Welcome to the Commonwealth club. I'm Leonie Mendoza, and I'm pleased
to be the moderator for today's program. Previously, I was the chief
economic and business adviser to Governor Newsom and senior partner emeritus
from McKinsey before introducing Dr. Daley, a quick note about the club. We return, as you can see, to stage
our signature in-person program in our lovely facility
here on the Embarcadero in San Francisco, and we expect to increase our in-person programs
over the next few weeks and months ahead. So is no better time to become a member
of the Commonwealth club. Visit us at W W
Commonwealth dot org to learn more. OK, so I'm so pleased today to be able
to welcome back to the club, Dr Mary Daley, the President and CEO,
the Federal Reserve Bank of San Francisco Dr. Daley, as you just
heard, was here a couple of years ago when we were in slightly different
economic environment. So today is a great time
to get an update from Dr. Daley about what she sees
going on in the economy. As a participant in the Federal Open
Market Committee, she helped set American monetary policy that promotes
a healthy and stable economy. Today, of course,
she will discuss, among other things, the Fed's role in combating inflation
at this critical time and navigating the choppy economic waters
of this country as we continue to emerge
from the pandemic. A brief about bit about Dr. Daley Dr. Daley began her career with the San
Francisco Fed in 1996 as an economist specializing in labor
market dynamics and economic inequality. I think that's about the time
that we started working together, Dr. Daley, when your predecessor, Bob
Perry, was chair of the Bay Area Council. She went on to become the bank's executive
vice president and director of research. Dr. Daley earned a bachelor's degree from
the University of Missouri, Kansas City, a master's degree from the University
of Illinois Urbana-Champaign and a Ph.D. from Syracuse. And all of this, I believe, after earning
a high school GED in Baldwin, Missouri, since taking office in October 2018, Dr. Daley is committed to making the San Francisco
Fed an even more community engaged bank that is transparent and responsible
to all of the people that live here. She works to connect economic principles
to real world concerns and is a sought after speaker on monetary
policy, labor economics and increasing diversity
within the economics field. Dr. Daley is going to give some comments
from the podium here about 20 for about 20 minutes, and then we'll have a discussion
that will include your questions. So for those of you here in person,
please write them on the card that's on your chair
and they'll get brought up to me. And for those of you online, please
post them in the YouTube chat feature. Questions will be brought to me
and the Q&A portion after Dr. Daley speaks. So with that,
Dr. Daley, the stage is yours. Thank you. So nice to see you next to. So I am absolutely thrilled to be back in
person. Zoom is great, it's amazing,
and for everyone watching on YouTube. Welcome and for everyone here, I really enjoy
seeing faces in the audience, so it's way better than looking at a tiny little lens
with no faces behind it. But what we're seeing today in the first,
I think of this thing that I've done where I'm in person in
and streaming at the same time is what our new future holds. And so I'm delighted that we're here today
and thank you so much for having me. Now, let me begin by just saying something
that I think everyone will recognize. We are in unusual times
the very worst of the pandemic looks to be behind us and this is nothing
short of a welcome relief. But the impact of COVID and its threat to the economy
continued to delay the recovery. Worse, perhaps, is that we don't actually know
how long any of this will last. So we are in flux limbo
waiting for the pandemic to be done so we can move to
whatever the new future holds. But waiting is hard,
and I think most of us know that, and it's very tempting to want to act, to want to respond to what we see
before us today, a visit. It is as if it's a clear signal,
a definitive signal of what we will see tomorrow. Action, after all, feels empowering. But feeling empowered and empowering our future are different things. Acting without clarity is risky. It can lead to decisions
that have unintended consequences, boxes into outcomes and make the flux we feel today,
which is quite uncomfortable feel. Or become a more persistent part of our
economic future than it needs to be. So today,
that's what I'm going to talk about. I'm going to talk about
how this recognition that we are living through
ongoing uncertainty about the economy and about the pandemic affects
monetary policy and affects, importantly, the Federal Reserve's
dual mandate and how we accomplish it. The mandate for price stability
and full employment. Importantly, I'll talk about why the FOMC
is taking a vigilant approach, but a measured approach as we navigate
the long tail of the pandemic. Now, before I go on, I have to remind you,
I want to remind you that the views I expressed today
are my own and do not necessarily reflect anyone else's views
in the Federal Reserve system. So let me start by saying,
where are we today? Let me take stock. So here's the headline. In case you're unaware, inflation is high. Both overall and core inflation have been running
well above the Fed's 2% goal. I think something we're all aware of
and in fact, overall inflation. The headline numbers
are at their highest levels in 30 years, with price increases in some sectors
hitting simply eye-popping rates. The magnitude
and the persistence of these readings has come as a surprise
to almost everybody, but it's actually not that mysterious
when you think about it . Standard economic theory
tells us that inflation occurs when demand outstrips supply and prices
rise to adjust. So the question then is less about
why it's happening and more about how long will it persist and importantly or specifically,
will it last beyond the pandemic? And there are good reasons to think that it won't. I want to focus on three of those reasons,
in particular, two for demand and one for supply. So let me start with demand. COVID has changed
how and where we spend our money. Public health policies aimed at stopping
the virus, including lockdowns, social distancing, mask wearing,
have kept us from going to the gym, seeing a movie, traveling
and using a host of other services. So we've collectively taken to the internet
and we've worked hard to recreate our normal lives,
the ones we love at our homes. Now in economics parlance,
which is my training, we have simply rotated our spending, rotated to buy an outsized
number of goods, things like home exercise equipment, video games, lawn furniture, cars, why we lift behind and keep
leaving behind our spending on services. These individual actions that I'm sure each one of you has taken,
I know I have. They feel familiar,
but they also add up collectively and show through to the aggregate data. Over the past 18 months since COVID hit our shores, consumer
spending all of consumer spending togethe has been historically tilted towards
goods, things and away from services . And something this is something I'm sure you recognize every day
you open your front door and you see the mountain of packages
that have stacked up. The result, of course, is higher prices for a range of things
than we want more of today than we usually do as we manage our way
through this pandemic. Of course, another usual thing,
unusual thing that's less well known, but this very unusual characteristic of the pandemic is
that people have money to spend. Some of this, of course, reflects
the fact that the pandemic has been a highly focused sectoral shock, devastating certain parts of the economy
that rely on in-person contact while boosting other parts of the economy
that enable working from home
and connecting through technology for workers in these thriving sectors, these ones related to technology
and working from home. Incomes have stayed study
or even grown, supporting spending as the economy has struggled. And here's another part of it, though, for other workers,
those that were negatively very negatively affected by the pandemic,
financial challenges have been eased with unprecedented
fiscal support. Cash grants,
expanded unemployment insurance, child tax credits
all help those who have been hardest hit maintain their financial well-being
through the worst of the pandemic. And this is not only benefited these workers and households,
which thankfully it has, but it's also kept overall consumer
spending in the United States high,
even as the labor market has struggled. So in other words,
if I want to just underline and highlight that consequence
during the worst economic shock in U.S. history demand, consumers have remained resilient . Unfortunately, though,
the resilience of us as consumers has not been matched, the result by the
resilience of supply and supply chains. They've been far less robust. COVID related
related disruptions have episodically but regularly depressed production
across the globe, city by city. You just opened the paper,
you see the latest one city by city plans have shut down
or reduced their shifts to curb the virus And these disruptions, these episodic
but frequent disruptions have accumulated and snowballed, leaving many goods in very short supply. But even when goods are available,
when production has come back, it's been very hard
to get them delivered in a timely way. Shipping containers are in the wrong
places. Trucking networks are lagging,
and ports across the globe are struggling to clear the backlog of ships
waiting to dock and unload. We're actually not out of the woods
on this front yet. With lagging vaccination rates
in many countries, shutting down is still often the best way to fight surging infections. These policies, while necessary to curb COVID, leave a long imprint. I'll give you an example. A port closure in Vietnam in August. So several months back. To curb delta infection, surges continue
to be felt up and down the supply chain. The supply chain is in many ways fragile. one disruption creates
a ripple effect that lasts a long time. So if you put all of this together, it's very easy to see why
prices are rising. Consumers with income to spend have demanded more goods
than they usually do. And suppliers have struggled to keep up. The question, though, is what does this mean
for inflation in the future? We understand
what's driving inflation today, but what does it mean
for inflation in the future? Well,
given the factors boosting the prices that we see that I just described,
I expect a moderation in price pressures
as the pandemic recedes. Consumers will likely pivot back to normal bundles of goods and services,
spending some time with new home entertainment centers and gyms,
but also going to the movies, concerts, dinners
and hopefully if we're really lucky. Holiday parties. And similarly, though, as fiscal support
starts to roll off, many households will move through that savings they accumulated
in the income that they were given. And it will drift back to more
historically typical levels. And this will be another factor
bringing demand and supply in sync with two factors
bringing demand back in sync. But I also think supply will get back
in sync. Production and supply chains
will be able to catch up and repair. And that's will reduce bottlenecks
and ease the pressure on prices because remember, inflation is high because supply
and demand are out of balance. So as we get demand to ease up
and be more in synchronization with the economy and supply catches up
as they work through the backlogs, then we'll have the easing
of the price pressures that we see. And that's my modal outlook or the thing
that I think is most likely to happen. When these
things happen, then we'll return to the dynamics that typically drive
the economy, the normal things we're used to a strong economy brings
more demand, brings more supply and things are in synchronization
and move together. But what about the labor market,
that's the next natural question you might ask, because after all,
the Fed has a dual mandate, price stability
and full employment. So what's the future of the labor market? Well, on one hand,
the labor market looks tight. Unemployment is down. Job openings are at all time
highs and wages are up in a whole variety of sectors. If you walk anywhere
in the United States, basically, but certainly anywhere in the Bay Area,
you see help wanted signs everywhere and workers are quitting
jobs at record levels. So if you backed up from that,
that description of the data, what we saw These are things
we typically only see when we're very nea or even at full employment in the economy. But then you have the other hand. And it's a really important hand. We're still over 4 million jobs
short of our pre-pandemic peak. 4 million fewer jobs in the United States
than we had before COVID came. And that doesn't even count
where we would have been if you just extrapolate out
and ask if COVID never had occurred. That's a number closer to 6 million
missing jobs. Now, some have speculated, and you may have read this, that
this is just a new normal. This is a great epiphany
that work isn't all it's cracked up to be So maybe we won't work at all. We'll just keep. Not working. Well,
it's hard to argue against epiphanies, but I'm going to offer a few alternatives. COVID continues
to affect schooling and child care, workplace safety, transportation
and even the ability of businesses to offer predictable
and consistent hours in pay earnings that occur each week
that people can depend on. Faced with these barriers,
some individuals, considerable number of individuals,
especially women and older Americans, have opted to leave the labor force
altogether. Others have stayed in the labor force,
but continue to search for jobs
that feel safe, predictable, convenient or simply better
suited to their aspirations and interests. These behaviors,
frankly, are understandable, they're understandable reactions
to an unprecedented shock. But as COVID recedes, I expect people to settle in to land a job
they want, return to the labor market to support their families,
build careers, have the kinds of economic participation
that they had prior to the pandemic and history. I always like to go back to history
and evidence. History supports this prediction. Although labor force participation,
how many people want to participate tends
to lag behind the unemployment rate. Unemployment falls
and then participation recovers. Time and again,
we see that workers come back. We saw this in the last expansion and in most expansions before that. So the bottom line here
is that it's too early to count out millions of people currently
sitting on the sidelines. We don't know what they want to do. If I step back from the data I just described on inflation in the labor
market. Here's my summary. Although inflation is high
and the labor market seems tight when we dig into the data,
look beyond the averages or beneath the averages to see
what's really there. We come away with the idea that at least some of this reflects
the ongoing effects of the pandemic. To me, this makes it much, much harder to conclude right now that we are facing a completely new world
that will persist once COVID is behind us. Of course, though, if you think about it. The truth is,
none of us is completely certain what the next six or nine months will be. We don't know how the economy will evolve. We can't really say for sure
that the eye popping rates of inflation won't leave a more lasting imprint
on overall price setting. And we don't know for sure
how long it will take for sideline workers
to come back and participate. And this, frankly, is a hard place for policymakers,
monetary policymakers, in particular, as monetary policymakers, we have the tools
to support the economy if it needs it. And we have the tools to beat back
inflation and cool the labor market. If that is right, that's required. We know what to do. The question is which of the scenarios
will turn out to be true? And so in the face of this uncertainty, many have argued
that we should act preemptively. We should get ahead of things
rather than fall behind the curve. And frankly, this logic has some appeal. If the high readings on inflation
last long enough, they could seep into our psychology and change our expectations
about future inflation. Households
would then expect prices to rise and they would ask for higher wages. Businesses would give higher wages,
but then raise prices to offset those increases
and then higher prices to consumers would cause them to ask
for even higher wages. And on and on this would go in a vicious wage price spiral
that would end well for no one. And this
is nothing short of a troubling idea and would be a deeply disturbing trend
should it occur. But so far,
and this is the important part, there is no evidence, very little evidence
that this is happening. Despite the large jumps in measured
inflation inflation expectations, the psychology in the longer
run remained relatively stable and well anchored around the Fed's price
stability goal of average inflation of 2%. So this suggests
that households and businesses sitting out there watching the economy
evolve expect inflation to moderate at least somewhat as the global
economy emerges from the pandemic. But most importantly, for those of you
who think about the Fed, Alan, these readings
suggest that people understand that the Fed is committed to action
and has the tools to act if inflation begins
to look more persistent. But of course, that brings us to the next thing
that people ask me. I'd like to share
what people ask me with all of you. The next question I get is but Mary. Why not take out some insurance? Why not raise rates anyway preemptively to make sure that a painful inflation
spiral doesn't occur to get ahead of psychology? And the main answer is this preemptive action is not free. Like all insurance that we buy,
there are costs and policymakers, monetary policy makers, we must balance those costs
against the risks of waiting. Monetary policy is a blunt tool,
and it acts with a considerable lag. So raising rates
today would do very little, almost nothing to increase production. Fixed supply chains or stop consumers like all of us
from spending more on goods than services But but it would absolutely curb demand twelve to 18 months from now. And then should the current high inflation
readings that we see and worker shortages
that we worry about turn out to truly be COVID related and transitory, higher interest rates
would be Breitling our growth just when the economy needs it
the most slowing the economy when millions of sideline workers
are ready and able to come back. And against this calculus, I come down on the side of waiting
for greater clarity. The Fed, we are well positioned to act should inflation
begin to look more persistent or the labor market
look to be at its full employment level. It is much, much harder
to unwind a preemptive action, a change in the interest rate
that bridles the economy too quickly. Should we turn out to be wrong? The final thing I want to talk about on this front
is that. Not now for interest rates doesn't mean not ever for policy. In fact, earlier this month, the Fed announced that we will reduce
the pace of asset purchases, which are a key tool
in our toolkit of support in response
to substantial improvement in the economy And this tapering, as it's called,
will slow the amount of support we are adding to the economy
and allow it to function more on its own to get its feet more under it
without the, you know, extreme accommodation we've been offering. And over the next several quarters,
as this tapering completes, we will watch vigilantly
to see how the economy does and whether inflation
eases and workers come back. As we get a clearer signal, then we stand ready and we'll be prepared
to act continuing to provide support if support is with the economy needs
or to remove support. If it's true that we find inflation
in employment where they need to be, we will do what it takes to ensure
that the economy settles at a sustainable pace
that delivers ongoing growth to every American. So I'd like to leave you
with just a few concluding thoughts. As a policymaker and as a person and anyone who knows me knows this,
I'm biased toward action. I like to solve problems. So I completely understand
the desire to immediately confront the challenges in front in front of us
to actually try to offset them. Action gives us a sense of agency, especially the time when it feels like
we have none or very little. But not all motion is forward motion and reacting in response
to things that aren't likely to last or move us farther
from not closer to our goals. It's extremely easy to mistake motion for competence or action for attention. But I think we all know as we sit here that running headlong into a fog can be costly. So in the face of the unprecedented
uncertainty about the evolution of the economy
that we face, the best policy is recognizing the need to wait to gain further clarity about what our real future holds. And all this,
although this can be hard in the end. Patience is the bravest action
we can take. Thank you. Very instructive to hear your view of where we are, what we know
and what we don't know, and importantly, at least for me, it was all in plain
English, so it was helpful to understand. So just a reminder for those of you in the audience or online that we will be
taking your questions as well. So if you're in the audience,
feel free to fill out a card. And if you're online, please put it in the chat on YouTube,
and I will start the conversation with Dr Daly and then take your questions as well
along the way. So I know we have a very informed
audience here and online who are deeply following every move
that the Federal Reserve makes and care a lot about interest rates
and all those sorts of things. But before we get to the substance of what
you're talking about, I'd love to just I know you don't wake up every morning
and spend all of your time thinking about,
do we raise rates this month or not? What does the president of the Federal
Reserve of San Francisco do? Oh, that's a great question
and one I get asked a lot. So let me let me tell you a little bit
about what I do and why I might have one of the best jobs
in the world. So every day, so we have this banner
at the front of the lobby and when people can come back to our bank,
we'll see it right. And the banner says our work serves
every American and countless global citizens, and we have committed
to the idea of unreserved opportunity. That's an opportunity
that's not reserved for very few. It's not reserved for a certain segment
and and that's important to us. So then how do I do my work with those? Are our goals and those is our mantra. Well, it's really simple. I have really three important jobs. I lead a bank of about 200 200. If only 200,000 2000 people, 2000 people and each one of them is committed
to the mission deeply. But also we're looking at how do we work together,
how do we collaborate, how do we go out during a pandemic and continue
to serve the American people, whether it's getting cash
to where we need it to be supervising banks, getting PPE loans, facilitate it
or doing monetary policy? All of this is for the American people,
but we we are leading a bank. The other thing that I get to do, which is really terrific,
is monetary policy thinking about where
their interest rates going. But it's not that I get up every morning
thinking about the interest rate. I get up every morning thinking about people in my community
who are struggling to find workers. And then I think of the people who don't
feel comfortable going back to work. Or I was at Walgreens the other day
and I'm standing behind a woman who had to put things back out of her basket
because she used goes to Walgreens once a month and things have risen in price
and she only had her money . And that was a painful thing to witness. I've actually been in that situation,
but that's who I think about. And then I think about the countless
moms still at home who really can't come back to work yet,
but they want to. So I'm trying to balance those things off
so you can see just from this description that my job is an amazing one because
every day I have the privilege of serving And that's really how I think about it. I hope you can hear the passion
in my voice. I like every single aspect of my job,
and I don't do it alone. You know,
I have those 2000 people working with me who are probably all watching to see because it's
my first in-person live event. But they're really committed
to making sure that we do all of our jobs effectively and well
and with with love and dignity, basically So that's in a nutshell what it is. I can you can always come with me
and have an hour by hour addition is less exciting than what
I just described, but I'm happy to do it. I can wear one of those head cams. That's great. So you have all kinds of sources
of information for how you think
about those issues of serving. Some of them are formal
economic statistics and in a number of economists
that work for you and for the Fed overall,
who are bringing that to bear. But it's also observations
that you see from being out. And, you know, San Francisco's
not like the rest of the the California,
let alone the rest of the country. So how do you
how do you process that process that? And what are the things that you look at what really drives
your view about what's going on? Well, that's a that's a great question
and one of the things that we've always done at the San
Francisco Fed and every other year, twelv reserve banks, twelve regional feds and in every president
and every place in all the teams there would be
doing these types of things. So we obviously look at the data. We have all the newest data. We're looking at
deeply thinking about that, but that's never been sufficient. And so we also talked to contacts
and those contacts are business leaders, community leaders,
people who are running not for profits all the way up to people who,
you know, run the biggest companies in ou in our country
and the biggest companies in the world. And that's always been the case. But the pandemic made that even more
so because you need this on the ground information. So I spend a lot of my time
virtually as it. Turns out now. But doing SEO roundtables,
community leader roundtables, talking to populations,
African-American populations, Latin next population,
Native American populations. Leaders in those communities,
what do you need? What do you need? We're doing an event
this week on child care. How important is that
for the infrastructure? And it really is this combination, as you said,
you have to source from a lot of places, but you're
you're never in a didactic conversate. You never just let me tell you what we do. It's really
let me hear what you have to say and let me understand where
those those issues and pain points are. And I'll give you a real world example. We had teams out doing this virtually. Of course, when we were rolling out, the government was rolling out the PGP
program, the Paycheck Protection Program. But the Fed was facilitating it
through the PGP OLAF, which is the Paycheck
Protection Program lending facility. But we sent our bank supervisors out to ask community banks, larger banks,
what's getting in your way? Which challenging
why can't you get the money you need? Then we would bring that information
back in and we change the program. So it evolved in real
time as it was rolling out, many compared it to building an airplane
while you're flying it. But I think the real issue is
we were able to get out to our communitie where we had relationships already
and then source information in real time that comes back and shapes
how we we craft our programs. And that doesn't
stop it at those programs. It goes all the way to monetary policy. You mentioned in my introduction
that I'm committed to us being a community engaged bank,
but that's what it means, right? We we only exist to serve. And if we don't ask
the people we're serving that we actually can't ever do a good job. And so that's really the part of it. Data driven and people dependent. So the 12th District is different from other districts and a lot of ways. Are there particular perspectives or early indicators or anything about where you are
that you feel is different than and helpful
for those conversations when you get together
with your colleagues? You know, the interesting thing is that
you can point to things where we lead. You can point to things
where we lag in the district. So I have the 9:12 district is the nine
Western states, a it's the largest geographic area of the regional Fed's
largest population, most output. All the things
you can calculate to say rank one. But the most important thing
about all of this is that if you take the 12th District,
the nine Western states, you have a really good sample
of the entire nation because you have businesses
that are resource dependent. You have businesses
that are completely technological. You have businesses
that are part of the thriving community, the businesses that I talked about
when I said technology and work from home You know, Silicon Valley is
is generating a lot of that capacity. But then you have a travel
and tourism industry in a farming industr and other things that have been
just really disrupted by the pandemic. We have, you know, problems
with getting public health, access to people, to populations of low
and moderate income communities. And then we have one of the highly most
highly vaccinated educated populations in the in the country. So we have this mix and what I bring back
to my colleagues at the FOMC and what I really can capitalize on
is we see everything. And so it's really about it
helps with tradeoffs because ultimately, policy usually
central bankers are not very popular. And the reason is
because we have tradeoffs. We're constantly facing tradeoffs. But making sure that those tradeoffs
don't forget whole swaths of the population that we serve
is the really important aspect of it . And I feel like that's my special value. Add by having the 12th District is
I can talk about everything and everyone's experience
in a way that's really equitable
and allows us to make optimal decisions. Great. You mentioned in your talk that you like to also look at history
and different recoveries, and every recession is different
and you've been at least since you've been here through three
very different ones completely. Exactly. My own little history book at this point
where you go. Hopefully the future will have a different
one that's not as challenging as the last ones. But is there anything in history
as we are in this downturn and recovery that really provides a perspective for you
that people aren't paying as much attention
to what you think they should? You know, one thing
that's thanks for that question, because I've been thinking a lot
about that. You know, in many ways
you think this is an unprecedented shock. We haven't had something like this since 1918, and in 1918
we didn't have a global economy, so we weren't so dependent on how
interrelated we all are across the globe. And that might make
you think we just don't have a playbook. We don't have. What can we posit? Simply use from other expansions
or other recoveries or other recessions to learn here, and I think that's a mistake to think that, you know,
I know it's for me, it's tempting to think of this in precedented,
but but what I really think about it, what we have is a series of dynamics
that have occurred in the economy that we actually have
historical reference for. And one of those historical dynamics
that gets almost no play ever is that we have as a central bank
as frequently taken the punchbowl away too quickly
as we have left it on the table too long. And what that means. And I mentioned this in the speech. It's not about a punch bowl. It's about millions of workers
who don't find themselves with employment when the economy is strong enough
to absorb them. In this case,
it's safe enough to come back. And so a key lesson
I recognize each and every day that is I think about these these decisions
to make right now is that we have one of the lowest
labor force participation rates in the industrialized world,
and now it's fallen more. Other countries are coming back
faster than we are to work. And I really think hard about what would it mean
if we lock away that potential by sidelining them before they're ready
or able to come back? And that's a history lesson
that doesn't get as much play as the seventies inflation difficulties
and the Volcker disinflation gets. But boy,
is it an important part of our history that we can learn from,
and I really think about it every day. Right. There's a lot of questions coming in, and I'm going to work a lot of these
into the to the questions that I asked Dr Daley as we go forward. But a reminder if you're online,
put them on YouTube and if you're here, put them on cards
and I'll get to as many as we can. So as you said, a lot of the the media
attention headline conversations around the Fed are about inflation,
but you have that dual mission. And as you described,
we've got a workforce participation challenge that there are structural
things that make it change, but things that are specific to the pandemic. I know
these are not Federal Reserve tools. You have a lot of tools,
but you don't control the labor supply. We don't. What what are the things
that we should be thinking about to try and beyond what the specifics of the Fed
can do to help improve that labor force participation
and have more people have opportunities? Sure. And let me start by saying that
while we don't have, as you mentioned, we don't have the tools to change
labor supply. We do have a very important tool
to assist its recovery and that is running and a sustained
expansion, a sustainable expansion that gives people
the time to come back in. And we saw this in the
in the last expansion before the pandemic that, you know, if you remember we
we took two rate cuts in 2019 because the economy
was facing some headwinds and and we recognize that the time we might not be at full employment,
we needed to learn about it experientially as opposed to thinking that our models told us
what the exact number is and and consider that done. And so I think that's one of the lessons
the Fed can do and we can contribute run a sustainable expansion so that people
have an opportunity to fully participate. But we won't be able to solve
all the issues or even most of them, because many of
these things relate back to. Let's start with and I. I would call this an economics, labor
economics work infrastructure, but I know infrastructure people think
roads, bridges and things like that. So let me just call it the things
that are important for us getting to work So what are important for us
getting to work well for parent child care, for people, helping elderly parents, elder
care for others, transportation networks, safe workplaces,
those are all essential ingredients to having people feel like
they can come back to work. And did I forget schools, schools
being reliably in session? Vaccinations for young children
could be a game changer, an important one because, you know, it's not. We've opened schools, but yet, you know,
I know many parents, here's what their life is like every morning
they get up. I was actually on the phone
with the person who hopes to have the speechwriting. And she said, I got to get off. My daughter's school is calling. And I said she and I think both had the collective,
Oh no, I hope it's not a COVID exposure. It was just a toothache. It was fine. Kids could stay in school. But the bottom line is every parent lives in that fear
that today is going to be the day when one of my kids comes
home is home schooled and the other kid has to be picked up and shuttled around
to soccer and everything else. So those are hard things. And if you're a mom or a dad
whose principal job is caring for your child,
you're the principal home care, then you're like struggling
with a lot of things. So all of those things matter
for how quickly the labor force can recover,
and those are pandemic related. But there are other things that are not pandemic related,
and those are things like, you know, child care, access to affordable
child care that's reliable. And we are unfortunately lag
in that capacity as an industrialized nation
and finding out what the fiscal agents, congressional Congress and the administration
will figure out how to do that. But the important thing is that is it
that is a good tool for getting everyone the ability to make a choice about
whether they want to work, not be told they have to take a certain path
because they don't have access to this. Another important one
that we always talk about. But boy, you can't talk about it enough is we have to educate our population
so that they can take the jobs we want. And I've been on that bandwagon
for a long time, but I now have a new one I'm going to add to it. If you're a firm out there, are you listening
and you run a firm? It's really an important time for us to
recognize that we have historic deficits and how many people have credentials
like a college education or above? And why can't we, as firms actually ask have we over
credential ized the ability to work? Have we made this so hard for people
who are actually quite capable and have a ton of skills
and lots of energy? And so let's rethink whether our job
really requires a college degree. Maybe it just requires a set ambition. It's a trainable skill,
and if you're dedicated, you want to work We've got room for you. I know I'm thinking about that as a
as a president of the Fed. I know we're thinking about it
as the Federal Reserve system. But what if every firm took the moment
of the pandemic to think about that? That's a structural thing
that that anyone can change, right? So some things need
the federal government. But these things,
they just take businesses, right? So you mentioned infrastructure
and you're obviously have a fiscal partne in a lot of these questions
about where the economy's going. As we all know, the president signed
the infrastructure bill yesterday. What influence is that going to have on your perspective
of the economic outlook? And then I'm going to ask you the next question,
which is on the build back better. What what do those what what's
your perspective on what that might do? So let me say that, you know,
we don't have any role to play in the fiscal negotiations. I actually don't think
don't talk to people about those. And so I'm not speaking
with on the specifics of the infrastructure bill or build back
better, but I am going to speak from a person who studied economics
my whole career . And here's what we know,
and I'm going to reference history again. But I think it's also just actual common,
common sense. Everybody can think about this
if we have better roads, better bridges, reliable
air traffic networks, reliable, you know, distribution networks,
we are better off. We're more effective. And importantly, we're more competitive
with our global partners that have spent more on infrastructure
to keep their infrastructure up to date. So infrastructure is generally a win
because it it you don't build a bridge or a road overnight,
so it doesn't typically push inflation up you know,
because it's not crowding things out, it's going to take place
over a number of years. But it absolutely puts things
in the economy that increase our productive capacity,
make us more productive. That's the pie expanding for everybody
rather than, you know, something where we're just taking from one
that we're not building anything. It's a good investment. So I expect this to help
and to actually increase our productive capacity in our growth
potential going forward. OK, well, a lot of questions here about the level of both monetary and fiscal stimulus
and the pace and scale of that. And is that an important element of what's driving inflation beyond the elements
of the pandemic that you mentioned? And how should we think about the level of federal support and deficits
as you look forward? So I want to separate so, you know,
as an economist, you really have to have you have to be a card
carrying deficit and debt hawk. You just mean
they won't let you have the degree. So you just have to start with that. And what's really important is
this was a historic shock. A pandemic is a really bad thing,
and we hadn't had one since 1918. That's 100 years or more ago. And the idea
that we would just leave people behind because we are afraid
we increase the deficit. That's I mean, I grew up in the Midwest. That's like eating your seed corn. That's like sort of saying, Well,
I'm going to be so short sighted that I'm going to say, Well, that might
have this, but then I lose population. I lose people's ability to have financial
well-being and keep their livelihoods apart from just being sort of hard
to grasp morally or ethically. It actually is terrible for the economy. So the unprecedented fiscal support,
the unprecedented monetary support is something that
I think history will judge us well on. We will be on the right side of history
for that. The question, though, is, you know, we're all trying to build a bridge
so that we get through the pandemic and we get people to the other side
so that the economy can pick up. And we're going and we can discuss debate, argue
about whether the bridge was too long. And now there's a little too much fiscal
in there or monetary or the bridge was too,
you know, some would argue it's too short What I would argue is this we haven't yet
even seen the tale of Delta go away. It's still affecting global economies. We, fortunately, are moving beyond it,
which is why you're able to come here. If we were still had a surging delta,
we wouldn't even be here. So we are fortunate,
but we are also unique. You know, if you go other places
in the country, you do not see the same in the country and also in the world,
you don't see the same. Sort of movement through it. And so it's really hard for me to argue
the bridge is too long when so many people feel still disrupted
by the pandemic. Will we have to pay for these investment,
these this spending going forward? Absolutely. But that's why
pivoting from support to investment so support comes in the way of cash
grant unemployment insurance aid. And now we see the economy picking up speed and can absorb those individuals
without that support. But we're pivoting to investment,
which is infrastructure and other things, which actually says we're going to build
our productive capacity out. We're going to come out of the pandemic,
hopefully with greater potential
than we went into the pandemic with. And that would be a great outcome. It still has to unfold, but that would be something that I think
all of us would benefit from and be proud of in the end. So how do you think about it and how should we be
discussing that impact that this environment has had on asset
prices, the stock market, real estate prices
feel like they're out of control again. How how should we be thinking about that
in the context of this uncertainty? Sure. So the stock market is euphoric
and many people have benefited from that. Anybody who's got a 401 K or
other investment has benefited from that. And this is not uncommon
when you're seeing people are pretty optimistic
about the future, right? Because when we get through the shock,
we think we have a lot of potential. And that's partly related. There are many things that drive
the stock market, and I'm not going to talk about
all of those things. I'm going to talk about the things
that seem more fundamental to me. one fundamental is that a pandemic
is different than even a financial crisis It doesn't really destroy
productive capacity. People don't get destroyed in terms
of their their livelihoods went away. We had that fiscal support. Businesses don't lose their their balance
sheets, they don't lose their buildings. We didn't destroy things. And so we're waiting for the pandemic
to work itself through so we can pick back up and go,
and the stock market knows that. And it's
why the stock market is it's supportive. It knows that monetary and fiscal
authorities across the globe are helping get people through, and it's betting that
people are going to be ready to go once the pandemic is behind us. And if you look at consumer demand,
we're ready. We're ready to go. Right. And it's just about supply catching
up. So. So I think that's where the some of
the euphoria of the stock market is. You know, I personally,
when it gets really euphoric, I think maybe there were all like
too enthusiastic, but it's better than being less enthusiastic,
I guess on the housing. This a very different thing. Housing is completely different
than it was in the financial crisis. And let me talk about two completely
different things about it, right? one is households are in very good
position. Savings rates are high relative
to historical norms and balance sheets. Household balance
sheets are in very good shape. People used some of the money
that they either saved not traveling if they were working
and or that they got through the the the assistance checks to pay down debt
or to not take on more debt. This is a good thing because when households are
well-capitalized and their balance sheets are in good shape, it means we're much
less at risk should a housing. Should the housing prices slow down
or values come down a little bit? So why do we have these elevated prices
while people have money and the interest rate is good, mortgage interest rates are good
and people want more space. So we all had to go home and live in
whatever space we thought was enough prio to a pandemic when we were working at home
with all of our family members . And for many people, they decided
that was not enough space, that a studio apartment
with two people in a baby, two adults and a baby just isn't enough
to actually manage your life. And so people started trading up,
getting better, getting bigger places. Many people and you saw this in 1918
really about 1918 is so informative in 1918. Here in the Bay Area, people, you know, think about how undeveloped
we were at the time. People fled the city to move out to, you know, past Oakland
and into Contra Costa, right? And then when the pandemic ended,
they came back for the roaring twenties to be in the cities
where we've done the same thing, right? We're just doing it
even more far flung places. So we believe we pick up out of the city
and we move. And in the depth of the pandemic,
I would drive into San Francisco to go to work at the office and you'd see
a not a single white in these high rises. Nobody walking the streets. No light signs. So it's nothing like people are here
working from home and now I drive in. Sometimes I have to come in at four
or five in the morning to be on East Coast Time and their lights everywhere
and people getting coffee and things. So I think part of what you're seeing in housing prices
is this need to get more space. But I'm already starting
to see some of this return to city living So, you know,
there's a normal balancing things there. But Lenny, you know, you and I have,
and I hope you will call me Mary. I'm the doctor daily thing. I actually told my team when I first got the president,
they called me President Daley. I said, Well, you can call me Mary. And so then they started calling me
President Mary. So I would just say, you can go with Mary. But the thing we remember from way back
when we first met is that housing has always been a challenge
in the Bay Area and in most American cities,
we have too little housing that's affordable for the populations
that we need to to serve. So that's a perennial issue
and one not just specific to the pandemic And we need to tackle it. Okay. And you mentioned in your talk. And in response
to one of the earlier questions that we did have some history lessons
from 1918 around the pandemic. I hope we have a different
kind of roaring twenties where people are in fact out
and spending money on services, but that we don't have
the downside Adobe to completely. But one thing that you said,
we didn't have that. That is now
is we're clearly a global economy, right? Talked about the supply chain impacts. Different countries have very different
levels of response to COVID. There have different, somewhat different,
although mostly aligned, stimulus support and monetary policy, but we're still in a very uncertain. Global economy. So how does that influence the
your outlook and questions about how we should
or should not be responding today? Absolutely. You know, I didn't spend a lot of time talking about the global economy,
but when I said that, you know, we have the tools,
we know the framework, we actually understand
underlying economic dynamics. But what's uncertain is. It really comes back to as goes covert,
so goes the economy. And you can double underline
that when you say as goes COVID, so goes the global economy. So the uncertainty about how the next six to nine months will look
is, is what is PI? And it's high, in part
because we don't know in the U.S. how inflation in the labor
market will shape up. But it's high globally because we don't
know how cove it's going to shape up. Is Delta Plus going to be a real thing? And is it going to send another derailment
to the the fledgling recoveries
in other countries would further disrupt supply chains
or keep people from coming back? And you know, my when I ever say anything about what people should do to help the economy,
I say this. Get vaccinated. Find a way to get the COVID
pandemic behind us. That's our path.
And that's the path of globally. It's the path nationally. And in the meantime, you're right. I mean, I the thing I would say
is you're absolutely right. We have a lot of uncertainty globally,
and that's the wild card. If globally we can get COVID behind us
or at least find mitigation strategies that don't shut down factories
or don't result in people having to completely curb production
or disrupt supply chains further. Then I have optimism
we'll get through this. But if we don't, then we will have
will be sitting six to nine months from now in a very different situation,
having a different kind of conversation. I hope that COVID
every forever isn't our new normal. I think we can beat
this, but we have to do it. one of the questions here that was about
why is inflation so much different than the United States than
in other countries around the world today You know, that was true. In fact,
my my economic research colleagues, they they were telling you, we look we
look at the data constantly, as you noted And so we're looking at inflation in
other countries and we seem to be higher and then not so much. So inflation in other countries
is also picking up because ultimately all countries
buy and sell goods from each other. And a supply chain disruption
in Vietnam affects the United States and affects Germany. It affects, you know, Singapore. It doesn't matter where you are, you're
going to see these things come through. And so in part, Americans have been eager to get out more eager,
I think, than other countries. And so the demand and supply challenges
emerge more quickly. But now everybody wants to get out
because people are tired of being locked up and as they want to get out
and demand surges in those countries. Supply is still lagging
and we find ourselves with inflation in a variety of places where the U.S. has been pretty different
is in the response of labor supply. And I think part of that has been that,
you know, other countries have opened their child care resources more quickly than we have,
and ours is mostly in schools. But after care programs, for instance,
in the United States have really not opened fully
and in other countries, they've been more responsive as Kovic rolled off. And so that has been a difference. But in inflation, other countries
have caught up and not such a great thing if you think about that,
but they have caught up to us . OK. I read this morning
that the backlog of ships at LA Port were down 29% from the peak,
so we may be working through some of these things. But as you said, there still can get another shock someplace else
in the world that flows through that. Absolutely. Do you think that we're going to have
a dramatic reconfiguration of supply chains and business
as a result of this? So, you know, this is fascinating to me
anyway, but I'm geeky. So but I'll let me tell you about it. So back in 2019 for the pandemic,
the end of 2019, I we were having our one
of our economic advisory council meetings which is, you know, CEOs of major
companies, medium sized companies, smaller companies,
and they were all talking about how they were going to have to rethink
their supply chains because of trade policy. They were really worried
that they had over invested in, say, China
and underinvested in finding other places So they were talking about the resiliency of supply chains
and how efficiency is not the only thing. And then we got COVID
and that is locked in that mindset. So now I do see a reconfiguration
because I think that we we've come through this great era of. Efficiency, cost reduction, efficiency,
et cetera. And what businesses have learned suppliers
have learned is that if you drive it to the point where it's so efficient,
you've probably made it more fragile. And resiliency is important
because consumers get frustrated. You lose orders, you get frustrated,
you lose too much sleep or money. And so I really do think
we're going to reconfigure this. And you know, there's an issue about why is the Port of Oakland
under subscribed right now? I live in Oakland, so I look at it. They're not.
They don't have a backlog of ships. And why is L.A. completely oversubscribed
in a perfect world? This would just move around,
but these are pretty rigid, fixed things. And they do take this
sort of let's reconfigure and rethink the supply chains,
find different ports of call. Maybe we'll move back to smaller ships. You know,
a big ship is an efficiency ship, but a bunch of smaller, more nimble ships
that can go to different ports. That's a resiliency future. So I know the Port of Baltimore
is really working hard to try to get people to go all the way around to Baltimore
as opposed to stop in L.A. So we'll see. But I do. I absolutely think that that our
our evolving future will be one focused on resiliency, and that resiliency
will be a reconfiguration of the things that we've now come to
to know we need, basically. And as you well know, the long run drivers of the economy really have to do with
growth, have to do with labor force participation growth
and with productivity improvement, right? What's your outlook for productivity? And do you as the pandemic changed
your view of that? Or what do you think's
going to happen here in the next while? So we we were, you know, in 2019. So just to level set here, 2019,
the global economic forecasters,
people do projections across countries. While we're saying the same thing,
we're in a productivity growth lull. It looks a little bit more like
some of the slower periods of productivit growth, not the rapid growth
that we had in the 2000s. And we also have a labor force growth lull because of the aging
of the population across the globe. So that's why you saw that forecast
of potential growth across countries. No matter what country
we're all for coming in around, you know, 2% as opposed to four or 5%. And so then the question is, does the does
the how does the pandemic shape that? Well, this is why I was so focused
on labor force participation. We really have to kind of keep that going
because the aging of the population is a downward trend. But on productivity, I don't I don't actually know
how it's going to shape up in many ways. You would think that all this ability
to use technology will make us more productive, but that will take some intention, right? We won't be able to just hope
for the best. We're going to have to really work
for the best and and think, how can we be productive and how can we increase
productivity going forward? The key there
and I've done a lot of studies about productivity growth and you know,
you always have kind of these factors. You can invest in capital
or you can invest in people. And the real lagging piece in
the United States is investments in people,
our labor quality. That means the number of bodies times
the amount of skills that they have has been falling, lagging,
not growing as much as it used to and certainly falling
behind other countries. So that brings us back to what can we do,
what we can invest in our people, our our human assets are our best assets and in investing in them
is the sure way to get to good growth. Great. I mentioned in the introduction introducing you
and you talked a little bit about it, but I want you to talk a little bit more about
why diversity is so important to you, not just in the economics field,
but more broadly and in the economy. Yes, thanks for that question, of course,
and I'll make 22 points and let me start from the vantage
point of a policymaker, so. There is just a fact that who sits around the table
and who has voice matters for policy. Why? Well,
because people from different backgrounds different upbringings,
different experiences. They use a different lens
and they come with different lenses. They see different problems
than other people would see and they find different solutions
that other people would see. So the optimal policy requires the population that you have
as policymakers, the group of policymakers
to reflect the populations that you serve Otherwise they're missing groups and and we won't see everything
and we won't find solutions. And that's true for gender, race, ethnicity, diversity,
but it's also true for where you grew up. Did you grow up in a rural area or city? Did you grow up in like I did a lower socioeconomic class
or a higher socioeconomic class? Someone asked me, Do we need more of you? And I said, Well, no, we need more of lots
of other people to write. It's not just you make ten of me
and now you're better off. It's that I am. I have an important place at the table, but so do other people
have an important place at the table? And that's a critical reason
why I work so hard for not just diversity because that could just be an optical
delusion, right ? But not illusion delusion. And really, for inclusion, inclusion is voice and voice is what makes better
policy, better decisions. The other reason that diversity matters
and this I just worked with some colleagues of mine
in San Francisco fed to talk about is that our ability or willingness
are just inertia of tolerating inequity in our society
is costing us a lot in terms of the size of the economic pie
and how quickly it will grow. So if you think about who's sidelined
in the population, who doesn't actually work or have access to education, it's it's really in communities of color that that just ability or willingness
or inertia to tolerate that is costing us in terms
of how many people can participate in our economy
and make the pie bigger for everyone. So diversity is essential for policy,
but ultimately it's essential for ensurin that we can hand future generations
a better future than the one we inherited And as I get older, I mean, I always think
this is the right way to think about it. But as I get older,
I'm more pressed to recognize that I do want to give the next generation
a better future than the one I received. Otherwise, why was I here? That's sort of how I think about it. That's great. So as I'm sure all of you feel
we could talk to Dr. Mary about this, Dr. Mary. But we're unfortunately at that point in the agenda where we have to ask you
one last question. So I know you don't like to talk about this very much,
but I and others have admired your career and what you bring and the quality
of who you are as a person. But you know,
you have gotten to a point in your career not by somebody handing it to you. If you were advising someone,
if they would like to be a future doctor, Mary, what would you what would you advice
would you give to a young woman or a young man who's thinking about
pursuing something like you've pursued? So if? I asked the answer this question
a lot and and my team knows that if you want to give me
like the proverbial candy, you let me talk to young people
because I have so much faith in young people and what what I received
that really changed. Everything for me is people
giving me a hand up, people mentoring me, people being willing to just sit down
and and say, Hey, I think you can do this And when I boil all that down
and I think about what that really was, it was the gift of being able
to see something in myself that I mean something in me
that I couldn't see in myself. So the thing I'm going to talk
to every young person listening about is
the road is is always going to be crooked There is nobody, if you really think
of it, that took this straight path. It's very rare. So don't get discouraged. Don't find yourself, you know, saying, Well,
I didn't make this step that I wanted to. So now things are going to be less for me. But importantly, ask people,
ask people what they think because we all get caught up in thinking
less. We're capable of less than we really are. The number of times each day
I spend telling anybody, but young people in particular,
you're more than you think you are. You're more capable than you're
allowing yourself to be to see. That's really the gift. And for all you young people,
take that gift. As for that gift, want that gift? Let other people see futures in you
that you might not feel so comfortable in because it's not wrong to
be uncomfortable, but it's really can be Breitling to not own that possibility
and not try to run with it . And for everybody who's not young
who I'm talking to help out, you know, we all think that nobody
wants to hear from us, but they do. They absolutely do. And they more than now than ever,
I think, need us because there's an experience
of having lived a long time that allows you to think that today's
discomfort won't last forever. And if you can just share
that with people, that is in itself
an inspiration and helpful. So I do not get here by myself
and in any way and and I try to give gratitude
and appreciation to people not only in the universe, but I call them
every time something good happens. I said, See, I can see your DNA in that
in that decision I just made or in that opportunity
I just got. And that's just because some people along
the line were willing to take a chance on me, and I had the good fortune
of being willing to listen. Terrific. Well, unfortunately, we're out of time,
but please join me in thanking Dr. Mary Daly of the Federal Reserve
of San Francisco for spending her first public appearance with us since it's
so great, so great. Thank you. And with that,
this meeting of the Commonwealth Club of San Francisco is adjourned. Have a great day, everyone. Thank you.
