Bloomberg Audio Studios, Podcasts, Radio News. We'd like to welcome San Francisco Fed President Mary Daily to our studios here. Thank you for joining us. Before we get into the cycle question that Tim raised, I want to ask you if you're on the same page with the chairman. You and others had said you wanted to see more data, and we still have a jobs report in CPI report, but it looks like a cut is now all but certain.
Well, to my mind, we've been on this path of ready to adjust policy rates for several months. We just needed to get a little more confidence, and inflation was truly on its path to two percent, and I wanted to see the labor market come into balance. But I think that's completely happened, and the risk to our goals are now balanced in the time to adjust policy is up on us.
Is there anything that could derail a cut in September?
To my mind, that would be hard to imagine.
At this point, I do see that adjusting policy is appropriate. We don't want to get ourselves into a situation where we're keeping policy highly restrictive into a slowing economy. And remember, every time inflation comes down, the policy gets more restrictive, and I think that's a recipe, if you will, for overtightening and injuring the labor marketing growth.
Well, the Chairman and basically the Open Market Committee said coming out of the meeting that the downside risks are greater to unemployment than to inflation. How big are the downside risks to employment right now?
That's the very important question, and so we definitely have to keep that in mind because, as you know, the labor market when it starts to adjust often has adjusted abruptly and significantly.
But right now we don't see any signs of that.
You look at initial claims for unemployment insurance, you look at early indications of layoffs. They're just not present, and so that's not giving us any signs that there's a deterioration. Importantly, as you know, the Reserve Bank presidents spend to consider amount of time talking to contacts, businesses, workers. We're really not hearing signs that firms are poised for layoffs. What they are doing is managing headcount, making sure that they really want to refill a job before they do it.
But at this point I don't see any warning signs of weakness. But we want to make sure that we are adjusting policy as we go so that it's ready for the economy we have and for the economy we're likely to get, and ensure that we don't end up in that situation where we see real weakness.
All right, let's talk about tactics. Markets are now pricing one hundred basis points that cuts by the end of the year, but there are only three meetings left, which would imply at least one fifty basis point cut. Do you think the markets are wrong or is a good possibility we see a fifty somewhere.
Well, I think everyone's looking at the economic projections and then making a decision. For me, what I'm going to be doing is looking at the incoming information. As you said, we have another CPI, another labor market report discussed with my colleagues, talk to our contacts and fashion the policy that's right for the economy that we see. So it's too early to know exactly what the tactics will be.
We do know one thing, the direction of changes down, and we need to do it in a way that is responsive to the economy and not let the economy get in a position of weakness.
Well, let me quote the fed back to you. If the economy evolves as we expect, as you always say, would that imply a twenty five basis point cut in September versus fifty.
So I think of it as his scenarios, if I may so. The scenario that is my most likely outcome, and what I see in the data and the projections is that we continue to get gradual slowing and inflation, and we continue to get that study sustainable pace of growth in the labor market. If those things happen, then
adjusting policy at the regular normal cadence seems reasonable. But if we see a further deterioration or we haven't seen any deterioration yet in the labor market, if we should see deterioration or any signs of weakness, then being more aggressive to ensure that we don't see that it would be appropriate. So I think it's too early to know, and I don't want to make a declaration when none is necessary. The direction of changes down and the time to adjust is now, in my opinion, some of.
Your colleagues at the regional banks told me in Jackson Hole that they want to see a methodical, step by step process and that companies want to see that as well. What markets are reading into a little bit of what jay Pole said when he did not or did not say because he didn't use the word patient, do you think that there is a sort of bias to maybe do more if the labor market is a little bit weaker than anticipated.
Well, let me speak about myself, and I see further signs that the economy or the labor market is slowing, is unwelcomed, and I do not want to see that. That's not what we're looking for. We're looking for, and the Chair said this in this speech. We're looking for inflation to come down, can be sustainably down to two percent, and for the labor market to stay right about where it is. You don't want to see additional weakness because
that's actually what we're trying to prevent. Ultimately, we have two goals, price stability, full employment. We're trying to get those two goals to simultaneously exist, and adjusting the policy rate to ensure that happens is what we will need to do.
And so I will back.
Away or stay away from any kind of playbook or program and instead continue to be data dependent and recognize policy adjust to the data as it comes in.
Is this probing the economy or are you basically setting out on a path to neutral?
Now. I don't think we want to declare that we're setting on a path to neutral, because we have a lot of uncertainty still. But it is definitely the case that we have a policy rate that's highly restrictive and that we need to right size it for the economy that is slowing. Policy will remain restrictive even when we make adjustments, and that means that we'll continue to put
downward pressure on inflation, continue to have growth bridled. But we want to make sure we don't overdo that and find ourselves with economy that's weakening when weakening is warranted. We were getting inflation to come down without instilling any weakness, and I think we want to continue to focus on that.
Well, do you have an idea where you think neutral might be as potential growth faster now than it had been and will stay that way. You know?
The neutral rate of interest is is of course constantly debated and people are thinking about that now. For my own self, I think of it as if we came in to the pandemic at a point five real neutral rate. I can see it being as high as one now,
and we will find that as we go. I think the really relevant thing now is that even when we make adjustments to the policy rate to make sure it's right, we will still be in restrictive territory and we will still we have a long ways to go before we get to two point five or three in the nominal neutral space.
Well, we have a new summary of economic projections in September. Where are you going to put your growth forecast for the next couple of quarters.
I really think that growth is around trend.
My trend is, you know, like most people, between one point five and two percent, And I will work with my team look at more information and things before I write down any numbers, but I think I think growth at or a little bit below trend is what we're seeing. And the labor market's now in balance, and we're just trying to sustain those conditions while we see the arrest of monetary policy take effect on inflation and bring us into that two percent target.
Well, if you've got two percent growth, market is looking for something like three hundred basis points of cuts by the end of the next two years. Are you looking at getting inflation down low enough to make that make sense.
We have to get inflation down to two percent. That is the commitment we've made, and I believe we have the tools and the will.
I think that will is the second.
Part that's really important, the will to do that. But the goal has always been since the beginning of this effort to bring inflation down, to do it as gently as we can, not injure the labor market in any way that's unnecessary. We've shown so far, the data have shown that we were able to bring inflation down through improvements in supply and restrictive monetary policy, and the labor
market has not faltered. That is still the goal. I mean, ultimately people want a sustainable growth rate, is sustainable unemployment our employment picture, and two percent inflation. So there's a lot of work to do to get there, and we're far from declaring victory, but we have the tools in the will to do it.
What are you telling people who look at the SAM rule and we've passed that, so they're putting up umbrellas because they think a storm is coming.
Well, you know, these historical regularities is what the SAM rules based on. But other different mechanisms They're all about what has happened historically, and there have been and I think this has often forgotten. There have been a couple periods in our history where unemployment rose, but we didn't end up with that sharp spike in unemployment and the labor market didn't deteriorate. You have to look back to
the nineties in two thousands for that. But these things are possible, and importantly, we do need to look under the dashboard of the headline indicators, you know, employment growth and unemployment. We have to look underneath that say why are these things happening. We've got improvements in labor supply.
We really have to put this whole constellation.
As you know, we famously said, I think Vice Cherry Yellen at the time said during the financial crisis, we need a this aftermath, we need a full dashboard of labor market indicators. As a labor economist, I definitely look at the full dashboard. And the time is now to talk to our contacts, talk to workers, talk to firms, look at the dashboard and make the right decision.
Now, the FED said it would end QT before cutting. You didn't want to do both at the same time since they kind of work in opposite directions that I assume is off the table. Now, how do you mean you're going to keep QT running even when you're cutting great?
I see that. You know.
What we ultimately announced is that we're going to reduce the size of our balance sheet and we are going to adjust policy both of those. I think of it a little differently, which is why I ask for clarification. I think of it as we are normalizing both the balance sheet and policy rate.
At some point.
We're not there yet were you know, could start that soon. And both of those things are consistent with bringing our toolkit back into its normal position so that we're ready going forward. But while we do that, we have to continue to remember that we need to bring inflation down fully the two percent.
Well, you're worried. I didn't get a chance to ask you this last week about the revisions to the BLS Establishment survey being so large, and suggesting that maybe not through any fault of yours because you work with the data you have, but that you might be behind the curve.
You know, we periods of adjustment, large adjustments like these. You know, I started working at the FED in nineteen ninety six as labor economists. This was a very traditional kind of adjustment that would occur. It often occurs at inflection points in the economy that these adjustments are larger. But we have a feeling that these adjustments are coming.
We do our own estimates. We know adjustments of some size are coming, and that it is why you don't look at just employment growth, just the payroll employment growth. We look at the household survey, which tells us other indicators.
What was really interesting if you look back over the last year and a half is that these numbers of job growth, we're feeling inconsistent with the rest of the indicators, and so I think these adjustments are just bringing it back consistent with the other indicators in the labor market. Bottom line is people are still getting jobs. People are still coming into the labor force, usually a good sign
that jobs are available. Initial claims for unemployment insurance haven't really moved up in a sharp way, and firms are interested in growing their businesses consistent with the economy. So I think that that's important for us to look at, But we don't want to get over rotated on that one adjustment when we have so many pieces of information we can look to Before I let you.
Go, one last question. We've got the framework review coming up this fall. What would you like to see it look at.
Well, you know, I'll be debating that with my colleagues and discussing that. I don't want to front run what we're doing. What I really want to focus on though, in the framework is that you know, we've made a
commitment to review our framework every five years. That's a very different process than the one I grew up in, and I think it's really important that we look at the information we have and we think about, Okay, does that affect how we use our tools, what our tools should be, and that we're transparent about it as we were last year. Those are the components that are really important to me, and I'll delay specifics until we have I've had a chance to talk to my colleagues about that.
All right, Well, thank you very much. We'll have you back to tell us once you get into that.
It's a commitment very daily.
The president of the San Francisco Federal Reserve Bank