andI'm gonna wait for
Chair Powell to announce that afterwe've deliberated and decided.
So I won't tell you specificsbecause those are in discussion and
I'll let Chair Powell announce those.

(21:42):
But what I will say is,
what are some of the things in the oldframework that I've learned from?
And so I'm gonna speak for myself.
I should have said thatright at the beginning.
I am speaking for myself andnot the Federal Reserve System or
any of my colleagues, butI'll speak for myself.
So one thing is, and this is a tendencyof institutions in general, but

(22:03):
it's a tendency I see in the Fed as well,is we are, I don't wanna be too
pointed here, but we often just fall intothe trap of fighting the last battle.
And that is something that as aninstitution, you have to fight the future
battles and you have to know whatthe future battles are gonna look like.
And so one way you can do it is youcan predict the future battles and

(22:25):
you can be very precise abouthow you deal with them,
or you can recognize that a broad program,a broad paradigm of how to
deal with many things that couldhappen is the appropriate one.
So I like that broad breadth and
more latitude because we actually don'tknow what's gonna happen in the future.
So the second principle that I would liketo see is that we have a dual mandate,

(22:47):
it's been given to us by Congress.
Price stability, full employment.
So we know what those are.
We have that one tool andwe're meant to put this together.
The idea that we were gonna constantly,and
I didn't interpret our frameworkthe way you just stated.
I interpreted our framework on inflation.
We've been fighting inflationfrom below our target,

(23:08):
people have come to believe that 2%is a ceiling, not a symmetric goal.
We wanna make sure they don't think it's aceiling, and we also aren't that surgical.
We cannot hit 2%, other countries,many of them have a range.
And so having a recognition that itmight be 1.8, but they could be 2.2,

(23:29):
and something in the range of2 is you're comfortable with.
I think that's important.
So that came out as average inflationtargeting, but the way it was portrayed,
it's more like asymmetricaverage inflation targeting.

Yeah. >> Mary C. Daly
you're comfortable with it going up,but you're not so
comfortable with it going down.
But that, again, is if it's 1.8 andthe anchor in inflation expectation is
drifting down globally,that's a different kind of issue.
So I think some of these kind of concernsare real, the ones you've raised, and
we should really tackle them andtake them on.
And then the final one was on employment,and I think that was ultimately confusing.

(24:05):
That's how I've seen people respond to it,
is it wasn't about allowing inflationto rise to keep employment growing.
It was about, we don't know whatthe natural rate of unemployment is.
I know that's a revelation.
We do estimates of it, but it's nota truth that falls from the sky, and
it's like,that's the natural rate of unemployment.

(24:26):
And so using models that say ifthe labor market's too hot and
you've got to get it down becauseinflation might go up two years from now,
that wasn't really effectivewhen inflation was 1.8.
And so we're only going toeliminate employment shortfalls,
we're not going to fighta good labor market.

(24:49):
In the practicality of howthis framework was applied.
When inflation rose to seven and eight,
rates raised aggressivelyto get inflation down.
And we said again and again,inflation is our primary target right now,
our primary goal,because the labor market's strong.
And that's the spirit in which Ithink the framework is a guide, but

(25:13):
it doesn't tie your hands.
I didn't feel our hands were tied,we raised rates 75 basis points a clip.
And the only constraining factor therewas not disrupting financial markets.
And that's an aggressive strategy that wehad to do because inflation was so high.
But it's also an aggressive strategy thatI hope gives you some confidence that

(25:35):
we're agile enough to change our posturewhen a situation emerges which is
completely untenable.
Yeah, I mean, my own view is that you have now this problem how
do you fight inflation from above?
And that expectationsare really important.
The joke I told Mary,
what we came down here is that fightinginflation is like fighting cockroaches.
And just because you've got it downfrom 100 to 3 doesn't mean you're done.

(25:58):
But you really wanna persuade peoplethat should inflation break out again,
the Fed is ready to do.

>> Mary C. Daly (26:04):
We are ready.

Whatever it takes, in the words of Mario Draghi.
And that itself willhelp current inflation.

>> Mary C. Daly (26:10):
And I hope that that's what we've been conveying.
I mean, I'm regularly out there,I was actually using an AI model.
Many of them, I won't name names, andit'll look like I'm marketing them.
But if you do that, you can see the numberof times that we've listed inflation as
a really important goal.
We're resolute to getinflation down to 2%.

(26:31):
I mean ultimately, if you thinkabout the toxicity of inflation,
especially to low and moderate incomefamilies, everybody experiences it, but
low and moderate income families, it'sjust a direct tax on their well-being,
then it's really important.
2% inflation in my mind is an underlying
foundation of all other partsof how the economy functions.

So I was gonna ask about that.
Those who didn't know it learned clearlyin this last episode that people
of modest means werehurt most by inflation.
And I think we both told each otherthat the story of the versus look,
if there's a recession,1 in 20 of us loses their job.
If there's inflation,we all lose our jobs.
So to that extent are the doves, and

(27:14):
I made the mistake of alleging thatMary might be a dove and she said no.

>> Mary C. Daly (27:18):
But then I went on the models again and
I said it at Seaportthey think I'm a hawks.
It depends on where you're going.

But there are doves at the Fed.
Are the doves at the Fed becoming a littlemore convinced that low inflation is
the number one thing, even if you caremost about those with lowest opportunity?

>> Mary C. Daly (27:36):
So it's interesting I will say this, not that people
in this audience care as much as John andI do about hawks and doves.
But I think that is not as much of a gooddescription of Fed officials as it
once might have been.
I think we've outgrown it, andultimately a good disciplining device
to outgrow things is a periodof high inflation, right?

(28:00):
If you have high inflation,you immediately say,
everyone I talk to tells me that highinflation is their number one challenge.
I mean, I was telling John a story.
So as a regional bank president, a lot ofmy time is spent out in the district and
across the nation sourcing informationfrom people who live in the economy.

(28:21):
You can't do the job we do just bylooking at some published data and
thinking you've got the answers.
You have to actually ask people howdo they experience the economy.
So we did all these focus groups inthe period of high inflation and
we asked people,what are you worried about?
Is it high inflation or jobs?
And again and again and again they saidwhat you just said with the 1 in 20 lose

(28:45):
their jobs is that if one of ourcommunity members loses a job or
one of our family members, we can selfinsure because there's other people who
have jobs we can share,we can get resources from our community.
But if everyone in our communityis experiencing high inflation and
can't pay for the things they need,food, transportation, housing,

(29:07):
well then the entirecommunity can't self insure.
And so inflation becomes a muchworse burden than employment.
But that is not to say thatemployment also isn't important.
It just says that when inflation is thereat its high, that's the first thing and
the only thing people think about.
And I think that's the lesson from this.
So I think it has, if you thought thatit wasn't a toxic tax on people and

(29:32):
you just went through this,I mean I knew that I grew up like this.
I was a teenager in the 70swhen inflation was high and
I was telling John, I remember my parents,
figuring out which bills they couldpay and which bills they couldn't.
And then the Volcker disinflationcomes and then employment a challenge.
So I knew what it was like.

(29:55):
But I think if you've never experiencedit, you just saw what it was like.
If you were anywhere in the community.

My parents and
grandparents knew somethingabout the Great Depression and
they came to a different view but yes,they didn't have to see inflation.
Let me ask you->> Mary C. Daly: That's not good either.
Yeah, we don't-.

>> Mary C. Daly (30:12):
I mean, honestly that's why we have a double mandate.
Because you don't wantthe Great Depression or anything like it.
Think of the financial crisis thatwas terrible for the labor market.
So you don't want either one,both are bad.

So let me, as you focus on labor markets,
I think about interactions betweenmonetary and fiscal policy.
Right now interest costs onthe debt are a trillion bucks.
That's a lot of money.
And every time the Fed raises interestrates 1%, that raises the interest
costs on the debt another 1% andtherefore the deficit goes up 1%.

(30:44):
Now I know in the Fed youlike to be polite and
not tell the treasury what they oughtto be doing and they try to be polite,
not tell the Fed whatthey ought to be doing.
But these things are going to interact.
If there's another surge of inflation andyou got to raise interest rates 2 or 3,
4%, that explodes the interestcost on the budget and
Congress is going to be fairlyunhappy about that sort of thing.

(31:05):
And in the past these thingshave really mattered.
In the wake of World War II,the Fed was told, hold interest rates down
cuz you're going to hold downthe interest costs on the debt.
That could happen again.
So do you worry about, that interaction,how our fiscal mess may actually
make it difficult for the Fed to fightinflation if and when the time comes?

>> Mary C. Daly (31:26):
You know what I worry about is if we have that we raise interest
rates, then people feel,especially if it comes in the near term,
then people feel doubly burdened,and they're they're far behind.
I spend more time thinking aboutthat than I do about any fiscal or
elected official pressure on us.
I mean, you're right.
If you look through periods of history,there have been many periods of history

(31:50):
where the Fed has been pressured to changewhat it thinks is the best thing to do,
because the fiscal agentsneed a different result.
But most of those times you don't seethe caving, a couple of times you did.
And so I think this is one of the reasonsCongress when the Fed was created in 1913.
It was independent frompolitical persuasion and

(32:11):
independent from shifts that comewith changes in political office.
I see that as a strength of our system.
It's one of the things that ensureswe're not funding the debt and
financing the debt.
And I think that's a good thing forfiscal discipline.
But we do face the challengesthat you named and

(32:32):
how they'll be resolved is not yet clear.
But I will focus on our work andour work is to make.
It's interesting, someone asked me about,does the change in administration,
the upcoming change in administration,change what you do?
I said administrations change, butour goals are always the same,
price stability, full employment.
And that's what's reallyimportant about the Fed.

(32:53):
And that's why ourindependence is important,
I think, for persisting in that view.

Well, and
a little bit financialstability creeps in there as.

>> Mary C. Daly (33:01):
Yes, absolutely.

Yeah, if you have to raise interest rates,
it's not persistently.
I think the Fed got in some sense luckythat inflation came down so quickly.
If you have to raiseinterest rates persistently,
that's gonna tank a lot offinancial institutions.
A lot of people are gonna be very madabout their mortgage rates going up,
the ones who were on floating ratemortgages or need to buy new houses.
As well as the federal governmentbeing mad about having to pay higher

(33:25):
interest costs.
It's gonna be a difficult thing to do,especially in today's financial and
fiscal environment.
To really repeat in 1982,
to say nothing of the pain ofa recession of something like.

>> Mary C. Daly (33:35):
I wanna pull on that a little bit.
When you said the Fed was just lucky, I'mnot sure the Fed was lucky on this thing.
If you look at the originalshock that came to, and
we were debating whether it was allfiscal or supply shocks too what helped
us get inflation down soquickly was that supply chains recovered.

(33:57):
And since supply chains were a bigconstraint, we didn't have to bring demand
down as much as you would ifsupply chain stayed stuck.
And so those two things workedtogether and inflation fell rapidly.
What's happening now is inflation isfalling more slowly because supply chains
are recovered and demand is justbringing the rest of it down.
So maybe that's good luck.

(34:19):
I think it's just the shock was whatit was and we moved what's really good,
John, and I knew you care a lot aboutthis is what's really remarkable,
good credibility enhancing, etc.
Is that medium and long run inflationexpectations really didn't move very much.
People still believed that the FederalReserve is gonna get back down to two, and

(34:41):
that aids us in getting to two.
If people believe that it's gonna be two,then they act like it's gonna be two.
And it helps, it's just a positiveforce behind our work and
then the supply chains recovering.
So I think we would continue to do that,I mean,
ultimately you don't wanna haveto persistently fight inflation.
That's what we had to do inthe Volcker disinflation.

(35:03):
But that's because the anchor,well, there was no anchor.
The inflation went up, wages went up,expectations went up and
that we avoided this time,which I feel really good about.
And I think that's the principalthing we have to keep avoiding.

So let me ask you, what keeps you up at night and
in the following sense we had,in the last 15 years.
We've had two once in a century crises,
a once in a century financial crisis,a once in a century pandemic.
Let's hope there those twoare once in a century.
But surely the challenge forthe Fed is not gonna be if we keep this

(35:39):
beautiful late summer economyjust kind of growing along.
Europe is stagnating, we're doing with thebest economy in the world right now and
trundling along andsomething little goes wrong.
But the next shock is surely gonnabe the question for the Fed,
which could be geopolitical,it could be another pandemic,
it could be a debt crisis of some sort,it could be a sovereign debt crisis.

(36:03):
Who's the first to go when we'veall got 100% debt to GDP ratios and
promises to old people we can't keep.
So what keeps you up on the item?
What do you think?
How is the Fed preparing forthe next unknowable?

>> Mary C. Daly (36:18):
Yeah, sure.
And I think that's a good way to say->> John H. Cochrane: Cyber,
I should have mentioned.
Yeah, and cyber.
So when I'm thinkingabout what we need to do,
I focus not on the ever longer listof possible things that could happen.
But I recognize that if youmake that ever longer list,
those things are very different andthey might have different impacts

(36:40):
on the economy and they might call fordifferent policy responses.
So what I'm really focused onis how do we make our system at
the Federal Reserve as agile as it can be?
Agility is probably the mostimportant aspect of policymaking.
You've got to be committed to your goals,price stability, full employment.

(37:02):
You've got to be evidence based anddata dependent and thinking about things.
Just have to be looking to the future,analyzing where the risks are.
And agility is more thanjust changing your posture,
it's actually being willing tochange your thinking, right.
Because it's not about tactics,it's about thinking.
So you can always get the tactics right.

(37:23):
You can pivot the tactics and say, okay,we were doing this, now we should do this.
But it's more like a fundamentalway to think about the world and
maybe it's more dynamic,maybe it's more vulnerable to shocks.
I also think another place,what I'm really working on is,
monetary policy,when I came out of school,

(37:43):
PhD was like whateveryone wanted to study.
Everyone wanted to studymonetary policy and macro.
And I think we would reallybenefit if that was,
there was a resurgence in how we thinkabout what's the right way to do policy.
How do you marry the evidencewith the models?
How do you think about collectingreal time information?

(38:05):
These are things so we spend a lotof time having conferences and
gonna conferences with academics andreally pushing our thinking.
How do we become more agile?
How do we become more prepared?
So I'm not really up at night exceptworking, but I am absolutely working.

I hate to tell you the good way to get a lot of people to
focus on monetary policyis to screw up big time.

>> Mary C. Daly (38:27):
We seem to gotten a lot of new friends.

[LAUGH] Well, finally I want to give you a chance.
Well, a lot of attention gets focused onthe FOMC and interest rates up and down.
But you're the president ofthe San Francisco Fed, a regional bank and
I'd like to give you a chanceto put in a good word for
the importance of regional banks andthe regional bank system.
Which I happen to think is a wonderfulinstitution but I want you to say so

(38:52):
rather than me to say so.
I'll cheer you on.

>> Mary C. Daly (38:55):
I'm happy to talk about why regional banks are so important.
So in 1913,I think it was really a terrific idea.
You can look back and
you can say they were extremelyforward looking and innovative or
you can say they were making a decisionthat tried to create a compromise.
But I think they were innovative and
forward looking in that you can't makemonetary policy if you don't understand

(39:17):
the lived experience ofthe people across the nation.
And the best way to gatherthe lived experience
of the people across the nation toreally understand is to be in the areas.
So we have 12 regional reserve banks.
Presidents of regional reserve banks spenda considerable amount of time on the road
talking to the people in their district,learning from businesses,

(39:40):
learning from the communities.
Learning from workers, andunderstanding how the economy is not only
evolving right now, my lived experience,but how they expect to evolve.
Because ultimately,the published data that we get and
you could all look at if you were inDC is insufficient to make good policy.

(40:01):
And having those community connections,
realizing that what's happening here inthe 12th district might be very different
than what's happening on the easterndistricts or in the Middle West.
And having all of those voices come,what we recognize, though,
is that having all that information,having those contacts,

(40:21):
we've redefined what data means.
When people say, data dependent,I think they mean that I was waiting for
today's jobs market report.
Well, it's certainly I wasinterested in what that said, but
I'm also interested in what the 25CEOs I've been talking to in the last week
are saying about are they hiring?
Do they have layoff plans?

(40:42):
Are they investing?
What are they worried about?
Those things together and across allmy colleagues in Reserve Banks matter.
You said something that I reallyliked earlier when we talked.
The Fed is an aggregator of information.
We collect and we aggregate and
we recognize that the diversityof views we can gather from our
constituents in our district actuallymake us better at making policy.

(41:05):
And that's why I thinkthe Reserve Banks are so important.
Their presence is in the community.
We manage the payment system andwe supervise banks.
And you put all of that together, andhaving presence in the community, not just
in DC allows people in my district toknow that they're being listened to,
they're being heard, and their views areimportant to the policies we decide on.

So to reverse the old joke, data is the plural of anecdote,
after all.
And I wanna put in a plug for
the research departments at->> Mary C. Daly: My research guys will
love this, my folks will love this.
As well as the other ones, because, well,
you mentioned agility, thinking agility.

>> Mary C. Daly (41:42):
Yes. >> John H. Cochrane
say I think we were talkingabout supply shocks.
The big difference is this onewas a aggregate supply shock.
You might have an oil price supply.
Sure.

And you're used to thinking about, well,
that's a relative price it'll go away.

>> Mary C. Daly (41:55):
Right.

But this one hit everything.

>> Mary C. Daly (41:58):
Everything, right.

And there's a tendency at the fed, especially in D.C.
to live in a little bubble.
And the regional bank research departmentsare there to knock on the door and say,
wait, andthat often that can get in the bubble and
help you to think in an agile way.

>> Mary C. Daly (42:15):
So I remember Janet Yellen, she's president, and
I'm talking to her about regional.
And I'm saying there's a push thatmaybe the research departments at
the regional feds will beassigned centers of excellence.
And she said, no, absolutely not.
Because what we want is 12 differentresearch departments studying the same

(42:36):
kinds of topics andhaving different views.
I'm like, yes,preaching to the choir here.
But I think it was really important.
It's an important recognitionthat more diversity and
debate of opinions makes us better, right?
You don't want echo chamber thinking,
you don't want everybody to go tothe same model, say the same thing.

(42:56):
In fact, when I took over as presidentnow, I ran the research department, but
I took over as president.
My teams come and say, what do you want?
I said,I want you to tell me why I'm wrong.
I want you to bring alternative views.
You can believe them or not believe them,but make the opposite case,
because it doesn't do me any good forpeople to tell me I'm right.

(43:16):
That's completely irrelevant [LAUGH].
And if I come out saying, okay,but I think that this is correct,
or we all talk andwe get to that view, but
I don't think that this is whatthe regional banks, I think are strong at.
We have these regionalresearch departments.
They're all very different, studyingvarious things, but all dedicated to

(43:37):
the same goal, which is making ourpolicy decisions more informed and
better and hopefully more agile.

So it's time for questions from you.
Let's try to ask them as questions,this is the game of Jeopardy.
Try to keep them short and polite.
If it's okay with you, Mary,we'll take three or four.

>> Mary C. Daly (43:54):
Sure. >> John H. Cochrane
I brought you the notepad.
I sometimes need this, John, you are a savior.

And I don't have my glasses on, so
forgive me if I don't recognize you.
Your job is to get the attention ofthe people with the microphone, and
whoever gets the microphonegets to ask the question.
Harold, I can see you in the back.

>> Harold Ullig (44:10):
Yeah, [COUGH] so, thanks, John, thanks, Mary.
Very interesting,Harold Ullig University Chicago.
Visiting fellow at Hoover.
With the incoming Trump administration,
there's a lot of talk about raisingtariffs, and there's a lot of concern,
OPEDS written how that'sgonna impact inflation.
If I understand you right,you're saying, no inflation,

(44:32):
that's our job to watch out for that.
So I wonder what'sthe thinking inside the Fed?
Are you gonna wait untilmaybe tariffs are raised and
there's an impact on the price level,inflation, and you're gonna react to that?
Or are you thinking if it's known thattariffs are going to rise in the future
the Fed is going to have a plan forhow monetary policy preemptively avoids

(44:56):
the impact on inflationthat's going to come?
Or are you going to say the impact oninflation that's tariffs, that's not us.
The Fed has nothing to do with that.

Let's take a couple more if that's okay.

>> Mary C. Daly (45:07):
Okay, so tariffs.

Yes. >> Mary C. Daly
you gave me the pen.
Whoever can get the microphone first.
Tariffs, yes.
Steve.

>> Steve Davis (45:14):
Yes, Steve Davis, Hoover Institution thanks for the engaging,
interesting conversation.
I wanna go back to somethingMary said earlier, and
she pointed out that the US Performancewith respect to employment rates,
labor force participation amongpeople 25 to 54 is somewhat
disappointing relative to many of ourother major rich country economies.

(45:38):
So that's right.
On the other hand, if you look over thepast 15 years, certainly, and in the wake
of the pandemic, it's remarkable howthe US disappointing as its performance
might be in some respect, has outperformedGermany, France, the UK, Canada and so on.
So I just would invite you to reflecta little bit on the comparisons of

(46:00):
the US performance to theseother major economies.
What are we doing right?
What are they doing wrong?
What lessons should we draw from that?

Sure, I think one more and then-

>> Ie-Chen Chang (46:10):
Thank you for
being here.
Ie-Chen Chang,Premier America Credit Union,
what risks do you see to the independenceof the Fed in the next few years?

I like the shortness and the question mark.
[LAUGH] Mary go for it.

>> Mary C. Daly (46:24):
Okay, let me talk about tariffs.
So it's a question Iget asked all the time.
I actually was asked it on twodifferent media programs, Fox and PBS.
And I gave this answer andthis is the answer that
I'll give to you thatseveral things are true.
One, we have an incoming presidentelect not even in office yet.

(46:48):
And so I think it's just out of respectwe would not speculate about what
policies will occur when the presidenthasn't even taken office yet,
hasn't worked with his team,hasn't put together the plan.
And so I think that's justthe right answer in these times.
Second, if you look at the anyincoming administration,

(47:09):
just not the one that's about to takeoffice, but the ones that have taken
office over a long course of our history,they don't just come with one plan,
part of their plan,they come with a slate of plans.
So if you think about a plan that lowerstaxes, in this case raises tariffs,
changes the immigration policy and otherthings, you can make a little chart for

(47:34):
yourself that says plus on growth,plus on inflation, negative on this.
And ultimately,what you realize if you make this chart,
this little rudimentary chart, is that itreally depends on what the net net is.
So if taxes spur growth and we grow out ofthings and we can produce them ourselves,
then of course, it's differentthan if we can't import anymore or

(47:58):
there's tariffs and it's costly, andthen we don't produce anything different.
Our economy is the same.
So it's net, net.
That's the second, the second part,
the third thing is that whenpeople talk about policies, and
I've seen the commentary, they are oftenput forth as if they're light switches.
All the immigrants will leave,terrorists will come,

(48:21):
and policy doesn't work that way.
I was reminded in the Obamaadministration, many,
many people were deported, 2.5, I think.
If you look at the research literature,I didn't do this calculation myself, but
the research literature says 2.5 millionand another 500,000 voluntarily left.

(48:42):
That's a huge number.
But it happened over a period of time andthe labor market responded and
things went on.
Firms purchase technology to make up fordifferences.
They incented workers who might nothave worked otherwise to come in.
And so I ultimately think our cautions,Harold,
offered to everybody here is the Feds,of course we have risks,

(49:03):
of course we know we have historiesof how tariffs work, etc.
We can do all that researchin our staff teams.
But when you think aboutwhat's really happening,
we haven't had the president start yet.
We don't know how the policies will netnet and we don't know the duration of time
over which things will roll out,and those are important components.

(49:24):
And if you preemptively react to aspecific thing and start managing policy,
you're more than likely to be wrong.
So at least we have to get some moredetails of how these things are evolving
before we make decisions.
But of course, we have all the data andinformation and
models to help us with that.
So, Steve Davis, I'm gonna answer yourquestion, you're absolutely right.

(49:47):
It's kind of a question, right?
How can we have the lowest laborforce participation relative
to our industrialized partners, ourcompetitors, really, and then still grow?
And this is my own view, I don't knowif others in the room should share it.
Importantly, I don't knowif you would share it.
I just think we're a dynamic economy.
And I know you talked about howwe have too much regulation,

(50:10):
but we have a lot ofdynamism in our economy.
And we have entrepreneurs, it's reallyinteresting after the pandemic,
business formation was rising, right?
People were out there doing things.
And we can have debates about whetherit's fallen or it's the same or etc.
But there's a lot of justreinvention that people do and
changing who they are and how they work.

(50:32):
And I think that's a positive thing forour economy and
it's allowed us to grow,it's allowed productivity growth to rise.
And we're interrogating AI right nowacross the nation and businesses.
When I go talk to businesses in the USthey're really interrogating AI.
How can we use it, what can we do?
Let's practice with it,let's think about it in safe ways.

(50:54):
Let's do back office orlet's have a sandbox.
They're not changing theirfrontline production yet.
But if I talk to businesses in someof our other competitive countries,
they're like, okay, we're gonnafigure out the regulatory frame and
then we'll do the experimentation.
And I'm oversimplifying, but

(51:15):
I think experimenting beforeyou decide what the rules are,
it's scary, but it can be a usefulaspect of how innovation occurs.
And if you're looking for those moonshots,it can be a helpful aspect as well.
So I don't have a full answer,but that conundrum is there.
And I usually have fallen back in allthe periods of time that it's occurred

(51:38):
to dynamism, innovation,entrepreneurship, and productivity.

Threats to Fed independence.

>> Mary C. Daly (51:45):
Thank you.
The best way to maintain our independence,in my judgment, which I view as important,
it's the norm in central banksthat work well across the globe.
It allows you to have durable policydecisions that are not moving around as
administrations change.

(52:06):
But the best way to build credibility andtrust is to do your job.
So if we focus on bringing inflationto 2% and doing it without being so
aggressive, we break the economy andleave people without jobs or growth,
then that's the best way totell people we have our goals,
they were given to us by Congress andwe are doing our work.

(52:29):
And so that's what I focus on.

Let's take some more questions, in back and then Elena, and
then go.

>> Mei Lin Fung (52:37):
Hi, Mei Lin Fung,
cofounder with Vint Cerf of the PeopleCentered Internet based here in Palo Alto.
I am surprised about not hearingthe term digital money or cyber cash.
How does your research departmentbring forward ways for
the Federal Reserve to be agile inthis tsunami that's coming forward?

>> Elena Pastorino (53:01):
Thank you, this is Elena Pastorino, Hoover Institution.
So being an Italian born economistliving and working in the United States,
part of my eye and my heart is towardsthe Fed here and part is towards the ECB.
So the ECB is important by its ownsize one authority that has a very
different mandate compared to the Fed.
So if I may ask, what is your view for thescope and role of the interplay between

(53:26):
the actions of large scale monetaryauthorities, and is it a constraint
to the range of policy actions thatsuch authorities can really contemplate?
Thank you.

>> Tim Henderson (53:38):
Hi, Tim Henderson.
The San Francisco Fed is the largestat 69 million by population.
Minneapolis is the smallest,I believe 10 million.
Would the system work better ifthe population sizes were balanced and
what would the politics of such a move be?

>> Ann Sophia (53:59):
Thank you so much, Ann Sophia with Reuters.
I did just wanna ask you, you said you sawthe data this morning on the job market.
I think you said it showedwe're in a good position.
You said inflation is still a big tax,it's elevated.
Why is there even any debate?
Why would you even cut rates coming up?

I think you got four hard questions there, Mary.

>> Mary C. Daly (54:24):
Okay, here we go.
So you didn't hear digital money and
cyber cash because Johndidn't ask me about that.
But I will->> John H. Cochrane: I tried to
reduce the list of questions.
I'll talk to the issue a little bit.
So we work for the American people and
Congress makes decisionsabout what we can do.

(54:45):
If Congress told us we weregoing to have digital money,
we would have digital money.
But Congress hasn't told us we'regoing to have digital money.
So we're not gonna have digital money.
But that doesn't mean we don't study it.
We study a lot of things wherewe have no purview, right?
And the important thing is we just can'tbelieve that we have decision rights.
We have to study them to see howthe economy is going to function.

(55:06):
Weather is an example.
We have no rights ordecision rules or any,
any kind of decision opportunity in,in climate or weather.
But we study the impact that weatherchanges are having across the nation
because it's really important to know ifthere's going to be a reallocation of
economic activity.
So the same is true on digital money,cyber cash, etc.

(55:28):
We have to study how it's affectingthe economy in exchange to
understand how it might be affectingthe economy going forward.
But again,Congress is the decider on this issue for
the United States andthe Fed is not a decider.
So let me turn to the ECB/Fed interplay.
Can I broaden the questiona little bit and

(55:50):
tell me if you just raise your hand andsay, that's not what I asked, Mary.
But I think you're asking meabout the coordination versus
just knowledge of what othercentral banks are doing.
Competition, so here's how I think of it,here's how it works in my judgment.
Is that there's a lot of informationsharing across central banks, and

(56:14):
I see that as a good thing,
that central banks are looking at whatother central banks are doing, etc.
But we all work for our sovereigns andso we make policy for
the nation that we work for, right?
When I'm thinking about ourpolicy levers and what's right,
I'm thinking about the US economy andprice stability,

(56:35):
full employment in the US the ECB isdoing the same under their mandates.
What has been interesting is ifwhen you have a global shock,
you actually have central banksacross the globe reacting similarly.
And so you had the pandemic,central banks lowered interest rates,

(56:55):
then you had high inflation, central banksacross the globe raised interest rates.
And sothere was a lot of synchronicity and
there was a lot of discussion then aboutwhether that's an amplifying effect.
There wasn't a lot, I mean,it certainly looked like it could be, but
there didn't seem to be a lot of evidencethat it was an amplifying effect.
Maybe many researchers afterwill find out that it was, but

(57:16):
it didn't seem to make a materialdifference at the moment.
Now it's become less synchronizedbecause central banks are dealing
with different problems.
As you mentioned, Europe has a muchweaker economy and then many parts of
Europe have a much weaker economy,Germany in particular, than the US.
And so we are gonna be in a position,in all likelihood, where we're gonna have

(57:39):
differences in growth rates,differences in progress on inflation.
And differences in the policy rate.
And then that will causedesynchronization, or
whatever the right word would be.
It would cause uncoordination,less correlated.
And we look at that, but the way Ithink of it is headwinds or tailwinds.
Is global growth a tailwindto the US Economy or

(58:01):
is it a headwind to the US Economy?
And policy in those and in those countriesis a component of whether they grow
rapidly or they grow slowly.
So that's how I put it.
That's how I think about it.
And that's,I think in most central banks, well,
in the US in particular,policy is for the United States.

(58:22):
And you can think of these other thingsas global financial conditions or
global growth.

Rebalancing the regional Feds and should we-

>> Mary C. Daly (58:32):
Thank you.

Rates.
That's why I have in my notepad.

>> Mary C. Daly (58:35):
Yeah, that's what I have too.
I don't think that it matters forthe kinds of things we
do because this is really inthe weeds on central banking.
So this is your nextcocktail party conversation.
So the way the Federal Reserveis put together,

(58:55):
it was put together in 1913, andpeople vote at different times.
I'm in a rotation forvoting with Minneapolis and Kansas City.
And you might think that's very strange.
But what you recognize is votesare not as important as evidence,
models, influence,discussions, the debate, right?

(59:20):
The people always get excited whenthey say, you're a voter this year.
It doesn't really matter on them.
Maybe a little bit first,maybe in history, but
on the margin what matters is,did you build up an idea?
Can you make an argument?
Are you thinking about things that matter?
And you've 18 colleagues,are 18 colleagues looking and

(59:43):
saying, that makes sense, I get it?
Cuz we're coming togetherto make a decision,
you won't always have a full consensus,we have dissents.
But you're generally having thosediscussions around the same issue.
And then,in terms of how the activity is sorted up.
We actually sort our activities soyou're doing regional work,
you're doing the kinds ofoutreach we talked about.

(01:00:04):
But then different reservebanks have responsibilities for
parts of the payment system,part of the financial system.
We're doing differentwork across the system.
We all have research departments,
Minneapolis is actually oneof the best in the country.
So its size hasn't limited itsability to be a heavy hitter.
And I think that's why it doesn'tseem a problem we need to work on.

(01:00:28):
I'm sure if Congress wanted to do it,they could do it, but
it doesn't to me seem likea constraint to our work.
I'm just a bit busier.

>> John H. Cochrane (01:00:38):
And the last one was, so what are you doing cutting rates?
I hope I summarized that.

>> Mary C. Daly (01:00:42):
Yeah, I'm glad you asked the question because it allows me to sort
of talk about the twothings that are important.
So, when I'm talking aboutthe policy rate today,
you have to think about boththe level of the rate and
the pace at which youmight get to neutral.
And so let me first,talk about where we are today.

(01:01:04):
So we had inflation, extremely high, and
the labor market was frothy at times,just going full bore.
Over the last year and a half we'veseen tremendous progress on inflation.
And we've seen the labor marketslow from frothy to strong to
really growing to now balanced,in my judgment.

(01:01:25):
So you got a balanced labor market andyou got inflation nearing our 2% goal,
but not there yet.
So then I ask myself the question,is the policy level,
the level of the rate,is that where it needs to be?
Well, I can tell you,I'm looking at John back there.

(01:01:45):
If you look at the Taylor rule,you look at a basic textbook,
you look at just history.
With inflation not as far away from two asit once was and the labor market balanced,
you wouldn't basically havepolicy as tight as it was.
Which is why I was very supportive of a 50basis point cut, a 75 basis point cut.

(01:02:07):
I see that as recalibrating the levelof policy to ensure that we're not
too tight on the economy andwe end up, you know,
unnecessarily stop stalling out growth anddamaging the labor market.
There's no reason to do that.
But as we get to a level that we think,okay, that level is about right,
then additional efforts have tobe put on this data dependence.

(01:02:31):
What more is the economy telling us?
How is the economy evolving now and there?
I'm a proponent of sortof a gradualism approach.
I'm gonna go all the way back toBernanke's 2003 speech where he introduced
this idea that you could go cold turkey oryou could go gradually.
So if you go cold turkey, you do that,
you make policy decisions all at oncewhen you have a lot of certainty.

(01:02:54):
So in the pandemic there was a lot ofcertainty that rates needed to come down,
we went cold turkey.
If you remember,we reduced the rate rapidly to near zero.
In the high inflation, cold turkey.
Inflation is very high, the only directionof change for the policy rate is up.
And you want to do it as rapidlyas you can, conditioning and

(01:03:14):
disrupting financial markets andthus the economy.
So that's what we did.
But now we're in a much more uncertainworld where it's not clear what
the evolution of the economy will be, howquickly inflation will come back to 2%,
and how durable the labor market,which looks good today, will be.
So you put those things together, andit just calls for a more thoughtful and

(01:03:36):
cautious approach.
So right now I'm focused on is the levelof policy right to wait and see.
So you get the level right andit's watchful waiting.
And then after that I would be verycomfortable, unless the data changed,
with a more gradual approachto policy adjustments.
So that's the answer to the question.

(01:03:57):
I don't know,I'm not answering that question.
So I think ultimately, and the reasonI'm not answering her question is
because ultimately, we have a meetingin a week, a week after next, and
that meeting is really important.
And I think this is maybe the thing I'll,I don't know how close to the end we are,
but I did want to say this, is that themeetings are important because we have 12

(01:04:21):
Reserve bank presidents,we have 19 people, right?
We have the governors, we have all of us,we're all analyzing, studying,
thinking hard.
These are not casual decisions.
These are decisions you can say, hey,directionally, I think I might go here.
But then the meeting itselfbecomes an informative aspect.
Because you're thinking about informationthat is about the policy change you'll

(01:04:42):
make at that meeting.
But also about future policy changes andhow you'll evaluate it.
So that's why I won't answerthe question about December,
because I haven't gone to the meeting yet.

>> John H. Cochrane (01:04:52):
Thank you, Mary Daly, that was a wonderful talk.

>> Mary C. Daly (01:04:54):
Thank you. >> [APPLAUSE]
[MUSIC]

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