Fed's Daly, Hammack on Outlook for US Economy

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00:00For me, it's really about thinking about the significant amount of change that we've seen

00:06over the recent past, the strength that we have in the underlying data. We came into this period

00:12in a really good position, but the soft data that we've seen, the sentiment data, has been

00:18concerning in terms of where it's showing up. Now, that doesn't always necessarily translate

00:24into the hard data, which is why I'm trying to think about three different scenarios. So,

00:29for me, the three scenarios that I'm most focused on are, one, if the tariffs that have

00:34been put in place are going to be a one-time price level move, if they're going to be reasonably

00:39static from here, and because they're at the levels they are, that could weigh more on growth

00:46and have implications for the labor market, then it's pretty clear, as we start seeing

00:50that flow through in the data, what we need to do. On the other hand, if it's more inflationary,

00:55it's more persistent, because you've had this on-off, and businesses are starting to layer

01:02it into their prices slowly, because they say, well, I need to add 5% to my prices today.

01:08It might ultimately be 5%, 10%, 20%, 30%, but I want to start with something today, so I graduate.

01:13That could be more persistently inflationary. And one of the things that we've been hearing

01:18from our contacts is that they've worked so hard to build up their labor force over the past

01:23several years, they're very loath to let them go. And so they're going to hold on to them for a

01:26really long time. So if that's the case, then it could be that we need to stay at elevated rates

01:30for a longer period, or think about further adjustments there. But if we're in this position

01:36where we're challenged on both the inflation side and the unemployment side, then that's going to be

01:40the really difficult place of figuring out by how much are we missing on each side of the mandate,

01:45and what's the persistence of those misses? How long do we think each one is going to obtain

01:49to decide in what direction we need to shift policy?

01:53Thank you. And Mary?

01:57I'm sorry. Pardon me.

02:02So when I think about the outlook, I think like both of you and all policymakers, I'm constantly

02:09thinking about the outlook and how it's evolving as I talk to people. But it doesn't make me data

02:14point dependent because we don't have to really write down a number like forecasters, private sector

02:19forecasters do until we get to a point where we're doing the SEP. But we do have to have an outlook

02:25for the economy that we can update. And so for me, I've started with the thing that happens on every

02:32administration. I've worked at the Fed since 1996, been through a lot of changes in administration.

02:37Every administration comes with a slate of policies. And those policies can often have supporting or

02:42offsetting effects. So the current administration came in with four major platforms. Trade policy,

02:49immigration policy, tax policy, fiscal, and then deregulation. And so that tells me that we can have

02:57a net effect that we don't yet know. Trade policy was first a lot in the news because of the tariff

03:04announcements and the ongoing negotiations. Then the fiscal situation has become more visible and

03:10more important in terms of the conversation. We have some immigration policy, but so far not the big

03:15effects that many anticipated. And then finally, we have deregulation. So I think the outlook is fairly

03:22uncertain. And it's why being data dependent, sourcing our data through contacts, but also through the

03:29incoming information that's a leading indicator is so important. So I said, like all of us, I think we

03:35can put scenarios together. But the real issue for me is to keep my mind open that we don't actually

03:41know what the outcome will be. We don't know what the tariffs will end up being. We don't know then if

03:48once the tariffs have come, so that's the scope magnitude, what the timing will be. We then don't

03:52know how firms will respond. Will they negotiate with their firms in other countries to try to split

03:58the cost difference? Will they then pass parts of it along the production chain or will they pass it

04:03all along to consumers? None of that we know. We don't know if consumers are so exhausted at this

04:07point from persistent inflation that they can't pay it. And so it's a volume loss. I think those are the

04:12kinds of things we have to think about. And the information Beth said she's sourcing and Rafael, you

04:17mentioned your sourcing, we're sourcing, is critical. What are employers doing? Are they stalling out

04:23their investment plans? Are they changing their hiring plans? Are they keeping their employees or

04:27not? Passing through prices or not? That's going to be critical. So right now, I have an open mind

04:34with the ability, the willingness to move as the incoming information comes in. You know, I think in

04:39central banking, you know you could face a situation where our goals are in trade-off, but you also know

04:46there's a lot of other things that could happen, and you have to be prepared to move to either one

04:51or any of them as the data evolves. So it can be an unsatisfying answer because everybody wants

04:58precision, but if we had precision, we wouldn't have uncertainty. So it's about just keeping on the

05:03open mind as we navigate through this. But my outlook isn't gloomy at this point. It's just thoughtful.

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