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00:00What's guiding your assessment of where we are?
00:03So I'm looking at both inflation and productivity. And if you look at inflation,
00:08you're seeing that it's been pretty contained so far in the goods prices, which have been
00:13directly tariffed. And then you look at the other parts of inflation, you just don't see
00:17much of a run up. So that's good news. And inflation expectations, what people expect,
00:22remain very well anchored. Look at productivity and you see that productivity is rising,
00:27GDP growth is rising while the labor market is slowing. So that tells me there's a little bit
00:32of that boost coming from firms looking to do more with less, but that's also causing a slowdown
00:37in the labor market. So the 50 basis point adjustment we've made has helped support the
00:42labor market, but still keeps policy restrictive so that we can put downward pressure on inflation.
00:48President Daly, what are you looking at to determine whether it's the 1970s or the 1990s?
00:53Well, I'm going to really look at things that improve productivity to think about the 90s. And
00:59it's more than just the stock market valuations for AI companies. It really is about the companies
01:05out there who might be using AI and then asking them, going directly to them and asking them,
01:10what's it doing for your bottom line? And how are you using it? And what we're hearing are pretty
01:14encouraging, but very early signs. They see how it can help their bottom line, how it can improve
01:19their productivity, even how they can be supportive of their workers, give them more interesting work,
01:24take the less interesting work away. But they all tell us it's early days, so more to come on that.
01:29And then on the inflation part, are we in the 1970s? Really asking employers and firms,
01:35what are you doing with prices? Are you thinking about raising your prices? How are you going to
01:40think about losing volumes if you do so in a slowing economy, especially for consumers, you know,
01:45from the 50th percentile down? And putting those two things together, I think we'll get a lot of
01:50clarity about which direction we're heading. And with policy, you know, been slightly adjusted,
01:55we are in a good place to continue to evaluate the information before we make any decisions.
02:00We can't know ex ante before the data come out and before we get that information,
02:05really what we're facing. We just have to have an open mind about which one it could be
02:09and maybe other periods of history I didn't even mention.
02:11President Daly, how different would the neutral rate be if it were, say,
02:15more like the 1970s or more like the 1990s? Just how different would Fed policy be in response
02:21to one or the other paradigm?
02:25Well, you know, there's many nuanced ways it could affect the neutral rate,
02:29but I can back up from that and just ask what were the policy remedies? If you think we're about
02:33to have an inflation run up, then we obviously would have to hold policy tighter for longer
02:39because we wouldn't want that to occur. You know, honestly, Americans have endured
02:44already too much inflation and we really need to get that back down to 2% to restore price
02:50stability as we've committed to. On the other side, if it's productivity, you would start seeing
02:55the economy able to run a little bit longer. Maybe if you go back to the debates of the 90s,
03:01you know, we saw the labor market slow. Workers were insecure, but the labor market had
03:05unemployment that was fairly low. And many at the time were worried that could spur inflation.
03:11But Greenspan, Chairman Greenspan held on with his colleagues. They didn't raise rates. And what
03:16you saw was, you know, the 90s, which was a booming time. And we ended around target inflation and we
03:22had a productivity boom. So you're trying to balance those two things together. And it means not looking
03:27just at headline information, but getting below that information, talking to firms, talking to consumers,
03:32talking to workers, really on the ground work like we do at the reserve banks and other places.
03:38You know, the Fed is built to do this on the ground work as well as look at the published data.
03:43President Daly, reading the blog post this morning, it seems like you're leaning more
03:46toward the 1990s side of things than the 1970s. Is that right?
03:50Well, you know, right now, you know, I'm in the West and I have the nine states in the Western United
03:56States. And it's not just Silicon Valley that seems interested in AI, no matter who we talk to,
04:01whether they're, you know, small businesses, medium or large businesses, manufacturing,
04:06tourism, et cetera. They're using AI in a way that they say is going to improve their productivity.
04:13And they're already seeing parts of it. So when I see that, I'm like, OK, we need to think about that.
04:18What really will spur this as an ongoing thing is if they start to change their business processes.
04:23So that's what I'm looking at now. That means. But I guess a different way to say that is we cannot
04:28take our eyes off inflation. Again, Americans have endured high inflation too long. That's our
04:33mandate. So while I'm looking for productivity gains and seeing if they're going to continue,
04:38I'm also keeping my eye completely focused on inflation to make sure that it doesn't pick up
04:43in a way that would suggest we need to do more or we need to hold longer.
04:47President Daly, how would you respond to the criticism that the Federal Reserve as an institution
04:50has taken its eye off inflation, that inflation is closer to three than it is to two
04:55and the Fed's been counting interest rates? You know, I don't think that if you unpack the
05:00inflation data, you really see signs of that. It's true that headline inflation is printing at
05:05that level. But you have to take apart that inflation and ask how much of it is the effective
05:10tariffs passing through to goods prices that we expect to be a one time price level adjustment
05:16and not a consistent run up in inflation. If you unpack the data, what you see is you don't see
05:21inflation running up in services or housing. And importantly, you don't see it spreading into
05:26inflation expectations. That would be the thing that would continue to run up inflation going
05:31forward. We also see a labor market that's softening and wage growth that is moderating.
05:35So you're really not going to see a lot of pressure coming on the cost side of labor.
05:39So I put those things together and we don't want to make the mistake of holding on too long
05:44for rates only to find out we injure the economy.
05:47President Daly, can we just pick up on the cost of labor? I think this is really important right now.
05:50Clearly, and it's hard to dispute this, it's in the data, we've had a massive step down in payrolls
05:55growth. What's behind that is a little bit more confusing. Is it demand? Is it cyclical? Is it
06:01structural? Is it something else like immigration? What's your talent right now? What can you point
06:06to that helps tell you it's one thing over the other?
06:10Yes, you look at prices. In this case, the price of labor is wages. If it was simply about supply
06:17and firms were still scrambling to find workers to fill what was jobs that were supported by the
06:23previous immigrants, you would find wages going up as they bid for workers to try to fill those jobs.
06:29But that's actually not what you see. You see wage growth slowing, even in sectors where
06:33immigration played a larger role. And so that to me tells, says it's a demand shock, a negative demand
06:40shock, along with just a coincidental negative supply shock. So you lost workers,
06:45but you lost jobs at the same time, or you had job growth slowing. And what we're seeing now
06:51is, does that continue to net out? What if the supply of workers doesn't keep going down,
06:57but the demand for workers does? Well, then we'd end up with a rise in unemployment. So
07:01have to keep squarely focused on those types of things. We're definitely in a low-firing, low-hiring
07:06period. And interrogating that labor market, continuing to watch the information, see what
07:11firms do next, that's going to be the important part.
07:14And it's something that a lot of people have said really is the K-shape, the idea that particularly
07:18on the lower end, you have not seen wages keep pace with the rest of the income spheres. I just
07:25wonder, though, how much we are seeing a massive amount of inflation and asset prices, and how that
07:30feeds into what you're looking at, especially at a time that may rhyme with the 1990s. And we know
07:35it happened after the 1990s. How much do you weigh that? How much do you have to pay attention?
07:40Well, you know, one of the things that you do, so financial market conditions are one input into
07:46our decision-making, one of many inputs. You know, we have two goals, price stability,
07:51full employment. We're trying to think about what inputs affect those two variables, those two goals.
07:57But what I look at is, if you look under the valuations, you know, people are really talking
08:02about one of two things. This is going to be a transformative technology. AI is going to change
08:07the world to be like electricity or the steam engine. And then the people who are a little
08:11more skeptical are saying it's going to be a business-as-usual technology. Think of computers
08:15and the internet. The thing that's true about both of those is they're both productive. You get
08:20productivity from both of those. They both help with growth. They both help the pie in the U.S.
08:25expand. And so we're not talking about a bunch of ideas with no backing. We're talking about,
08:31you know, equity investors, not highly leveraged, going in and making bets, really, on whether it's
08:38going to be transformative or business-as-usual. But everybody agrees on one thing. It will change
08:43productivity.
08:44At the same time, President Daly, some people would suggest that, yes, you will see stocks continue
08:48to go up in the face of another rate cut. But at the same time, the transmission mechanism
08:53of the additional cuts are slower to take place. It's less efficient in terms of the pass-through,
08:59just based on how much lending there is, whether it's in the private lending sphere
09:02or beyond. How do you measure these things at a confusing moment?
09:07Well, you know, I guess this argument that we've somehow lost our power,
09:11monetary policy doesn't transmit. I simply don't see it in the information. If you go out and you
09:17look at what happened when inflation was running really, really high, we raised rates pretty
09:22aggressively. And mortgage interest rates rose rapidly. Car loan rates rose rapidly. And the
09:27economy slowed. Inflation came down. Right now, what I'm seeing is we adjust rates. Mortgage
09:32interest rates come down. Not one for one. That's not how it works. Usually is less than
09:37one for one. But they come down. You see a little more activity in the housing market.
09:41You see a little more activity in the borrowing market more generally. And you see that dynamic
09:45work. So I guess the most important thing is just to remember that monetary policy acts
09:50with a lag. And right now we're making decisions not just for what's going to happen next week,
09:54but what's going to happen in the next six months to a year. So that's how we have to think about it
09:59with our forecasts and then how we adjust policy as those forecasts evolve.
10:03How frustrating has it been not to get government data?
10:07You know, I really want the information, the fullest amount of information we can possibly get.
10:12But one of the things that I think may be underestimated in public about what the Fed does
10:18is we're regularly relying on government-provided data. That's the gold standard of data in the
10:23world. We're also relying on private sector surveys, which have been collected for many,
10:28many years. And we can correlate them with the government-collected data over time and know
10:33exactly how they relate to one another. And then, of course, there's really no replacement,
10:37especially at inflection points in the economy, for talking to businesses, workers, communities,
10:44and consumers. Asking people what they're really doing. And then, you know, I like to do this.
10:49Go to the parking lots of your favorite retail stores and look at how many cars are in the parking
10:53lot and what people are buying. That tells you a lot. You know, airports are full. People are out
10:59there. You can go to, you know, go to a sporting event or a concert, see how many people are there.
11:04What you see is an economy that is slower than it was. Consumers that are not, they're more picky
11:09about what they spend on, but they're still out there participating in the economy. And that's how we
11:14get the information we need to make the right decisions that are according to our mandates,
11:18but mostly for the American people. President Ali, you've been working with the Fed or on the
11:22Fed committee for a long, long time on these, in these debates. Have you ever seen it more divided
11:27than it is right now on the FOMC? You know, of course. I mean, look at the, if you look at the
11:34transcripts and the meeting minutes and, you know, it's helpful. Go back and look at the 1990s debates
11:39and go back and look at the commentary around the 1970s. You know, it is a misnomer to think people
11:45always agree. The right way to think about it, my judgment, this has been my experience,
11:49is that the debate we have, I wouldn't even call it division. I would call it differences
11:54of opinion that are really healthy in a debate about trying to make policy in an uncertain time
11:59with no truth. We don't have truth. We have forecasts. We have our best estimates. We have taking
12:06the evidence and then taking it again and looking through it with different lenses. I see that as a
12:12strength of the committee, a strength of the Federal Reserve, and importantly, is it, is delivering the
12:17best possible decisions we can make. So I have seen this many times before, and I think it's always
12:23at inflection points that you see the broadest amount of disagreement. And it's exactly what I
12:28hope people would want from a committee making decisions on inflation and full employment. It really
12:33does help us make sure that we're doing the best we possibly can. So you're happy to confirm on the
12:38record. You have not seen Governor Myron and President Smith in a fight in the two-day meeting.
12:43Can we confirm that, President Daley, today? That hasn't happened.
12:47You always try, and yet I'm not a rookie.
12:51Mary Daley, thank you.
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