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To the Federal Reserve policymaker is remaining divided ahead of the December meeting. The San Francisco Fed President Merry Daily, writing in a blog this morning, we must ask ourselves, are we in the nineteen seventies or the nineteen nineties. We can't ignore the seventies or the post pandemic inflation run up, but we can't ignore the rest of history either. The Fed President Merry Daily joined us now for more. President Daddy, welcome back to the program. Always good to
see you. Let's just start with that question that you ask yourself what's guiding your assessment of where we are.
So I'm looking at both inflation and productivity. And if you look at inflation, you're seeing that it's been pretty contained so far in the goods prices which have been directly tariffed. And then you look at the other parts of inflation, you just don't see much of a run up. So that's good news, and inflation expectations what people expect.
Remain very well anchored.
Look at productivity and you see that activity is rising GDP growth is rising, while the labor market is slowing, So that tells me there's a little bit of that boost coming from firms looking to do more with less, but that's also causing a slow down in the labor market. So the fifty basis point adjustment we've made has helped support the labor market, but still keeps policy restrictive so that we can put downward pressure on inflation.
President Daily, what are you looking at to determine whether it's the nineteen seventies the nineteen nineties.
Well, I'm going to really look at things that improve productivity to think about the nineties, And it's more than just the stock market valuations for AI companies. It really is about the companies out there who might be using AI and then asking them, going directly to them and asking them, what's it doing for your bottom line and how are you using it? And what we're hearing are pretty encouraging, but very early signs.
They see how it can help.
Their bottom line, how can improve their productivity, even how they can be supportive of their workers, give them more interesting work, take the less interesting work away. But they all tell us it's early days, so more to come on that. And then on the inflation part, are we in the nineteen seventies, really asking employers and firms what are you doing with prices? Are you thinking about raising
your prices? How are you going to think about losing volumes if you do so in a slowing economy, especially for consumers you know, from the fiftieth percentile down. And putting those two things together, I think we'll get a lot of clarity about which direction we're heading. And with policy, you know, been slightly adjusted, we are in a good place to continue to evaluate the information before we make any decisions.
We can't know x Ante.
Before the day to come out, and before we get that information really what we're facing. We just have to have an open mind about which one it could be and maybe other periods of history.
I didn't even mention.
President Daily how different would the neutral rate be if it were, say, more like the nineteen seventies or more like the nineteen nineties. Just how different would FED policy be in response to one or the other paradigm?
Well, you know it, there's many nuanced ways it could affect the neutral rate. But I can back up from that and just ask what were the policy remedies if you think we're about to have an inflation run up. Then we obviously would have to hold policy tighter for longer because we wouldn't want that to occur. You know, honestly, Americans have endured already too much inflation, and we really need to get that back down to two percent to
restore price stability, as we've committed to. On the other side, if it's productivity, you would start seeing the economy.
Able to run a little bit longer.
Maybe if you go back to the debates of the nineties, you know, we saw the labor market slow. Workers were insecure, but the labor market had unemployment that was fairly low, and many at the time were worried that could spur inflation. But Greenspan chairman green Span held on with his colleagues. They didn't raise rates. And what you saw was, you know, the nineties, which was a booming time, and we ended
around target inflation and we had a productivity boom. So you're trying to balance those two things together, and it means not looking just at headlined information, but getting below that information, talking to firms, talking to consumers, talking to workers, really on the ground work, like we do at the reserve banks and other places. You know, the FED is built to do this on the ground work as well as look at the published data.
President Daily reading the blog post this morning, it seems like you're leaning more toward the nineteen ninety side of things than in nineteen seventies. Is that right?
Well?
You know right now, you know, I'm in the West, in I have the nine states in the Western United States, and it's not just Silicon Valley that seems interested in AI. No matter who we talk to, whether they're you know, small businesses, medium or large businesses, manufacturing, tourism, etc. They're using AI in a way that they say is going to improve their productivity, and they're already seeing parts of it. So when I see that, I'm like, Okay, we need
to think about that. What really will spur this is an ongoing thing, is if they start to change their business processes.
So that's what I'm looking at now.
That means, but I guess a different way to say that is we cannot take our eyes off inflation again. Americans have endured high inflation too long. That's our mandate. So while I'm looking for productivity gains and seeing if they're going to continue, I'm also keeping my eye completely focused on inflation to make sure that it doesn't pick up in a way that would suggest we need to do more or we need to hold longer.
President Teddy, how would you respond to the criticism that the Federal Reserve as an institution has taken its high off inflation, that inflation is close to the three than it is the two, and the Fed's been kind of interest rates.
You know, I don't think that if you unpack the inflation data you really see signs of that. It's true that headline inflation is printing at that level, but you have to take apart that inflation and ask how much of it is the effect of tariffs passing through the goods prices that we expect to be a one time price level adjustment and not a consistent run up in inflation.
And if you unpack the data, what you see is you don't see inflation running up in services or housing, and importantly, you don't see it's reading into inflation expectations that would be the thing that would continue to run up inflation going forward. We also see a labor market that's softening, in wage growth that is moderating, so you're really not going to see a lot of pressure coming on.
The cost side of labor.
So I put those things together, and we don't want to make the mistake of holding on too long for rates only to find out we injure the economy.
President any can we just pick up on the cost of labor. I think this is really important right now, clearly, and it's hard to dispute this. It's in the data. We've had a massive step down and pay rolls growth. What's behind that is a little bit more confusing. Is it demand? Is it cyclical, is it structural? Is it something else like immigration? What's your talent right now? What can you point to that helps telling you it's one thing over the other.
Yes, you look at prices in this case, the price of labor as wages. If it was simply about supply and firms were still scrambling to find workers to fill what was jobs that were supported by the previous immigrants, you would find wages going up as they bid for workers to try to fill those jobs.
But that's actually not what you see.
You see wage growth slowing even in sectors where immigration played a larger role.
And so that to me says it's.
A demand shock, a negative demand shock along with just a coincidental negative supply shock, so you lost workers, but you lost jobs at the same time, or you had job growth slowing, and what we're seeing now does that continue to net out right? What if the supply of workers doesn't keep going down but the demand for workers does well, then we'd end up with a rise in unemployment.
So have to keep squarely focused on those types of things.
We're definitely in a low firing, low hiring period and interrogating that labor market, continuing to watch the information, see what firms do next.
That's going to be the important part.
And it's something that a lot of people have said, really is the case shape the idea that, particularly on the lower end, you have not seen wages keep pace with the rest of the income spheres.
I just wonder, though, how much we.
Are seeing a massive amount of inflation and acid prisis and how that feeds into what you're looking at, especially at a time that may rhyme with the nineteen nineties, and we know what happened after the nineteen nineties. How much do you weigh that?
How much do you have to pay attention?
Well, you know one of the things that you do, so financial market conditions are one input into our decision making, one of many inputs. You know, we have two goals, price stability, full employment. We're trying to think about what inputs affect those two variables, those two goals. But what I look at is if you look under the valuations, you know, people are really talking about one of two things.
This is going to be a transformative technology. AI is going to change the world to be like electricity or the steam engine.
And then the people who are a little more skeptical.
Are saying it's going to be a business as usual technology. You think of computers in the Internet. The thing that's true about both of those is they're both productive. You get productivity from both of those. They both help with growth, they both help the pie and the expand And so we're not talking about a bunch of ideas with no backing. We're talking about, you know, equity investors, not highly leveraged going in and making banking bets really on whether it's
going to be transformative or business as usual. But everybody agrees on one thing, it will change productivity.
At the same time, President Daily some people would suggest that yes, you will see stocks continue to go up in the face of another rate cut, But at the same time, the transmission mechanism of the additional cuts are slower to take place. It's less efficient in terms of the pass through just based on how much lending there is, whether it's in the private lending sphere or beyond. How do you measure these things at a confusing moment?
Well, you know, I guess this argument that we've somehow lost our power monetary policy doesn't transmit. I simply don't see it in the information. If you go out and you look at what happened when inflation was running really, really high, we raised rates pretty aggressively, and mortgage interest rates rose rapidly. Car rates rose rapidly, and the economy slowed. Inflation came down. Right now, what I'm seeing is we adjust rates, mortgage interest rates come down, not one for one,
that's not how it works. Usually is less than one for one, but they come down. You see a little more activity in the housing market, you see a little more activity in the borrowing market more generally, and you see that dynamic work. So I guess the most important thing is just to remember that montary policy acts with a lag, and right now we're making decisions not just for what's going to happen next week, but what's going to happen in the next six months to a year.
So that's how we have to think about it with our forecasts, and then how we adjust policy as those forecasts evolve.
How frustrating has it been not to get government data?
You know, I really want the information, the fullest amount of information we can possibly get. But one of the things that I think maybe underestimated in public about what the FED does is we're regularly relying on government provided data that's the gold standard of data in the world. We're also relying on private sector surveys which have been collected for many, many years, and we can correlate them with the government collected data over time and know exactly
how they relate to one another. And then of course there's really no replacement, especially at inflection points in the economy, for talking to businesses, workers, communities, and consumers, asking people what they're really doing.
And then you know, I.
Like to do this, go to the parking lots of your favorite retail stores and look at how many cars are in the parking lot and what people are buying. That tells you a lot, you know, airports are are full. People are out there. You can go to you know, go to a sporting event or a concert, see how many people are there. What you see as an economy that is slower than it was, consumers that are not they're more picky about what they spend on, but they're
still out there participating in the economy. And that's how we get the information we need to make the right decisions that are according to our mandates, but mostly for the American people presidentially.
You've been working with the FED or on the FED Committee for a long long time on these in these debates, have you ever seen it more divided than it is right now?
On the FMC? He knows, of course.
I mean look at that, if you look at the transcripts and the meeting minutes, and you know it's helpful. Go back and look at the nineteen nineties debates, and go back and look at the commentary around the nineteen seventies. You know, it is a misnomber to think people always agree the right way to think about it. In my judgment, this has been my experience, is that the debate we have I wouldn't even call a division. I would call
it differences. Of opinion that are really healthy in a debate about trying to make policy in an uncertain time.
With no truth. We don't have truth.
We have forecasts, we have our best estimates. We have taking the evidence and then taking it again and looking through it with different lenses. I see that as a strength of the committee, a strength of the Federal Reserve, and importantly is it is delivering the best possible decisions
we can make. So I have seen this many times before, and I think it's always at inflection points that you see the broadest amount of dis agreement, and it's exactly what I hope people would want from a committee making decisions on inflation and full employment. It really does help us make sure that we're doing the best we possibly can.
So you're happy to confirm on the records you have not seen Governor Maron and President Smith in a fight in the sea day meeting. Can we confirm that President Daily today that hasn't happened.
You always try, and yet I'm not a rookie.
Marry Daily, thank you.
That's always good to see you.