Mary Daly on Fed Policy, the Economic Impacts of AI, and the Future of the Fed’s Framework

thank you to everyone for coming out to this live recording as Ben said we have a very special guest president Mary Daly with us not only is she the president and CEO of San Francisco fed she is a voting member of the fomc and that's why all these fine folks are here with us today um she also is a 28-year veteran of the Federal Reserve System so she brings a wealth of experience knowledge and insights to some of the questions we want to talk about today so thank you for joining us us oh it's my pleasure and it's nice to be Live Well it's great to have you here and I'm excited to get into discussing monetary policy fed policy with you uh before we do that though you have an amazing journey Your Story You've overcome a lot I'll just throw out a few quick facts you dropped out of high school you worked retail paycheck to paycheck you went back and got your GED you got a PhD and here you are fed president so that's quite a story and there's a lot to learn from that lessons you could probably share with us so you've seen it on that side you've also seen it from the side of a president hiring people a lot of grad students young people here people who listen who are thinking about a career in economics what would you share with them based on that experience well I have had a very different path but I I reject the idea that it was crooked maybe it was exactly the way it was supposed to be I think and I think that's a really important message that's why I say it because so many people young people all kinds of people but but especially young people think they need a a linear path and that is the right path and any movement off of a linear path is a mistake a failure a stop and go and that's completely wrong if you ask most CEOs in the nation they will tell you some version of a crooked past story that they got into something they moved over there and it reminds us all that you know the thing we think we want to do when we graduate from school and we might even get a job in that environment made not be the exact thing we end up doing or we find our passions and our talents meet I mean you have to have the passion for something and the talent and that has to marry and then you want to take it alignment with your values and if you put all those three things together well then it's almost impossible to think you'll hit the ground running with your first experience so as David said my first jobs were in in retail I drove a doughnut truck I you know I had uh no I really did I drove the oil night doughnut truck and delivering flow and things and I worked at Target and I worked at a deli called room is Deli and I used to go by a billboard while I was driving the doughnut truck and it said be a bus driver because if you're a bus driver you get you're in a union and you get benefits it's only also one job and I thought well if I can drive a doughnut truck I can surely drive a bus um it's harder than you think actually but the um but the TR but the the thing that is true is that then I had a meeting with who turned out to be my mentor she was in her early 30s at the time Betsy she says you know you can't get a bus driver job unless you get a GED and so I got a GED and that was just Serendipity right I get the GED to be a bus driver but the GED then opens up an opportunity to get a semester in college which I had never heard of really I'm sure there were people around me who had been to college your teachers and things I didn't know that and the only person I ever knew who had really gone to college took a community college degree in court reporting and I remember she had to sit in front of this tiny little machine and practice endlessly on that thing and I said no way I'm not going to college um but then you know ultimately my mind opens I end up at a four-year degree and I end up here today and so what my journey the main message of my journey that I will impart to all of you in the room is you don't get where you are despite things you get where you are because of things so treat each of the little things you do even if they seem sideways or backwards to others as an integral part of who you're going to become how you will lead how you will contribute and that's the narrative you you're in control of your own narrative and I think it's really important for me uh to impart that to you you won't always know it at the time there's a lot of external pressure that sometimes comes your way but ultimately owning that narrative and and realizing you get there because of what you do not despite it is is the important thing to to remember great advice and I will note that I got the chance to speak with President Dy before this for a few minutes and learned that she does many other things outside of Economics she's an artist w a metal artist um what was the other artist I paint I U I weld make welded sculpture and here's an important fact about that it is a hobby I do love it but I have no formal training I mean I did take welding classes I would go and because you have to use the Big Welding things and that's it's dangerous if you don't know how you do it but you know I taught myself how to paint and the one of the things that I have learned is in your professional life you obviously want to devote a lot of time to getting the skills that you need to make the contributions in your personal life don't let perfect be the enemy of the good or the fun do what you like nobody cares you're not going to be you know getting a you're not going to make a living out of it usually so just enjoy it doesn't matter if you're good at it and uh president Dy has agreed to come back on at a later date to talk about her Hobbies special bonus episode of macro music so so stay tuned uh and we'll get back to you on that you'll find out how we got how I got to these Hobbies yes yes great story but let let's go to monetary policy so and the economy so something that's happened is we all know is that inflation was really high but it's come down dramatically since 2022 although recently it's been a lot more sticky a little more stubborn stubborn I like stubborn okay stubborn and you are a voting member of the fomc you're thinking about this how has this past year changed these past few months changed your outlook on monetary policy the expectation of rate Cuts forward so I think it's really important answering this question about 3 months of data to just back up and roll back to last year first of last year inflation was still printing High you know there was a considerable amount of concern that I had and other committee members had that we were really going to have to put the raise the interest rate even higher than it is now to try to get a hold of this and that didn't materialize of course because inflation came down rapidly at the second half of last year and that gives people a lot of optimism but myself I didn't read much as others not other committee members markets would be an example I didn't you know I just smooth through that got to stay study in the boat so inflation's going to be a bumpy ride it's going to come down rapidly sometimes maybe get stubborn in in a three months and before we can jump to the conclusion that you know if we had jumped to the conclusion last year that we were on a downward trajectory and everything was golden I I think you've probably heard all of us but me I I said it repeatedly we can't declare Victory it's far too early to declare Victory and the 3 months that we've just seen is why you don't declare Victory before you get confidence so at the beginning of the this year you know the confidence banss think of the think of the confidence bands that you have you have confidence bands around projections well the confidence bands coming out of last year and into the as we start the year they looked like they were tightening up getting more confidence than inflation's coming down and what the last three months of data have done is widened those confidence bans back out so there there's considerable now uncertainty about what the next uh few months of inflation will be and what we should even do in response the important thing that I go back to is the reaction to uncertainty to me isn't to make more projections with definitiveness I just say that the confidence bands have widened and we are now prepared I am prepared to think about through the scenario so scenario the a scenario that would be a very nice scenario is inflation got a little bit a slow start but it continues to come down because the labor market is is starting to slow the economy is slowing we see kind of a continuation of what we saw the second half of last year if that happens then of course starting to normalize the policy rate would be appropriate but if we get a different scenario where inflation stays you know level just doesn't make much further progress then you know then it's not appropriate to start adjusting the rate unless we see the labor market faltering which it's not showing any signs of doing so that's scenario so that there's a range of scenarios under which you would do uh different policy actions and I think the the best way I can talk to people is to go through those scenarios and really reveal the reaction function as opposed to trying to get a probability uh statistic on something where really what's happened is the uncertainty bands have widened okay sounds very data dependent it is Data dependent and it's interesting data dependence has been I think there's not a clear Narrative of what data dependence means let me be as clear as I possibly can be it is not a backward-looking variable so yes the information that's coming in that you know comes in and we everybody looks at it is a input to the process but that input isn't definitive because things can happen so you have to that's one leg of the stool because our if you take the data and you put it into our models and theories and things you can you can project out but there's other legs to that stool which is what's happening in real time we week what do you see going on in terms of price increases that that people are making and what are our contacts telling us you know Reserve Bank presidents in particular spend a lot of time out in what we would call the field talking to businesses and uh small medium and large businesses unions you know different kinds of worker groups communities and we're asking firms in particular are you raising prices do you think you're going to pass through do you think about you know is this a slowing inflation what are your input prices what are your forward contracts looking like that gives us that data dependence that we see and so far that's why I say there's just a lot of uncertainty because we're getting some different signals you know firms are saying I don't think I'm going to be able to pass as much through consumers are getting more choosy about uh looking for bargains and but my input prices aren't going down quite yet so I'm in a wait and see mode and that's that coupled with the the stubbornness of the last three months of data means that the uncertainty bands are wider so you have the largest District in the Federal Reserve System so I I just can imagine all the trips you have to make through that District to get this I am a well-traveled citizen okay it's true yeah um going to the other part of monetary policy that we think of and that's the balance sheet and there's a big announcement big change at least a reduction in how quickly you will reduce the balance sheet roll it over so what are your thoughts on that does does that signal anything about the stance of monetary policy okay hard no no signal about the stance of monetary policy this is it's truly something we had already said out in our principles and our our talk discussions you know over a year ago about how we would do balance sheet runoff so the idea is always to get back to a level that is ample reserves that's the regime that we're running to to conduct monetary policy but is if you roll back to September of 2019 uh you recall if you were there paying you know paying attention at that point in time that we were running the balance sheet down and then we ran into in uh balance sheet lingo the kink the reserves demand Supply and we ran into that and that caused Market volatility you want to avoid that right our goal isn't to create Market volatility that has literally nothing to do with the stance of policy so we always had uh forecast and communicated that we would um decrease the pace of runoff as we got nearer to ample and we would do it well in advance of being at that place so that we could make sure we don't run into that place again but the benefit of doing it this way is that you then don't have to stop short of getting to ample the goal is always to get to that level that's ample but if we got if we found ourselves in A disruption we might have to start stop short of getting to that what is really truly ample so this is a way to get a smooth landing on that and it has nothing to do with the Stans of monetary policy St of monetary policy is all about the funds rate and any forward guidance we have given and the forward guidance right now as you know which I think is very frustrating for many people now I don't think people in the economy as much as um sorry I'm looking over at the the media core media core who wants to know exactly what we're doing our markets but essentially it is true that a projection a strong forward guidance at this point other than here's what we do under these scenarios isn't actually going to lead to you know better outcomes because we don't know how the economy is going to evolve we only know how we would react to the evolution of the economy okay so the FED has a dual mandate date so we've been talking a lot about the inflation side there's also the employment side so you feel pretty good about that the risk there any any chance that you keep rates too high for too long and you begin to jeopardize that side or you feel it's a good balance between the two as you might imagine as a labor Economist by training and just a policy maker who holds both sides of that dual mandate at the top of my mind laser focused on the employment part the because the risks become come into better balance you know when inflation's printing at the high sixes and sevens and the labor Market's going strong well then we obviously need to turn our attention to the inflation side it's so far away from our goals but as inflation's come down and the labor market is slowed then both of the the risks are more balanced and we have to keep our eye on both sides of the Mandate now right now I don't see any evidence that the labor market is approaching a worrisome position but you know we did see initial claims rise today we saw the labor market report uh come in weaker than expectations still strong relative to what people think is the study state level of job growth but there is there there is evidence already out there that firms are a little more picky about hiring and many firms especially in tech for instance which is dominant in the in the west they're rebalancing their portfolios of employees and so that's something we have to watch but today no I see a really healthy labor market where people who want a job can get one what I see is we still have inflation too high and that's creating some un certainty for people about are we really going to bring it down and the main message there is absolutely overtime down to 2% is our goal we're Resolute to keep it all right 2% it is what about our star I want to come to this oh I love rstar okay so our star is the natural or equilibrium interest rate the one that would clear the economy on a sustainable path um there's a lot of discussion about where is it going so put aside the near term but long term sure are we at a place that's different then say pre-2020 when rstar was viewed as really low I mean Dem there's a couple things you could look at demographics that seems to be very similar to what it was before if anything maybe even worse because the Aging planet is still with us which would are I know you can take two views on this but push down our star um also some people worry about fiscal deficits pushing up our star and I know that's beyond your your policy perview but you have to at least respond it when you see it happening and another area would be AI or productivity and I I will tie to AI I want to spend more time on AI later in our conversation but you know AI in theory could be raising productivity pushing up our star so where do you see us going like over the mid to longterm Horizon with our star sure it's a it's a terrific question and one that really I was uh I was just talking to a group of economists at uh Stanford and I at an event we were doing and I said you know academics would really help if we could all just pitch in and study some of the fundamental things we're grappling with one of them is what's happening with rstar and the truth is we don't know you named the things that could affect it but we don't really have a good sense of where those things are heading for my own views I've put in you know if you come came in Pre pandemic just thinking about the consensus estimates 0.5 for the real rstar for for rstar the real neutral interest rate was about right and so that put the nominal neutral at 2.5 2% inflation 0.5 uh rstar that is in all likelihood gone up a little bit and so then you ask well by how much and what's a good assessment and so I've really got a ban for myself of between 0.5 and one and then if you think about where we are with policy and you use that one instead of the 0.5 you said okay I'm just going to be thinking it went up for all the reasons you named well you still have restrictive policy and if you look at a a gra a diagram of of Time series The only time we've had more restrictive policies really in the in the vuler disinflation otherwi we still have very we have restrictive policy which is what we want to have at this point so I think the rstar conversation is is important and all of the factors you named will influence it but it's I don't feel the press to to know exactly what it is today because we don't have the research yet to really think about that and what's important for monetary policy today is are we restrictive and clearly even under that higher estimate of our star we are restrictive but it might take more time to just bring inflation down so when I think about the the factors affecting and I I think you're right it's it's demographics it's uh fiscal positions of of it because our star we talk about it locally as in domestically but it's really a global variable because financial markets are Global and so you have to look at what other countries are facing as well and and other countries are facing the same demographics some idea that productivity growth might be stronger for the reasons you mentioned and a lot of deficit and and now debt from the pandemic and trying to get right sized after that and all of those things have to play out and it just really depends on how they evolve particularly productivity and and fiscal well I was hopeful that productivity uh will continue to go up there's been a surge one of your economists Andrew fyer Forester Forester he had a little post that he has his probability model does have a probability model he's like H it's not it's not happening folks don't don't get too excited about it but I want to believe I want to believe the productiv is going to go up the AI is making a difference and we just had a conversation with my boss Tyler Cowan in here the other day yesterday in fact and AI is very interesting because on one hand you could see it improving productivity pushing up our star be a great world to live in um on the other hand Ai and this is something Tyler mentioned could cause us to live longer too could help find cure diseases live till 100 years old that would increase this this issue of demographics having to save more for longer life you could see AI depending on the magn is going both ways but I want to segue into a broader discussion of AI because you have talked about this a lot you're from Silicon Valley San Francisco uh what are your thoughts on AI and its long-term impact on the economy on labor markets so let me think about there's a lot in there so I'm trying to think about all those aspects of it but let me think first step back and say you know the bottom line on AI and what its impact will be on the economy the labor market is that's going to be up to us so the most important thing to know about Technologies is they don't it Technologies don't make decisions people make decisions societies make decisions so if we get to 10 years from now and say this didn't work out like we want we can't blame technology we have to think about where we could have done something different so I think one of the few things I see is very encouraging is you're already seeing conversations at firms but importantly among workers you know whether they're any Union or not they're thinking about what's the impact of this on the labor force and and maybe the Health Care System how do we get better but also how do we utilize the the folks we have and the people who should be integrated into the economy so stepping back from that then what are my ideas well you know I came up to the fed you mentioned I'm a 28- year veteran okay so I started the FED in 1996 I'm a rookie Economist I got my PhD went to a post do came to the Fed so I'm at the fed and my early interactions are with chairman Greenspan staff calling me saying because I'm in the look I'm in charge of like going to Silicon Valley looking in Seattle and seeing what's going on and are people investing in this and what's happening and you know the famous Bob solo quote of you see productivity everywhere except in the productivity statistics that was really true in the late 90s you weren't measuring it yet we started to measure it after the real-time data came out but you could see it everywhere and I remember so clearly two things that made me completely understand that this was going to be transformative in terms of the productivity one was went to Salt Lake City and they were installing uh meter meters on the on the houses that could be read from the truck so that they didn't get bitten by dogs and they didn't have you know they couldn't read them and then people have bills they didn't want and so they had just invested in this and so we went and asked them why did you invest now and here's the three things they told us well the technolog is available uh the labor market is tight and so it's really hard to get meter readers and this seems like it's going to be transformative and live for decades and so I thought okay those three ingredients that Salt Lake City did and then also you go somewhere this tourist I mean this um uh luggage company was doing the same thing they used to hand inspect all the suitcases and they built a machine that could inspect the quality of the suitcases so they would know if it's going to break and that was all done by computers so now you had one person sitting in the back figuring all of this and sorting them and and those things about business processes the investments in the technology but also the tight labor market was sort of the forcing function to get businesses moving on this because computers have been around for a long time I see similar elements today so you talk we do these roundtables we talk to businesses all kinds of businesses small medium and large manufacturing retail are already using AI whether they're buying an off the taking an offthe shelf product or having something built for themselves depending on their size they're using it but they're using it because they're facing really you know a long period of tight labor markets and they wanted technologies that make the work more interesting and more sustainable for people take the what do they call it the soul sucking work they wanted to remove the soul sucking work and leave people with better work but they're already in conversations with their workers about okay what is this going to look like in terms of new jobs at it and things because there is this existential threat that workers feel about is this going to take my my my job so I am more optimistic than Andrew for my colleague but what he's doing is say he's reminding us of a simple thing that we should not hope can't be enough to get us past his model his model and countless other models like his would really say the following it's really hard to move from a average level of productivity or what he calls the low productivity state which is 1.5% for the US to something more like what we saw in the late 90s and early 2000s those are just not that frequent these big jumps so we can't bet as a policy maker I can't bet on productivity grow SA us from uh inflation that's but I absolutely am there watching and if we see the signs that we're observing in small areas start to scale up and it shows through to the productivity statistics let me just say I wouldn't be surprised so don't count on it but look for it okay so we are very AI bullish here at marcadas so we talk a lot about it we have a program we have some Scholars here who work on it um you should come to the West Coast well we I I know I know Tyler our colleague and and boss does take a lot of trips out there to Silicon Valley um we even have used it in the monetary policy program believe it or not and I believe I believe uh one of your colleagues used it to prepare for this trip out here uh we have something called the macro mbot so check it out listeners if you haven't already um but we have fed in you know 400 plus episodes uh that we've done it's built on an existing brand I think clad 3 so you can ask it anything about the show about people ideas things we've talked about and it it hit me you know if you take that which knows me my mannerisms my thinking pretty well take my voice I could easily be replaced by you know an AI version of David beckworth for this podcast not really though I mean I think I think that the the distance between that and and where we are today is is pretty large because it is missing some element right so it can do things right we could if you were sick we could get something out that but you have this way of doing things that I think would be hard for the current gen products to to do which is if a person throws out a question throws out an answer you can think you can respond and get the most interesting thread as opposed to the one that the model might have trained it to ask next so it can go off script but it's always going to ask something which has been previously fed into the model and you're going to say something like oh you like football uh which what are your team you know and I don't think that if unless lots of other guests had said they liked football and your re your reaction was what are your teams then it would be hardpressed to do that so I there's there's a way in which I think it's the responsibility of all of us since you all are doing this here in badas I'm certainly doing this to help educate people that the existential risk of complete replacement is not a current risk of complete replacement you know one of the things I'm more bullish on with AI truth will tell us is that Technologies on net never reduce employment but there's a big gap between when they replace jobs when they augment jobs and when they when it creates jobs and that leaves people left out and feeling like wait I was replaced but AI is unusual in that the firms we're going to anyway which is a large number of them are saying that they're using it to replace certain tasks which they collectively say are the soul sucking tasks then the their but they're augmenting work right away and then they're building new people into their Workforce because they need prompt engineers and other people to to help with the model so uh one of my firms is a re big retail uh group has a lot of copy editors writing copy for things that range from a 50 Cent screw for a for something that they make to you know a $700 high-end product the copywriters and this going to be shocking to you they don't actually like to write about about the screws it's not very interesting it's tedious but they love writing about the other items well it turns out the firm's incentives are for the copywriters to write about the expensive items which have high margin and not about the screws so the Gen product writes about the screws and they have an auditor and now there are orders of magnitude happier copywriters and more output and accurate descriptions of screws which is I think a win-win win well I'm glad my job is secure so thank you're okay you're toally we're AI bullish I'm kind of just throwing out you know an example because I I want to throw out another possibility here since we're talking about the fed and I have a fomc member with me but imagine in the distant future we make use of Big Data AI what is the Fed look like would it be a much less labor intensive organization more AI if few Economist people you still do the same thing you still maybe have big balance sheets do follow some version of a tailor rule but could you foresee a future where there's much more AI intensive use at the effected so one thing that is maybe little known but certainly important is that you know we like all other Research Institute you know we've got a whole group of researchers we also have we have three responsibilities as you know the payments monetary policy payment system monetary policy uh Financial system and we've been using like all other groups have big data for a long time right it's been around it's not a new thing generative II started around Thanksgiving uh of 2022 but not machine learning not the use of big data so of course we're using that to get insights and lessons but those are just they're generating patterns that have happened before and looking for patterns in the existing information so they point you to things but they don't replace thinking and so I I still think that you know the FED will look different like all institutions will in terms of how it does its work and does more hopefully effectively and efficiently and much more information that can be collected and used in real time to generate ideas and things but ultimately there's still the Judgment part to how you think about things because you you're also bringing in the qualitative information and we have to be out in the field talking about that with individuals and bringing that in and balancing the qualitative information with the quantitative information with the history models and empirical work is still not I mean much like you I I don't see uh a machine replacing that but it also kind of underscores that the FED is not just technocrats it's uh actually individuals with judgment and things like your job is not just being a you know you're not just getting questions reading them and getting up you're interacting and those interactions are interesting and useful for for listeners hopefully um say yes okay thank you it's a big not I'm doing that kind of thing like not yes okay well let's move on to another topic that's very near and dear to my heart and that is the fed's framework review which starts the second half of this year goes into next year uh maybe give us the basic Contours of it when is it going to happen and then what do would you like to have happen and what do you think will happen at it okay so the first thing I'll say is that we haven't really announced yet um let the chair do that and so I don't want to front run the committee about when we'll what the parameters of the framework will be and in the specifics but what I will say is the last framework review was very intensive if you remember it if you don't remember it it really had many components to it so one component of course which you saw reflected in the minutes and eventually you'll in the transcripts was just the the study of what are all the different ways you can go um what could how would we do this well what are the facts that are pre present today and are likely to be present for the next five years that we should really think about because remember at the time we did our last framework review uh we couldn't get inflation up to Target so there was a lot of conversations about what do we do in a low our star world we're going to hit the zlb or the zero lower bound regularly what happens when inflation doesn't get up to Target not only in our country but other countries so that's a those are risks that we have to manage so I suspect that at this point some of the questions that that will come out and I'm again don't want I'm not front running the the committee I'm just saying what is on the minds I have this written on my whiteboard it's a good study for academics too so here's some questions that are really important are we going to be in fighting inflation from below our Target or above our Target so last framework review the world was thinking we're going to fight inflation from below our Target whatever the given Target is now I think there's a real conversation out there about whether we're going to be fighting inflation regularly from above the target pulling it down well that has different implications for for any kind of a framework or what the FED how the fed and other central banks react the other one you already mentioned is what's go what's what's where is our star headed is are the same things that we came into the pandemic with still Salient or have they changed in a fundamental way that means that the zero lower bound is not going to be as uh pervasively um hit as it was before that is it something different and I think the third one is and this is we also touched up on this with AI but I think it's different than that is what do potential output look like so if you remember prior to the pandemic there was a lot of talk about secular stagnation that the global economy was simply going to have a slow growth environment you just weren't be able the pi wasn't going to expand we weren't going to be able to offset you know recessions because we were at the zero lower bound and inflation was just going to drift now the world seems to be we've got AI potentially boosting potential output growth we have is inflation really going to be coming down and then rstar is it higher those are all fundamental questions that any Central Bank has to Grapple with and so the framework is is certainly going to have to live in that context and then of course talk about you know the tools and and the techniques we use um but you know certain things stay stay the same and what's really important is everybody asked me this question we're not changing the goalposts while we're still trying to get to there so 2% is our inflation Target importantly we have a ample reserves regime that we're still trying to hit we're not you know abandoning our ample reserves regime at this point and all the things that people have come to depend on as part of fed policy are still there Resolute to keep our inflation Target and Resolute to do that um with while we balance the the uh the labor market which is incredibly important well Mary you know I'm a big fan and advocate of nominal GDP T know that and I I was at a conference where you and a number of other fed presidents were giving talks and I remember Jim Bullard gave a talk on nominal GDP targeting he was I know one of the big Champions inside the fomc for nominal GDP targeting he has since stepped down are there any Champions left from nominal GDP targeting at the Fed so you know what and I'm going to I don't usually speak about my colleagues but I'm going to speak about as collectively so here's something that I really love about working at the fed and you can you know I know Jim had a a model he that was the model it says imagine people live 200 under quarters and you know how do we how do we go through that um but but seriously you know all these things are are useful to think about there's nominal GDP targeting there's price level targeting there's inflation targeting there's a dual mandate right some countries are inflation targeters we're a dual mandate country and what's important is that the the goals are always the same these are how to achieve the goals the goals are to create a sustainable growth healthy growth rate that is not too fast not too slow against the potential output and do that with having a a price level or a price inflation rate that is stable and low and a labor market where people who want jobs can get them right and those are the goals no which technique or or methodology are you using and so we looked at all of those in the last framework review and came to the one we use which is inflation um and dual mandate our goals inflation at 2% and a labor market that has full employment I still think that's a a really winning proposition it served us well but I I gave you that sticker you know I am curious I I I I am a policy maker and a researcher am voraciously curious and so if people come and say look I have price level targeting or nominal GDP targeting could have produced a better outcome well then obviously we would think about those and consider those things but there's always advocates for all the different ways and the the goal is to try to get something that works for as many Americans as possible and there's two other things to the curious so be voraciously curious this is useful for younger people too is that you're doing anything just be viciously curious when I'm looking to hire people I look for for curiosity I also look for okay I've been very curious now you need to take a decision I want people to be confident in that decision but then immediately upon taking it I want a certain amount of humility right to say I what did I miss how do I get curious again so I have a sticker it says be curious be confident be humble and that actually is the way that I think the framework review will go and all of my colleagues share I don't know if they have my sticker but I'm happy to give it to them but the uh but the most important thing is we all share that that mindset of we've got to be curious we've got to be confident that we've looked at everything but we also have to be humble enough to ask again is this the right thing to do should we do something different well great well we are putting together a uh policy brief series on the FED framework reviews hopefully teric send it and of course it has a certain angle to it so I look forward to you I would uh I wouldn't think otherwise right but I I think it is it titled uh a nominal GDP tting it is it's it something along those lines so well I mean I'll be anxious to talk to you about it as as we I'll be happy to talk to anyone at the FED who wants to talk about it um a few minutes left before we go to the audience one one last question from me and and I we need to be careful how I asked this but we're going into an election year and and things get political everything gets political um and you know president Trump can say some things about the FED um as well as other candidates how do you operate in an environment like this how do you keep your eyes on the target when you got lot of noise and distraction around you so so the FED is really just what we say we are we're not political we're apolitical we just don't think about politics because you know the chair said this on his 60-minute interview and but it's something that all of us say is that Integrity is our most important attribute and Trust of the American people and the trust that they have and even Congress has in US is that we achieve our goals and we work to achieve our goals and can't take politics and political changes into the conversation I mean our job is hard enough frankly to get the price stability full employment part right and make sure that people can live their lives and livelihoods without thinking about inflation or that there could be a a recession in the labor market so you know You' asked how do we do it it is just the you have to almost sign a secret you know the thing if that so of say at the beginning of your tenure we're not going to think about politics because it is an a political position that Congress has asked us to take which is full employment price stability those are our goals that's what we're going to work on to achieve and that's really what I think about okay we will now turn it over to the audience for questions and as been mentioned if you're on this side please walk behind the cameras to the microphones over here and line up behind the mics and we'll take as many questions as we can within the hour hi Nancy Marshall ginzer with Mark Marketplace uh thank you for being here thanks for taking our questions just following up a little bit on the labor market you mentioned initial jobless claims today came in a bit higher than expected the job job report last week was a little cool so my question is if the labor market does look like it's getting weaker would that be enough for you to be in favor of cutting rates even if inflation we still a little bit sticky so the way I would put it it's a great question an important question so the way I would put it is that there's a difference in getting softer and being weak and if the labor market starts to falter or looks like it's getting weak well then absolutely that's one of the the things that would cause me to say we need to rebalance the policy rate as long as we're not seeing inflation Skyrocket you know those are trade-off decisions so I don't want to work in the exact I don't want to lay out a matrix of hypotheticals and tell you exactly what would be done on anything because we haven't faced that situation but I think there is a real conversation to be had here on your question of a softening labor market right now would just be getting back to what we think is normal growth right you still have we can have a view that like 110 120,000 jobs a month is is what the economy can absorb at any one time that we're outgrowing that even with the the slightly softer or below expectations report we had last Friday and so you do see it Cooling but that's what we should expect to see right the policy rate's High we're trying to bring the economy back into a more sustainable growth path whether that's GDP growth or the labor market and we want to bring inflation down but the the very most important thing to to remember is that we have two mandates price stability and full employment and right now we have a strong and healthy labor market but absolutely have to keep an eye on that continue to watch so I'd say the the recent readings I have my eye on it but I'm not yet get worried just to pin you down a tiny bit oh yes I love that I mean what would that look like how high would the unemployment get where you'd be like huh okay this is got to look at this so I'm not trying to obate or avoid the question I I really am not it's just very challenging to think in hypotheticals because it's you could write up a little map of what and this is what rules do or models do they write up little maps of when you would do which action but honestly what happens is you have to balance a lot of things in that moment that we don't know that don't fit into that Matrix of the Nexus between inflation and unemployment so let me let me explain so if we saw that inflation was coming down and or we had a lot of signals that consumer spending was weakening and the labor market was starting to get um challenged well that would be a different situation than if we saw a couple of ticks up in the unemployment rate but inflation still going strong consumers aren't budging in terms of their willingness to spend Investments taking place I mean those are you can't really write down a a little Matrix of inflation unemployment and say when would you act but we do have the mandate to also take care of the labor market and if the labor market would start to falter in some fundamental way well then policy actions would have to be different than if it wasn't faltering I mean I you know I go back I'm this isn't the an answer to the question but I'm going to give it anyway because it really I think will help you understand how I come to this table so if I may tell a little story about my so I came up in a family where um you know both my parents uh were we're in a lower lower middle inome well lower middle inome family and the whole neighborhood uh my community uh we lived in houses where you put a card table which is just a foldup table if you don't know what a card table is it's a little foldup table you put that in the living room and you do all kinds of things on it but one of the things everybody in my community did was pay bills on Sundays and in the late 70ss the high inflation they stacks of bills that they couldn't pay no matter what house I went to including my own was always taller than the stack of bills you could pay and then the voker disinflation came and my parents and all the parents around my community lost their jobs and they couldn't pay for anything and so that story of seeing people struggle on the treadmill it was kind of an IND right you're working you're doing everything and the inflation's just outstripping you and you that's demoralizing to almost everybody then you have to do something that causes the labor market to really falter and now people you've given them one thing that's better lower inflation but you've taken their their livelihoods which leaves them equally well you know not well off so I have that in my mind and that is The Balancing Act and it's why I resist the idea that we want to put this in some sort of a box like an equation and instead say we have two mandates and we have to be extraordinarily careful in managing those two mandates inflation to 2% over time and a labor market that continues to deliver jobs and opportunities to people that's what we're trying for I still believe we can do it but it takes constant work and we can't declare Victory on either side of that right now you get the mic Craig Steph Miller I'm uh with the financial regulation team and I'm an economist by training and most of my work is on Banking and crises and I would say the predominant views within that literature are was it a liquidity problem the the bank failures from last year was it a liquidity problem uh there was the run or was it a solvency problem and therefore was Capital sufficient I I tend to take the latter view that's my takeaway from the data I've work with and so but given your broad background I was wondering what was your overall take on what what happened last year so let me just be sure you you think it was a capital problem yes okay insufficient yes and it I think that you know ultimately when when you have bank failures and Bank stresses both are up for thinking about right capital and liquidity but one of the Salient components of the the svb failure and then signature and First Republic and then the stresses that persisted was the ability to translate Capital into liquidity so I think the liquidity piece was a new piece that when people were thinking about why would a bank fail that liquidity piece was really Salient and it was Salient because for a couple reasons one a lot of the part of their portfolio is held in the held to maturity part which isn't Mark to market for banks of a certain size and so investors suddenly got transparency on that and as you saw the bank stocks that were affected by that went way down and so I think that's a liquidity issue I think the other thing that happened is we realized how quickly people can move money and how willing they are to move money and you know if you think of Basil the difference in the weights internationally and certainly domestically was not that large between insured deposits and uninsured deposits and what we realized in those bank failures is is that that Gap is much wider that if you're not insured you're going to move if you think your bank is under stress and that can happen rapidly because you can move money on your phone and other things so there's a lot of lessons that can come from those three Banks um but I think I don't think it would be fair to say that it was only capital or only liquidity it's really the question is is the banking system sound and resilient and I I will remind everyone in the room who don't doesn't study banking that have over 4,500 banks in the United States and three failed so the big message is banks are are sound and resilient they're used to managing these types of risks but in these worlds you can absolutely have pressures on liquidity and capital that that matter and and we have to rethink those things I don't make that kind of policy as a Reserve Bank president have a role in regulatory policy but I certainly as an economist and a as a person doing policy understand the stresses and the impact they can have on the economy so absolutely great question thank you uh uh as host I want to give Craig a chance on the microphone he's a journalist visiting here so you want to give the journalist a chance to ask their questions too president da and this is also for you David um today I opened my fancy Bloomberg and I saw that since Jay gave the press conference bond yields fell the dollar fell stocks Rose and financial conditions eased none of which should have happened if you're the chair saying uh I'm going to hold for longer so um I'm humble I'm curious not that confident that what I learned in macro is working today so why do you think that happened so let me I think that it's a it's a good question because it it shows the complexity of the situation we're in so Financial conditions move around based on a variety of things what the FED says what they think will happen on the economy and on inflation their forecast their own forecast and projections what's happening globally and what you see is it's been moving around a lot on data points and importantly data points that suggest it might go one way or another way and you know we got a a weaker than expected job market report although not weak I'm back to the the first question it was a softer jobs report than many expected but it wasn't weak it was still a a reasonable jobs report we got initial claims printing a little higher than the expectations so there's always this thought well maybe the econom is weakening more than we thought earnings on on some major companies were below expectations those things all feed into how investors Market participants are thinking about the economy's direction but one of the jobs of the fed and I take this part of the job seriously is we have to stay study in the boat right if you you could there were many who got I think overly optimistic on the inflation front with the second half of last year when inflation was throwing falling pretty rapidly that proved to not be a durable uh Decline and so that study in the boat proved to be helpful right now we've got two pieces of Labor Market information that look below expectations but not especially weak and so we have to absolutely have to continue to watch that but I think it's far too early to declare that the labor market is fragile or faltering we just have to continue to watch and this is where to David your earlier question this is where your earlier point that D data dependence is really um not data point dependence it's really the the whole you know I I'm a microeconomist by training a macroeconomist by practice but what in either one of those what you learn is the preponderance of evidence is your best guide not a specific piece of evidence you can easily over rotate on a specific piece of evidence and find yourself making you know policy mistakes so I think this study in the boat uh approach is is is is the right one and and just to lean against the the one thing you said I don't think I don't think in an event study you can just look at press conferences or commentary by the FED because other things happen in the interm meting period And if people are understanding our reaction function then they should be adjusting depending on how the information's coming out and what they're seeing but again sometimes markets Etc can over and underreact information in a way that that we might just stay smoother in that but that's because we have to look at all the risks as well we are not just you know betting on one outcome or another we have to look at the full range of risks and plan the scenarios that we would use in those risks Mary if before I turn back over to the audience just going back to your comment earlier on the bank question how was tough to turn capital on liquidity there's been a big push for using the collateral banks have at the discount window more readily to to use it to meet liquidity requirements this would solve a lot of problems or at least some of the problems where do you see that conversation going so you you know definitely uh Banks making sure that they're signed up for the discount window this is a long-standing tool this is not something that is brand new you know Banks use the discount window on a regular basis and the the idea that many people are putting forward and it's it's a very useful one to consider is maybe use it more frequently but that will take more work and effort and the first part is getting Banks signed up who aren't signed up and certainly all reserve banks have been um always encouraging their Banks to sign up for the discount window but it's the push is obviously uh much more intense at this point to just sign up for it make sure you know how to use it make sure you've tested it Etc I do think that this is a fundamental question that you know we have to ask about how do we provide liquidity in a rapidly changing world and we have the federal home loan Banks and we have the discount window window and we have other you know non institutional sources of funding that wholesale funding that Banks can get but it is a it is a very important question and back to the capital question it's not one that I think was getting a garnering a lot of attention prior to the failure of those three Banks where they're they really couldn't get liquidity fast enough okay let's go to the audience hi uh Howard schne with roers thanks both for doing this really interesting um two things real quick one is a followup to nany's question there's a big gap from $175,000 175,000 jobs a month down to 100 uh do you think that's going to be adequate to uh continue disinflation or is it going to have to get even weaker with a consequent rise in the unemployment rate and then secondly from December through March everyone was saying if the economy evolves as we expect it'll likely be appropriate to lower rates this year do you think that statement's still true or rate Cuts still likely this year so uh let's go back to the labor market I you know I do think that we're seeing in a really positive way disinflation I mean just think about where we were last year at the start and where we are now inflation's come down a lot I mean a lot and that's because of a variety of factors one is monetary policy that's a slow demand there's no doubt that things are slower now than they were if you ask contacts and firms Etc they're going to say early last year it was very frothy it looked like we were riding a bicycle down a hill with we lost control of the pedals right it was just really frothy now it's back to something that seems more normal in fact one of my contacts said this looks like 2019 except for that inflation part so I think there's a sense that the economy is in a more on a more stable footing so the question Howard is you do we have to really push the economy down and I don't see evidence of that just yet I don't you know I certainly um don't want to rule things out but I don't see evidence of that right now because we're getting positive Supply there's still Supply recovery and supply incre improvements in in output across the board and Ai and other things could certainly help that but just people are making Investments the other thing that's happening is we had a really positive labor Supply uh boost both from increases in participation between 25 and 54 year olds which I no longer am comfortable calling prime age I used to be really comfortable calling that prime age now I'm completely not comfortable so uh but but really that middle group you know especially for women who came back in and then we had um immigration flows which continue to boost our labor Supply so those are things that are positive that help us get the inflation down without that and also there's this behavior of consumers I think we can't overlook this inflation expectations are well anchored and that's across the board and consumers at some point especially when they've spent down their excess savings and other things are just become more price sensitive and that price sensitivity means that firms can't just reflexively pass things on and that's the beauty of a well anchored inflation expectation environment so to answer your question specifically Howard I don't see that we have to cause more pain to get this to happen I see this is happening as we as we move it down disinflation is incurring we've had three stubborn months of data but I still see monetary policy is working and supplyer cooperating on the on the rate Cuts rate hikes rate po rate stays the same I'm going to go back to the scenario analysis and say I really am holding myself because I think it's the best thing to communicate to the fact that what's happened is the confidence band remember we said we want to be confident that inflation's on a sustainable path to 2% I have that still is my metric because confidence is is for me what it means is the confidence bands around my our projections get narrower and narrower the first three months of the year made them wider than I came into the to the year with and so I didn't grow more confident but I'm going to be looking at that and those are still the goals right ultimately the reaction function is get inflation down to 2% over time uh don't stop in our policy until we're there till we get that we are confident that that is underway but also watch if the labor market is starting to falter because that is another part of the equation at this point both of our mandated goals are in the frame and we have to attend to both of them thank you so much for coming my name is Brian Knight I am not an economist I'm just a lawyer so bear with me but I love lawyers I I I I had I had a I'm the only person in America says that by the way I I like to think my wife loves at least one lawyer oh okay there you go so I guess the question I had based on my colleague uh Steph's question is you you mentioned there sort of a a a liquidity problem but were the assets actually difficult to sell or were they difficult to sell at a sufficient price to cover the bank's liabilities and then the second follow question is you mentioned that like we had three Banks fail and that's evidence of of a good stable banking system but we also had a fire drill among the government and the FED rolling out new emergency policies and all this stuff which kind of had a whiff of 08 about it so do you think that was an overreaction or was that sort of prophylactic to make certain that problems didn't arise but that was a threat or or or what was going on there so you know so this is fully my vantage point I want to make sure I don't speak for any of my colleagues on this this is me looking at the the things that you see in the economy so March I don't see March of 2020 3 looking like 08 at all 08 was a a really challenging time people were carrying their stuff out of their companies in boxes people were losing their homes and things it was it was a very distressing Time March of 2023 was a was a a big awareness that not only the largest banks can cause systemic risk right that there's a systemic so if this svb was a not a small bank but it wasn't a a a big Bank either and there was a sort of a sense that maybe smaller Banks couldn't cause contagion or systemic risk across other Banks but what you saw is that because it was a liquidity issue they had assets but those assets hadn't been marked to Market as they've evolved that when those assets are marked to Market because you have to raise liquidity you suddenly don't have sufficient liquidity or Capital to fund your deposits that is something that all Banks who look like that who had underwater Securities underwater loans because they priced them at low interest rate environments and now the interest rates had risen that was the awareness that I think made this more of a systemic risk and so the actions that government took the treasury secretary and Treasury Department and uh the FDIC and the Board of Governors those actions to my mind were really a welcomed uh settling putting saying yes this is three banks that had that problem but are going to ensure that the rest of the banking system remains safe and sound I mean on those days having lived through a couple of these situations in my time at the FED on those days the very most important thing is to assure Americans and others that their money is safe and sound in the banking system so that you don't cause a greater run which is really problematic and you know that did not happen Banks didn't have counterparty risk with each other they didn't you know think of o08 I mean there was a fear about you didn't know what your counterparties had so you weren't lending I mean that was a completely different situation and at least in my judgment I think the history books will will characterize it as such okay we are at the end before we close we want to recognize that you're now can I get that young guy you want you want you have time for one more I do okay you've been standing so patiently and you're bringing up the uh younger end of the age distribution I'll mention Chris is one of our research Associates and he's starting the PHD program in economics in the fall I'm so glad I took your question uh what do you think about the fiscal theory of the price level o oo wow I you're okay now we'll see question yeah so you know here's what I think about is that it is easy to discount or get on a particular view and say that view is the view and should be the view or that view is isn't the view and should never be the view and I think that's at our Peril so we should be open-minded in my judgment to all different ways of thinking about the world and then ask ourselves what are the learnings from those ways of thinking about it that might influence us does it mean because you've listened to it and studied it and evaluated it you'll accept it but I do think that closing off debate is the best way to find yourself uh in in an echo chamber of your own thinking or the prisoner of your own particular uh way of thinking about things and I I just think that's never going to be good for for societies it's why we do the framework review every five years um I get a lot of people emailing me about the fiscal theory of the price level I get a lot of people emailing me about nominal GDP targeting uh price level targeting uh a single mandate and what I learned from all of those is it's good to have people thinking about how to manage the economy and um the the the mandates we have uh in a more in a better way and I'll I'll I'll read anything at least once well Mary before you go you're now a member of the macro musings family oh wow we give out mugs so every morning you you drink from this you'll see nominal GDP targeting on there and uh you know you haven't sold it all that well but okay and you know if if you ever feel the urge to travel to Washington DC for fomc meeting and bring this with you I'd encourage you to do that drink it in front of your fellow FC members uh uh fiscal Theory uh t-shirt once I've I've acquired a lot of different Theory t-shirts but I don't have a theory mug there you go we go next level let's give a hand for Mary Dy

Channel: Mercatus Center

Views: 681

Keywords: Economics, Policy, Lifestyle, Culture

Id: rgWS9Zp3LE0

Length: 62min 47sec (3767 seconds)

Published: Mon May 13 2024