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Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.
And I'm Joe.
Why isn't thal Joe? How about that hawkish cut?
Eh? Exciting interesting times in macro economics, the Fed, the marks plenty to talk about right now. We're recording this December twentieth.
Yeah, we're recording this December twentieth. So two days after we had what is being called a hawkish cut from the FOMC, the Central Bank decided to cut by twenty five basis points. But at the same time they unveiled, you know, their new forecasts for next year, and it looks like the expectations that inflation maybe is going to be a little bit more stubborn and maybe we're only going to get two cuts next year. And markets promptly
fell out of bed. They did not like that revised forecast, to say the least.
Yeah, it's a little surprising, and we'll get into it, you know. I think to some extent a lot of it was expected, but there are real tensions right now. Right so, we have had stubborn, sideways inflation prints in recent months, maybe not quite the soft trajectory back down to target, the fact that we might not be down to target completely in twenty twenty five, some questions about labor market stability, plenty to dive into, plenty of crosswinds for investors, traders, and so forth.
To digest crosswinds is a nice way of putting it. I feel like anyone who was hoping for a quiet end to the year might be disappointed with everything going on. But Joe, I have to say, we really do have the perfect guests to dive into all of this. We're going to be speaking with Federal Reserve Bank of San Francisco President Mary Daily, herself a voting member on the FOMC. So all right, thank you so much for coming on all.
Thoughts, I'm delighted my lucky day.
So why didn't I start with the obvious question? And one I think I suspect you've been asked this multiple times over the past couple days, But why cut at all if you think that inflation is expected to show not that much progress into next year and maybe not reach two percent until twenty twenty seven.
It's a great question, And if I can take a minute, I'll explain exactly how I thought of it, so we had policy rightly, so at a highly restrictive level. Remember, the interest rate was really high, historically high, and that was to fight very high inflation, and a very robust labor market was helping spur high inflation. The economy was out of balance. So now that we have inflation that is much lower, we've made tremendous progress towards getting it
back to two. We're not there yet, and the labor market is balanced now, completely balanced, appropriate to move into a more moderate level of restrictiveness. Otherwise what you end up doing is breaking the economy. If you leave the higher level of restrictiveness on while you're closer to your goals, the economy just starts to falter and you end up getting inflation down, but at the expense of people's jobs.
And that's not a recipe for a soft landing. That's a recipe for a very hard landing, and it takes away what people have really wanted their entire time that we've been in this high inflation period, which is low and stable inflation and jobs that help them grow their careers and communities and families. So that's why we cut the rate. In my judgment, that's why I supported it. It was a close call. Whether it's seventy five or one hundred basis points in total, that's the right level
to get from highly to moderate for me. We now have completed that recalibration right sizing, and now we can look at the data and the incoming information and our projection of how the economy will evolve, and take our time to make any additional policy adjustments.
So labor market is, as you put it, in balance and no longer a driver of inflation, and yet inflation has been sideways above target. In fact, the inflation forecast per the dots for twenty twenty five ticked up. What is the residual source of the inflation if it's no longer the labor market.
Now, that's another great question and one that we think a lot about. I think a lot about it, and really it traces to two things right now. One is driving it up, maybe temporarily, it's hard to say, and the other one is a more persistent issue. So let me start the first one. It's non market prices. And what that means for people who are really into this like me, is that it's prices we don't actually measure we estimate, and we're not doing this the BA and
BLS are doing all the data collection. But it's really these prices that we don't know, We can't see them exactly, and so we estimate them. And so financial services prices, for instance, are based on asset value this, and those have been up. So it feels like inflation's in those areas partly because of the estimates. But it's hard to get your mind on that as a fundamental underlying inflation. It's not really what people think about when they think of,
you know, high inflation is hurting me. They're thinking about other things. So that's one factor. The second factor that's really been elevating inflation is housing services, the price of housing and the price of rentals. Now what's interesting there is rental prices have been coming down, but home prices haven't been falling as much, and we're not seeing that gap close. And unfortunately we have a structural issue there
that has nothing to do with FED policy. It's really about the substantial, significant, very very large shortfall in housing relatives to the number of people who wanted and so that's something that you know, maybe stickier for a longer period of time than we thought and will cause inflation to be elevated.
I mean housing inflation. Is that something that the FED would attempt to offset? And I guess, like with what tools at your disposal? Because you have benchmark interest rates, and you know when rates go up as they have been up until relatively recently, the cost of capital increases for all these home builders and if anything, you know, we see housing activity tend to slow. Like, what is it that you can actually do about housing inflation?
So what we do, and this is we do have a limited set of tools for the kind of housing inflation we're seeing. The driver of that being the imbalance between supply of housing and demand for housing. We really don't have a surgical tool for that problem. But what we do have is the interest rate. And one of the things you saw is that building really was stymied when we had interest rates at those very high levels.
But as we started to move the interest rate down, then we saw builders start to come off the sideline. So I'll tell you an anecdote. Are some stories from my context. So I have the nine states in the Western US. That's the twelfth district of the Federal Reserve, and that's the coastal states Alaska and Hawaii, and all the inner mountains state so Utah, Nevada, Arizona, and Idaho. Those states we saw immediately when we first took the first fifty basis point reduction in the interest rate is
our contacts. I was out in those areas. Our contact said we're going to take some projects off the sidelines, and I said, really, that's just a fifty basis point reduction in the interest rate, and they said, yes, but the direction of change is down, and so now we're ready to come out. And that has been happening since we've been on this relaxation of policy, and the consequence of that is that we're seeing some improvement, but that's
not going to be sufficient. And another thing you learn, especially if you travel into Idaho Utah where they've had significant housing challenges, is the public sector and the private sector businesses are joining together to try to get some relief on the housing side. It's a problem for everyone, and the FED only has that limited tool.
Joe, I'll give you a cookie if you can name the three American territories that are in addition to the nine states in the San Francisco Fed Catchment.
Area Guam is one very good.
You'll never get the third one one or the other two American Samoa and the Northern Mariana Islands.
I just want to say Mary. Earlier this year, Tracy and I, I don't know if you know, we took a trip with one of your colleagues, Richmond Fed President Tom Barkin.
So he's my buddy.
If you ever wanted to record an odd lots with us on the road in Hawaii, I'm just throwing it out there. I'm just throw it out.
There anywhere I can come to any of the states. I'm going to Alaska, I go to Hawaii, Idaho. Yeah, anytime I have a road I do road trips all the time, and you're welcome to do it.
Okay. I'm making a note of that for our producers. Now, I want to go back to the inflation outlook specifically, and I take your point about some of these non market prices, and I certainly take your point about housing because very lots of crosswinds there, the degree to which the rate can affect things, some of the gaps between in some of the market private measures that come out on rents versus the public measures, and so forth. All that being said, there has been some sort of shift
in the outlook since September. So these are long standing structural issues, and yet since September, obviously the inflation outlook has firmed per the dots. What has evolved since September such that the inflation outlook for twenty twenty five has gone up.
Well, one thing that has evolved for me is just my better understanding as the data have come in and we've dug into them a little bit more, that housing inflation might just be more persistent. So if you think about how it usually works, you would see even with these gaps, you would see housing services inflation come down, and it has not come down as quickly as we would have thought, and so reevaluating how we think about
it and just allowing more time and persistence there. Another thing that's happened is we have geopolitical issues and trade back and forth. It doesn't depend on what administration you've been in the one we're in now, we're the one that's upcoming. It really is that trade relations between the US and China haven't been as strong as they have been in past years, and that's spread out to other countries, and so that affects your outlook for just the price
of goods. And then of course you know the economy has been consumer spending has just been stronger, and growth has been stronger than most forecasters, including US, have penciled in, and so there's an adjustment to the growth forecast as well. So the way it typically works in the economics models is that growth falls below potential growth, that puts downward pressure on inflation. But when growth is above potential growth,
then we're going to see whether that's boosting inflation. I did allow it to boost inflation in my own forecast a little bit, but if it's coming out of productivity gains and labor force growth, then it may not. So that's why you have to be agile as a central banker. You put a forecast in it, but you don't get too attached to it.
Definitely want to ask you more questions about the outlook for things like trade and some of the forward looking things. But before we do, just in terms of this week, were you surprised at all by the market reaction to the decision, because I mean there is an irony here, which is you cut twenty five basis points, and it was sort of the first time we've seen like a real tightening of financial conditions since like the summer.
Basically, well, they're really forward looking. They're never going to adjust just I mean, this is one of the things about markets, they're extremely forward looking. So they were seems like they were really looking forward on what we said for next year. Now you asked if I was surprised. I was a little surprised.
Not.
I mean they had expected the great cut that we made, so that wasn't seemed to be the surprising piece. And they had penciled in in their market prices three interest rate cuts next year, not the four we had thought we would make in the September sep And so then when we had they saw the median come out it two, it seemed to be a very large response. And yes that it was surprising because three doesn't seem that far from two. And it's certainly in this in the range
of the dispersion of forecasts. I mean, we had some with no cuts, we had some with one person with five cuts in the participant list, if I remember correctly, And so you know, I think the uncertainty bands about what will actually need to do going forward are very wide and I was surprised the markets didn't see that and say, okay, we were roughly in line with what the FED thought, but they didn't, and so that's unclear why.
Maybe there's a lot of other things going on in the economy in the world that caused them to take this more risk off approach.
But talking about okay, a one point a year ago or so, you know, the FED was in highly restrictive territory and now it's coming down to something that's a little bit more moderate. But either way, and of course we don't really know and you know those two dots, it's just could change again at the next update, But either way, at least right now, it looks like rates whenever this sort of cutting cycle comes to an end,
are not going to look like pre COVID levels. And so people talk about the neutral rate of interest having gone up. What's changed since pre COVID such that, regardless of where that sends, we do appear to be in a sort of new higher rate band than we were if we've been having this conversation in say twenty nineteen or twenty eighteen.
Yeah, no, a lot's changed since then. And so let's we can walk through some of the factors that I think are really material that the FED and other central banks around the globe are going to have to deal with. So one thing that's changed is the neutral rate of interest is just the price that clears the desire for investment and the desire for savings. Right, So you have the savings and you have the investment, and you balance
those two out and you get an interest rate. That's the neutral rate of interest, and it is the one that persists when there's no shocks to the economy. The thing that we were facing coming out of the financial crisis and for the decade that preceded the pandemic, is that we had an abundance of savings and a dearth of investment, and that drove the neutral rate of interest down.
Supply of savings was plentiful, interest in demand for investment was not as plentiful, and the neutral rate of interest fell, and it fell across the globe. It's a global rate. So now we have that unwinding. We have a lesser supply of savings. The sovereigns, the countries are all out there borrowing quite a lot of money, and that pushes the demand for an investment or spending up their companies are coming off the sidelines on investment looking to take
advantage of automation or AI. That very I't been a labor economist my whole care. And one of the things you see again and again and again is when we have tight labor markets like we had, it drives firms into investments to automate so that they don't feel so frantic when they can't find workers. So we've seen that normal process, and I think that's been spurred even more by people recognizing the AI as a thing. Now there's sometimes and mostly not even using generative AI. I mean,
some companies are absolutely reaching into generative AI. But when chat GPT was announced right before Things Giving of twenty twenty two, is that right, that's right, Yeah, twenty twenty two, suddenly people said, oh, I can do robotic process automation, I can do machine learning, I can do all these things. And it's my companies that sell me things to make my life better are going to give me those things. So I think that's really spurred some investment. Companies want
to manage their potential workforce shortages going forward. They want to get better at doing their jobs faster, better, cheaper and they're investing in these things. So the ultimately what drives our star is you know, this balance between investment and savings, and that's changed. Another thing that's changed, which is really material to how we do our work at the central bank, is we spend a decade or more
fighting inflation from below our target. Our targets two. We're stuck at one point five, one point six, one point eight, never got over one point eight. That's below the target. We're trying to push it up. Now we're back to the normal thing that central banks have done for most of their histories, which is fight inflation from above the target, pulling it down, and that means that interest rates are just going to be higher in order to keep that inflation at pay.
Speaking of our star, how much confidence do you have
in your estimates of the neutral rate right now? Because I do get the sense, you know, all the talk of data dependency, there is an interpretation out there that's basically while the FED is looking at the data and emphasizing data dependence because they have less confidence in a lot of their models at the moment, a lot of the traditional relationships that we've seen mean, you know, things like the beverage curve have broken down in the post
pandemic period, and there is a lot of uncertainty over how things are working at the moment.
I'm going to take the opposite view. I actually think the models have done remarkably well, so the beverage curve is like a grand success. For example, if you take this VU ratio and you look at that, we were on the very steep portion of the beverage curve, and you know, research at the San Francisco FED has demonstrated
this along with many others across the system. But you know, I was really pleased when I saw we're coming down the straight portion of the beverage curve, which means firms just reduce vacancies and has almost no impact on unemployment. And that's the happy world we've been living in. While we were raising interest rates to fight inflation, vacancies came down, unemployment didn't go up very much, and we got a
lot of balance in the labor market. Now, this vacancy to unemployment ratio is one, so one vacancy for every one unemployed worker, and that's a lot of really pain free adjustment. Now I'm talking pain free at the aggregate certainly we want to make sure that we don't say that it was pain free for those who had to resort themselves and change jobs or maybe even lose their jobs. But from an aggregate economy perspective, that was great. So
that's a model doing well. Another place where the model is doing well is it's telling us the Phillips curves a little flatter than and it had been for a long time where you don't get you know, once the unemployment rate comes up to a certain level, it just doesn't put additional pressure on inflation. And so at this point we don't think the labor market is really a source of inflationary pressure, and that would come out of the models. Our data dependence is really related to this.
In my judgment, this is how I think of it. The incoming information we have always used, we were data dependent. After the financial crisis, we were using we went to a dashboard of indicators. What we've really done in my history here at the FED is expand what we look at. We're not satisfied just looking these headline numbers, so we look at all the real side indicators, all the price indicators. It sort of reminds everybody data is a plural word.
It doesn't mean three series. It also doesn't mean simply the quantitative data that you see the big institutions publish. It means talking to our contacts. You said you had Tom Barkin on, Well, Tom and I is here a particular attribute that we gather a lot of information and many other presidents too, But we gather a lot of information from talking to CEOs. Those are the people who are going to tell us I am going to hire
next year, I'm not going to hire. I'm getting ready to layoff, I'm dusting off my strategic plans and I'm investing. Those are also data. So I think that our focus on data dependence is our focus on collecting that information and letting it affect our decisions so it can make better ones.
Since you mentioned the specific thing, whether you're looking at the data that we see on the screen or the data that you collect from talking to CEOs, what is your assessment of the health of the labor market right now? The proclivity to hire, the ease of finding a job. How worried or happy are you about the status time.
I see that labor market is really balanced, and that's something that I've been watching for and it hasn't ever gotten into a dangerous weakness. It's definitely slowed, and earlier in the year it was slowing at a rapid pace. Now that slowing is settled out a bit. What we hear from firms, So we do a lot of questions and surveys and with firms and we talked to them.
What we're hearing is they don't have the kinds of problems hiring workers that they once had, and they're increasingly able to find workers of all different skill levels, which you know, they had pockets of where they just couldn't find anyone. Importantly, they're also saying that they think they can now bring workers back to the office because they
have more bargaining power, if you will. Before, they know nobody wants to come back to the office, and now they don't have to say yes to that, and they feel really good about that from their productivity perspective. So then you go to workers and you say is it hard to find jobs? And say, well, it takes a little longer now and I'm hanging on to my existing job a little longer because I don't want to take the risk. But no, I can find jobs if I
really want them. So that's what when I think of a perfectly balanced laver market, I think of workers might take a little bit, but they find jobs. Firms say, I can't get everything I want, but I can get workers, and they're staying a little longer. But I am watching it to see if any weakness emerges where workers start to, you know, say, it's really challenging out there, and that would be something we would want to avoid.
By the way, I have some good news to report in the room. All right, you might be happy to hear this. Core PCE just came in as you were answering zero point one percent month over month versus expectations of zero point two percent. So just a little live date on the economic situation maybe makes your life ted easier in twenty twenty five.
Well, I think it's just good news. I mean, you know, one of the things when I see that incoming in information, I remind myself of a couple of things. It's just a one data point. We are not a data to point dependent FED data point dependent FED. We're data dependent. Can't react too much on one data point. And for all the households and families and businesses out there, you know, thinking about how can they manage inflation. I feel a huge amount of relief that it's not is going in
the right direction. So we got a lot of work to do. But that's good data.
All right, let's talk about I guess more more complicated things, which would be the policy outlook. So we are recording this on December twentieth. We might have a potential government shut down. That's complication number one. And then secondly, we will definitely have a new Trump administration that has some new policy ideas, including tariffs and you know, potentially mass deportation. How are you thinking through those sort of forwardlooking policy elements.
And one of the reasons I ask is because Pale at the presser on Wednesday, he said there were some members of the FMC who were starting to take that possibility into account in terms of their forecasts. Are you one of them?
I am not one of them. I actually have managed through you know this, worked at the Central Bank here versus an economist, and now as the president since nineteen ninety six. And one of the things you learn is I've been through several changes in administration. And one of the things you learn if you do that is that all administrations change. They bring in a slate of new programs. Sometimes they talk about them a lot before they even
come into office. Sometimes they don't. But those new programs are always things that cause you know, a lot of sometimes fear, exuberance, enthusiasm, whatever it is, expectations. But it's best for the Central Bank and my judgment, not to engage in that kind of speculation. Let's let the administration come in and put the full slate of programs together. Now, why is that better? Well, first, in my judgment, why
do I do it that way? Well, first of all, it doesn't mean we don't understand how models in data and other things work, and that how different programs, whether it's tax cuts, extended deregulation, tariffs, deportations, we can look at how those things work from the research literature, from models. We can think about that, so we're well prepared to
analyze it once the programs come into place. But there's usually a fairly large difference between what any administration says they would like to do and what they actually do at the end of the day when they've worked with members of Congress and the cabinet members, et cetera to get a slate that really works for everyone. Importantly, it's also and this is something that I speak about a lot, it's also the net net effect of all of these. So say you cut taxes, that's spurs growth. That's a
positive for growth. There's deregulation often a positive for growth. Then you put tariffs can be a negative, and you do you know, immigration it can be some people have said that's a negative. It just take potentially workers from the labor force. So you put all those things together, and which you realize quickly is it depends on the scope of the changes, the magnitude of those changes, the timing of the changes, and how those things all net out to leave the economy either with an impetus or
a restraint. And it's just too early to know any of that. So instead, back to traveling around the district, we ask our contacts, and what they're telling us is they feel pretty okay about how things are likely to go. If anything, they have the sentiments risen. And then the other thing they say is if you're in retail or manufacturing where you need inputs, they're just stockpiling some inventories. So if there are some early tariffs discussions, they will
be prepared and then they expect it to resolve. Is something that's not very harsh.
Speaking of sentiment, this is something I wanted to ask you, actually, So one of the big stories for the past couple of years was the terrible, terrible sentiment surveys. So you know, if you looked at something like consumer sentiment, it looked like we were already in a massive recession. People felt absolutely awful. And of course, since November we've seen some of those surveys start to turn People are turning more positive.
The small business survey has spiked quite a bit. How much emphasis would you place on those surveys given that there was such a big discrepancy between the heart and the soft data, you know, just a year or two ago, is it possible we could get another discrepancy, but just going in the other direction.
You know, I think it's possible. But in the before I really understood the discrepancy. And here's how I understood. You could see it when you would talk to people is they felt like inflation had raised the price level so much they weren't able to catch up, so it had stolen something from them. Because it's a tax, it's it feels toxic to people, and they felt like they weren't going to ever catch up, and that the economy
might break, we might fall into a recession. So part of the sentiment turn that I've seen started in about in the middle of the summer, and it started when people thought, oh, we're actually not going to have a recession. The economy will continue on and I will be able to grow out of you know, with my wages and my earnings, I'll be able to get ground, gain ground on what I lost, and I'll be able to restore where I was before the pandemic and maybe even grow
beyond that. And now with some of the changes for businesses and small businesses, our small businesses tell us that too, with some of the changes, they're somewhat hopeful that they'll be They like the extended tax cuts, the pretty They were hopeful that some aspects of regulation won't be won't feel as hard to manage. But you know, they don't know, they're just more they're hopeful. And so they say this too.
You know, enthusiasm has to be backed with reality, and so right now they feel enthusiastic or optimistic, but they're still cautious in that cautiousness that spending their own money on things that's only going to be removed when we really see how the economy and the policy changes are netting out.
Let's talk about as you mentioned, theoretical policy changes under the incoming administration. You are not one of the members who cause that to change how you're thinking about twenty twenty five because, as you said, we don't know, We don't know how it's going to net out, et cetera.
Of the academic literature, but it's hard to know. But speaking of the academic literature, one thing that's commonly said is, well, a tariff is sort of a one off increase in the price level and doesn't necessarily transitory.
Is it transitory tere.
In a sense transitory. I'm never really satisfied with that answer, because, Okay, that may be true that a tariff does cause a one off increase in prices, et cetera, but doesn't change the overall trajectory. On the other hand, in theory, it creates an impetus for a structural adjustment to the economy that could be costly. If it's just or to build more in the US to avoid tariffs, then that means
more spending and more investment. And as you described, one of the drivers of the sort of new hire neutral is this impulse among companies to spend. So how do you think about again we don't know the details, but when you hear the word tariffs, and whether it's a global tariff, whether it's a tariff on some countries or not others, how do you think about potential ramifications of that?
Sure, I mean, I think that's actually a terrific question because it's I think it highlights first of all, that it's very challenging to make simple statements about complicated changes in policy. So an example is in the classic models, a tariff would be a one off you just raise it. That's a classic model that doesn't have any retaliation, it doesn't have any knock on effects as we would call them.
Where you know, you say you teariff an intermediate input, Well, that's going to filter through the economy into the price of other goods that are produced using this intermediate input. That's unlikely to be just the one off time it'll filter through, and the duration of the time it takes for that to filter through is very challenging to know,
ex ante in advance. So I think it just is much more complicated than you look through it now standard classic textbook models would tell you do you look through it. I tend not to see transitory very much. I think that, you know, that's a word I wasn't using a lot before and I'm certainly not using now. So I'm going to say, you know, one off, she just raise it
and then it goes. But the practice of it has suggested that the economy is more complicated and it it takes some time to filter through now in terms of the structural changes, I mean, that's part of why tariffs are applied oftentimes they want a more fair playing field. Are elected officials because voters have said, we want a fairer playing field, and when you put a fair playing field in you might see a reorganization of activity to adjust to that new fairer playing field. But that was
the tension all along. And so ultimately this is why the Central Bank is independent and outside of what elected officials do. It's one of the reasons elected officials are elected by voters to make decisions that are bettering society. Overall, the economy and society, and even when you don't agree with those that's still the intention, right that all different elected officials come out to try to do the FED.
We only have two goals, price stability, full employment, and so we're taking the economy we have, and if there are structural changes that temporarily boost the price level on things or just you know, we're persistently due, we would have to work to make sure that that doesn't cause inflation to rise above two percent and that somehow we don't end up losing our full employment the place in
full employment that we have now. So that is a healthy tension in my judgment, but it's also why the FED is independent from It's one of the reasons our founding fathers. They were all fathers at the time. I know we'd like to change those words sometimes, but they were all following fathers, and it's why they did that is it's because they wanted that tension to be there, in my judgment.
So Joe and I were in San Francisco a few weeks ago.
I know I missed you. I'm sorry.
I know it would have been great to catch up, but I was in some other I love. I was literally about to talk about the weaibo. Okay, I went in my first ever WEIMO, and it kind of it blew me away, and we met with lots of vcs who are talking about all the cool stuff they're seeing in terms of AI. You sort of have a front row seat for AI, given you know your geographic location
in San Francisco. Talk to us about how you're thinking through AI and its impact on productivity because obviously a lot of people expect a big productivity boost from this new technology, but you know, like so far, I think it kind of remains something of a hypothetical, like at large scale, But what are you watching for in terms of monitoring the actual impact of AI on productivity?
So we're already seeing this. And one thing that if you go back to you Robert Solo, so there's a famous quote that you can see productivity everywhere except in the productivity data. And you're really seeing that now. And you know, I came to work at the FED in nineteen ninety six. So one of the first jobs I had sitting at the San Francisco FED as an economist was to collect evidence of a burgeoning productivity boom for Chairman Greenspan. Oh wow, it was literally what isn't that
like the coolest thing? You land at the FED, you're doing research on the labor market, and suddenly the chairman of the Fed's interested in you collecting this information.
So this would have been the early two thousands when since he was talking about like the big this.
Is ninety seven, ninety eight, you know, really before we even got there, and he's he was an early spotter that if people are using computers, you're not going to see it in the data just yet, because what they're doing is they're buying all this equipment, but they it's really the software and the change in how they did their work that was going to boost the productivity. So let me give you a cool example. Now this didn't happen until the early two thousands, but still a cool example.
So before, before we had the internet and the computers and connected networks and things, the gas meter readers had to come to your house and come up to your meter and read it and write it down in a notebook or to type it into a little machine. And they were getting bitten by dogs or they couldn't get in, and meters weren't getting written read, et cetera, et cetera. With this technology, they produced cars. This happened first The first place I ever saw this was Salt Lake City.
They had trucks, and the trucks had readers on them, and they would communicate with your meter, which was a smart meter, and they didn't have to get out of the vehicle. And so no one's getting bitten by a dog. People are all their meters are being read. Productivity goes up, safety goes up, and importantly people's bills go down and
are more accurate because you're not estimating them. So that was an example, and those were the kinds of examples I was giving Chairman Greenspan, and he was saying, Okay, we're going to see it everywhere except in the data, and sure enough turned out to be right. Pardevity was all over the place. And eventually, when the data got revised and we got better at biggering on what was going on, we saw that we had a computer revolution.
The same thing appears to be happening with AI. And again I want to caution people from thinking it's all about chat, GPT or perplexity or any of the other models. I'm not trying to advertise models, but those are the ones that get a lot of attention. So but it's not about any particular model. It's really about machine learning, it's about you know, robotic processing, automation, just people businesses
doing things. And so we started a network called the Emerging Tech Economic Research Network at the San Francisco FED and we're spending a lot of time with researchers, but we're also spending a lot of time with CEOs and CIOs and we're asking them what are you doing? And it is astounding how many companies in the United States,
probably the globe. We're focused on the United States first, are using these things, everything from furniture companies to improve their sales, to design companies to figure out how to design things faster and more accurately idea generation. So we're seeing it everywhere. I don't think we'll see it in measured productivity right away, and you shouldn't expect to, but it's the emphasis of change is there. And so it's
not all about the weay mos or the zekes. You have to write in the zekes next time, but it's really about businesses thinking about how to use technology to make their teams stronger, more capable, less tedious work get the job done. And I think that's potentially a huge benefit. It could take a decade, but it is happening.
First of all, it must be fun to be the sef FED president. I'm sure every regional FED president thinks there region is great, but a have so much territory, it'd be all the coolest stuff in the world is happening in your district.
I agree, actually, but you know I shouldn't say that.
So I want to actually go back to you know, you talked about this, and first of all, I did find that just sort of a very fascinating reminder that at the beginning of the dot com boom, first there was just a bunch of costly spending on computers, and it took a while before businesses figured out what they were going to do with them. And so when you think about the sort of lagged effects of that spending,
that's interesting. Going back to when we were having the more theoretical part of the conversation and you talked about why the neutral rate might be higher, you mentioned the higher proclivity to invest, but also mentioned there's a lot of government borrowing right now, and you know, one of the things that the new administration says it wants to do with the incoming treasury secretary is take more seriously
the deficit. I am a person, as I've hinted on the podcast before, who has a loan that is going to have to be refinanced in a couple of years. I would love to see lower rates, setting aside what the ideal mix of deficit reduction, etc. If we want to get to a sort of sustainably lower band for rates. And you mentioned it's a global phenomenon, does lower deficit spending seem like one of the key components to it.
You know, I don't make those fiscal decisions, but ultimately it matters. Total spending is what matters. So if the government spending goes down, and it's what happens is private sector spending goes up to fill that difference, then it won't really have much effect on the interest rate. But if we get a reduction in net spending because of that, then you could. But importantly, I think this is something that usually gets lost because most countries only talk about
their own country because that's what's important to them. Sovereigns across the globe, we're spending more money, right and that's you know, it's partly a response to the pandemic and then you know, kind of get used to it and going. And so I think this is a global, a global issue. And then of course we still have the aging population that's working through that we have to pay for. And that's true in almost every country, industrialized country in the world.
Every transition energy trans then you get technology that could help us, we could get more productive, but you do all these things and they end up becoming you know, expensive changes at a time when we're already paying for the aging population, and then we keep borrowing to do it. And it's just you know, it's a different environment that we were in prior to the pandemic, and we'll we'll
have to deal with that. So I don't know that we can give you a lot of near term relief on your refinancing issue, but I do think these are problems that all nations are going to have to wrestle with.
The nice thing about having the podcast as a platform, Joe, is that you can personally lobby the FED for a lower refi rate.
That isdefended cut rage and it doesn't even lower the mortgage rate anyway.
Sorry, I keep going, No, I just I think ultimately they you know this a that's another thing that we control the short term interest rate in it filters through to other interest rates. But we live in a global economy, and we live in a world where interest rates can move around for a variety of reasons, just like the stock market. And you know what really is what's important is that, ultimately, if you stack up has monetary policy
been working? You can see evidence, clear evidence that not just supply driven inflation has gone down, So the supply has improved, inflation's fallen, but the demand component has gone down and things are rebalanced. So I still think monetary policy works. But that's a different question than what rate will we settle at, and in all likelihood it'll be higher than we saw it prior to the pandemic.
I just have one last question, and it's sort of a Fed watcher question. I hope you're not offended by this, but before we did the episode, I had to look up as like is she a voting member or not? As I forget who is a voting member?
Of course we forget. No, I'm kidding, I'm kidding.
People who are fedwatchers sometimes talk a lot about the hawk dove meter and who's rotating in and out one year and there's this person more hawkish, more dubbish. You're currently a voting member right now. How significant is it when you think about especially now that we have the dots. People pay a lot of attention to the dots and everyone puts an a doubt regardless of whether they're a voting member or not, and those seem to be influential.
How important is it for the sort of average person or FED watcher to pay close attention to who has a vote at any given time or from the perspective of a someone who rotates in and out, how much does it change you believe your influence on the state of policy, whether you actually formally have a vote at a given meeting or no. I've never seen an effect. This is really interesting.
I've never seen an effect in my entire history working for the fat even when I was just staffing the FMC and not Audien. I just have never seen an effect. I mean, what is influential are ideas, arguments, evidence, thoughtfulness about where we should go and how we should get there, and being willing to interrogate and ask questions even when
you're sure. I mean, ultimately, we're best with each other when we question and question and question again and be skeptical and curious, and skeptical you come in and you say you know, I already know the answer. You're not actually as useful as you come in and say I'm thinking about it this way or you thinking about it differently,
And we have those rigorous debates. So if that's the main thing that's beneficial about being together and being on this committee, then you can see that voting doesn't matter because you really don't pay attention to the vote that people are talking about. You pay attention to the arguments that they're making. And so I've actually never seen a difference in my tenure under any chair. Work for four
chairs at this point, I've never seen any difference. And one of the things that also is true is that chairs are willing to take two sense and they're willing to live with differences of opinion. And the dots are a tremendous example of that. Right you look at the dots and they are as the uncertainty of the economy is going up and it's not clear what the right answer is for next year. The dispersion in people's estimates about the forecast, the neutral rate of interest, and the
policy that will be appropriate next year. They're just they're getting more dispersed. That is a benefit. That's a feature, not a bug, as we like to say. And I think it just speaks to the idea that voting doesn't matter and the rotation is not that relevant. What's relevant
is arguments and thoughts. And you know, luckily we have a very transparent fed so you can go and read people's speeches and remarks, see their interviews, hear their podcasts here Odd Lucked, and you can go to make your own determination as a citizen.
I'm noticed in the beginning you were still talking about like working towards a soft landing, And my question is, like when you actually get to say we did it, because like two years ago, I don't think anyone would have expected things to shake out the way they have.
Like to me, the soft landing is kind of here.
You know, I think here's what I would say. I gave a speech at NYU, And the reason I'm pointing to it isn't to say look at me, I give a speech is because it was about this. So ultimately I will judge a soft landing, and I think history will as well if we allow people the time to catch up. So if you look at people below the
fiftieth percentile of the wage distribution, they're still behind. If you measure the cumulative losses they had from inflation, they still need another year or so of this kind of growth of wages above inflation to get their earnings their lives back.
So for some.
People, you feel fine. For other people are like, I got in such a giant ditch that I'm only now getting close to seeing out of that ditch, and then they want to have some path restore it. So I would say, so I actually redefine or defined for people what I mean by a soft landing. It's a durable expansion that allows that to occur. So I'm not at all satisfied right now, but i just want to keep going because you know, I grew up in the seventies.
My parents had this card table, and as everyone in my community did, and they would on like one Sunday out of the month, they would put bills they could pay in one stack and bills they couldn't, And over the inflation period, the bills they couldn't pay just grew.
Then Voker did the vulgar disinflation. They both lost their jobs and now the whole family in disarray, and I just remember that, and I think, you know, I didn't go to work at the FED because of that, But I just remember that, and I think that's probably how so many American families are feeling right now. They're just getting kind of their feet under them. So that's what a soft landing looks like.
All right, Mary Daily, San Francisco FED President, thank you so much for coming on all thoughts. And I should say Mary has her own podcast, so you should definitely check that out too.
Can I say the name of course zip code economies. Please please join us and you can come to any state in my district and I will travel with you. If Hawaii is your destination state, I'm going back this year to see how the Hawaiian economy is doing, going to Alaska, going to all the other states.
I want Alaska.
So even though it sounds nice on a cold New York day right now, I would do it last.
The cool thing about any of these states, whether you're city in Idaho, Utah, Alaska, Hawaii, is you're going to see. This is the thing that I loved about the twelfth District. Once I moved to the twelfth district to take the economists job. Way back in the day, they would fly me to there. I would fly to the main city and drive all around. And here's what I learned that ultimately the economies are vastly different, and yet they're all
the same. They all basically have people working together trying to you know, build their lives, build their careers, make a business. And that's a cool thing when you see the vast difference and then you say, it all comes down to the same thing.
All right, Thank you so much. That was fantastic, Thank you so much.
Thank you, Joe.
That was a really fun conversation.
I think if I were going to be any FED president, have to be the Hawaii list.
Listen to Joe on this podcast lobbying for lower mortgage rates and for the twelfth FED district.
Well, and lobbying for us to take a trip to last And I'm on board with that one. Would you say the Northern Mariana Island.
Yeah.
And the only reason I know that, by the way, is because it was the tiebreaker around a recent quiz that we held in Los Angeles for Bloomberg clients.
Yeah, we didn't get to do it because there was no tie. But yes, we were going to ask the clients to name all of the states and regions, all.
Nine states and three territories. I wouldn't have been able to do it Americana Islands, no way.
Yeah, I thought that was a fantastic conversation. First of all, it's exciting we did get that nice beat on a core PCE in the middle of the episode. It still feels like a very tricky moment for sure for the FED, even before the effects of any Trump policies come into effect, regardless of what they are. The fact that the inflation outlooked for twenty twenty five it's still going to be a while apparently before they're sort of durably back. The fact that we have seen this sort of big increase
in the ostensible neutral rate if it exists. Tricky times for the FED.
Yeah, And I think there is that tension between you know, wanting to see how everything shakes out and so trying to be ahead of the curve to some degree. But it is interesting. It was interesting to hear her talk about like how she wasn't one of those people. Yeah, taking into account potential future policy, the.
Housing question is going to be really interesting. Yeah, right, Like, so, what are the residual sources of inflation if it's no longer the labor market. Of course, she defended the beverage curve. It's an employee, it's back and balanced. But this idea that and you mentioned it. You know that housing construction has fallen. This is going to be a persistent source of economic stress, whether it shows up in the formal
measures of inflation or how it doesn't. This remains a major issue, the fact that there is so much investment, or at least government spending happening around the world globally, military spending, aging, demographics, many, many such complications going forward.
Complications definitely the word of the day. Let's see so again, we're recording this on Friday, December twentieth. We'll see what happens over the weekend with the government shutdown. But like, it does seem like there are a lot of one offs that the Central Bank is potentially going to have to take into account.
Absolutely all right, shall we leave it there, Let's leave it there.
This has been another episode of the Authoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Jill Wisenthal. You can follow me at the Stalwart. Follow our guest Mary Daily, San Francisco Fed President. She is at Mary Daily econ and you can check out her podcast, zip Code Economies. Follow our producers Kerman Rodriguez at Carman Erman, dash Ol Bennett at Dashbock and kel Brooks at kel Brooks. Thank you to our producer Moses Ondam.
And for more odd Laws content, go to Bloomberg dot com slash odd Lots, where you have transcripts, a blog and a newsletter and you can chat about all of these topics, oh, including the fact and I meant to say it, including the fact that voting doesn't matter at the FED, which I thought was really interesting. Could talk about that in the discord discord dot gg.
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