San Francisco Fed President Mary Daly Explains the 'Hawkish Cut'

Last week, the Federal Reserve cut benchmark rates by 25 basis points, but simultaneously signaled a slower pace of cuts for next year. The guidance surprised markets and sparked a selloff in both stocks and bonds as traders adjusted to the new forecast. So what made the Fed change its stance? And where do the balance of risks to the economy lie right now? In this episode, we speak with Federal Reserve Bank of San Francisco President Mary Daly about how she's viewing the outlook for both inflation and the labor market. We also talk about the impact of AI on productivity, and how she's thinking about the potential impact of new policies from the incoming Trump administration. Read More:Fed’s Daly Says She’s ‘Very Comfortable’ With Two 2025 Rate CutsPowell Signals Fed’s Focus Has Returned Firmly to Inflation Become a Bloomberg.com subscriber using our special intro offer at bloomberg.com/podcastoffer. You’ll get episodes of this podcast ad-free and exclusive access to our daily Odd Lots newsletter. Already a subscriber? Connect your account on the Bloomberg channel page in Apple Podcasts to listen ad-free. See omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:15Speaker 01

  When you're a business owner interested in expanding to new markets, there's a lot to consider and countless questions to answer before making the call. The most important one being, are you ready? That's where ChatGPT comes in. Give it a goal, add your files and ask chat to help you map out different scenarios for the future of your business. So when growth is on the table, you've got an expansion plan ready to implement. Get started at chatgpt.com.

• 0:44Speaker 01

  Bloomberg Audio Studios. Podcasts, radio, news.

• 1:01Tracy Alloway?

  Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.

• 1:05Joe Weisenthal?

  And I'm Joe Weisenthal.

• 1:07Tracy Alloway?

  Joe, how about that hawkish cut, eh?

• 1:10Joe Weisenthal?

  Exciting, interesting times in macroeconomics, the Fed, the markets, plenty to talk about right now. We're recording this December 20th.

• 1:20Tracy Alloway?

  Yeah, we're recording this December 20th. So two days after we had what is being called a hawkish cut from the FOMC, the central bank decided to cut by 25 basis points. But at the same time, they unveiled, you know, their new forecast for next year. And it looks like the expectation is 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.

• 1:49Joe Weisenthal?

  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 a 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 2025, some questions about labor market stability, plenty to dive into, plenty of crosswinds for investors, traders and so forth to digest.

• 2:19Tracy Alloway?

  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 guest to dive into all of this. We're going to be speaking with Federal Reserve Bank of San Francisco President Mary Daly herself, a voting member on the FOMC. So, Mary, thank you so much for coming on All Thoughts.

• 2:42Speaker 04

  I'm delighted. My lucky day.

• 2:45Tracy Alloway?

  So why don't I start with the obvious question and one I think I suspect you've been asked this multiple times over the past couple of 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 2% until 2027?

• 3:05Speaker 04

  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. It's 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

• 3:50Speaker 04

  while you're closer to your goals, the economy just starts to falter and you end up, you know, 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, you know, low and stable inflation and jobs that helped 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 that's 75 or 100 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

• 4:31Speaker 04

  data and the incoming information and our projection of how the economy will evolve and take our time to make any additional policy adjustments.

• 4:39Joe Weisenthal?

  So if the 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 dot for 2025 ticked up, what is the residual source of the inflation if it's no longer the labor market?

• 5:00Speaker 04

  Yeah, 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 with 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 values, and those have been up. So it feels like inflation's high in those areas, partly because of the estimates, but

• 5:44Speaker 04

  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's 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 relative to the number of people who want it.

• 6:26Speaker 04

  And so that's something that, you know, may be stickier for a longer period of time than we thought and will cause inflation to be elevated.

• 6:34Tracy Alloway?

  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?

• 6:59Speaker 04

  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 sidelines. So I'll tell you an anecdote or some stories from my contacts. So I have the nine states in the Western US. That's the 12th district of the Federal Reserve. And that's the coastal states, Alaska and Hawaii, and all the Intermountain states.

• 7:41Speaker 04

  So Utah, Nevada, Arizona, and Idaho. Those states, we saw immediately when we took the first 50 basis point reduction in the interest rate, is our contacts, I was out in, in those areas. Our contact said, we're going to take some projects off the sidelines. And I said, really? That's just a 50 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 you know, another thing you learn, especially if you travel into Idaho, Utah, where they've

• 8:22Speaker 04

  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.

• 8:35Tracy Alloway?

  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, in the San Francisco Fed catchment area.

• 8:46Joe Weisenthal?

  Guam is one.

• 8:48Tracy Alloway?

  Very good. You'll never get the third one.

• 8:50Joe Weisenthal?

  So what are the other two?

• 8:51Tracy Alloway?

  Uh, American Samoa and the Northern Mariana Islands.

• 8:54Joe Weisenthal?

  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.

• 9:03Speaker 04

  Oh, he's my buddy.

• 9:04Joe Weisenthal?

  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 throwing it out there. Anyway.

• 9:12Speaker 04

  You can come to any of the states. I'm going to Alaska. I go to Hawaii.

• 9:16Joe Weisenthal?

  All right.

• 9:16Speaker 04

  Idaho. Yeah, anytime. I have a road. I do road trips all the time and you're welcome to do it.

• 9:22Joe Weisenthal?

  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 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 longstanding 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 2025 has gone up?

• 10:06Speaker 04

  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, you know, geopolitical issues and

• 10:41Speaker 04

  You know, trade back and forth, it doesn't matter what administration you've been in, the one we're in now or 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's 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.

• 11:25Speaker 04

  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.

• 11:59Speaker 00

  What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 12:15Speaker 05

  We're seeing a lot of insocial players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service insocial clients.

• 12:24Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reese Merrick of Ripple says.

• 12:31Speaker 06

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 12:51Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 12:59Speaker 01

  With ChatGPT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and ChatGPT can help you do it with confidence. Get started at ChatGPT.com.

• 13:36Tracy Alloway?

  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 25 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.

• 14:00Speaker 04

  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 rate 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 at two, it seemed to be a very large response. And yes, that was surprising because three doesn't seem that far from two.

• 14:44Speaker 04

  And it's certainly in this, it's 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 we'll 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 and the world that caused them to take this more risk-off approach, but.

• 15:18Joe Weisenthal?

  You're talking about, okay, at 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, it could change again at the next dot 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 stands, we do appear to be in a sort of new higher rate band than we were if we had been having this conversation in, say, 2019 or 2018?

• 15:57Speaker 04

  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

• 16:40Speaker 04

  the neutral rate of interest down. Supply of savings was plentiful, interest and demand for investment was, 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, you know, the sovereigns, the countries are all out there borrowing quite a lot of money, and that pushes the demand for investment or spending up. The companies are coming off the sidelines on investment, looking to take advantage of automation or AI. That very, I haven't been a labor economist my whole career, and one of the things you see again and again and again is when we have tight labor markets

• 17:22Speaker 04

  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 that AI is 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 ChatGPT was announced right before Thanksgiving of 2022, is that right? That's right. Yeah, 2022, 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, you know, things to make my life better are going to give me those things.

• 18:05Speaker 04

  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 then 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 spent a decade or more fighting inflation from below our target. Our target's two, we were stuck at 1.5, 1.6, 1.8, never got over 1.8. That's below the target. We're trying to push it up.

• 18:44Speaker 04

  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 bay.

• 18:57Tracy Alloway?

  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, well, 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, 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.

• 19:28Speaker 04

  I'm going to take the opposite view. I actually think the models have done remarkably well.

• 19:32Tracy Alloway?

  Huh.

• 19:32Speaker 04

  So the beverage curve is, is like a grand success. For example, if you take this V U 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.

• 20:13Speaker 04

  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 curve's a little flatter than 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.

• 20:56Speaker 04

  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 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 at these headline numbers. So, we look at all the real site 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.

• 21:40Speaker 04

  Well, Tom and I share 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 lay off, 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 we can make better ones.

• 22:09Joe Weisenthal?

  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 this 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 state?

• 22:27Speaker 04

  I see the labor market is really balanced and that's something that I was, I've been watching for. And it hasn't ever gotten into a dangerous weakness. It hasn't, it's definitely slowed and earlier in the year it was slowing at a rapid pace. Now that slowing has settled out a bit. What we hear from firms, so we do a lot of, you know, questions and surveys and with firms and we talk 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.

• 23:11Speaker 04

  Before they, you know, nobody wanted 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 they're saying, 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 labor market, I think of workers. It 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.

• 23:54Joe Weisenthal?

  By the way, I have some good news to report for everyone in the room.

• 23:57Speaker 04

  All right.

• 23:58Joe Weisenthal?

  You might be happy to hear this. Core PCE just came in as you are answering 0.1% month over month versus expectations of 0.2%. So just a little live update on the economic situation, maybe makes your life a tad, tad easier in 2025.

• 24:14Speaker 04

  Well, I think it's just good news. I mean, you know, one of the things when I see the incoming information, I remind myself of a couple of things. It's just one data point. We are not a data 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.

• 25:00Speaker 01

  With ChatGPT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and ChatGPT can help you do it with confidence. Get started at ChatGPT.com.

• 25:37Tracy Alloway?

  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 20. We might have a potential government shutdown. 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 forward looking policy elements? And one of the reasons I ask is because Powell, at the presser on Wednesday, he said there were some members of the FOMC who were starting to take that possibility into account in terms of their forecasts. Are you one of them?

• 26:19Speaker 04

  I am not one of them. I actually have managed through, you know, To the central bank here, at first as an economist and now as the president since 1996. 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, in 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.

• 27:04Speaker 04

  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 and data and other things work and that how these, 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, you know, the cabinet members, etc., to get a slate that really works for everyone.

• 27:48Speaker 04

  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 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, just take potentially workers from the labor force. So you put all those things together, and what you realize quickly is it depends on the scope of the changes, the magnitude of the 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

• 28:34Speaker 04

  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 as something that's not very harsh.

• 28:58Tracy Alloway?

  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 hard 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?

• 29:39Speaker 04

  You know, I think it's possible, but in the before, I really understood the discrepancy. And here's what how I understood it. You could see it when you would talk to people is they felt like inflation had raised the price level so much that they weren't able to catch up. So it had stolen something from them because it's a tax. It's a 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

• 30:23Speaker 04

  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. They're pretty they're 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. And that cautiousness, that spending their own money on things, they, that's only going to be removed

• 31:06Speaker 04

  when we really see how the economy and the policy changes are netting out.

• 31:13Joe Weisenthal?

  Let's talk about, as you mentioned, theoretical policy changes under the incoming administration. You are not one of the members who caused that to change how you're thinking about 2025. Because as you said, we don't know, we don't know how it's going to net out, et cetera. You have 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 change.

• 31:40Speaker 04

  Transitory? Is it transitory, Joe?

• 31:42Joe Weisenthal?

  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 a spur 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 this sort of new higher 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 and not others,

• 32:26Joe Weisenthal?

  how do you think about potential ramifications of that?

• 32:29Speaker 04

  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, you know, in the, 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 tariff an intermediate. 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 is very challenging to know ex ante or in advance.

• 33:11Speaker 04

  So I think it just is much more complicated than you look through it. Now, standard classic textbook models would tell you to look through it. We I tend not to say 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 takes 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. Right. They want a more fair playing field, our elected officials, because voters have said we want a fairer playing field. And when you put a fairer playing field in, you might see a reorganization of activity to adjust to that new fairer playing field. But that was the intention all along.

• 33:56Speaker 04

  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 do, we would have to work to make sure that that doesn't cause inflation to rise above 2% and that somehow we don't end up losing our full employment, the place in full employment that we have now.

• 34:40Speaker 04

  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 founding fathers. And it's why they did that is it's because they wanted that tension to be there in my judgment.

• 34:59Tracy Alloway?

  So Joe and I were in San Francisco a few weeks ago.

• 35:03Speaker 04

  I know I missed you. I'm sorry.

• 35:04Tracy Alloway?

  I know. It would have been great to catch up, but.

• 35:06Speaker 04

  I was in some other place.

• 35:07Joe Weisenthal?

  Go for a Waymo, ride in a Waymo with you.

• 35:09Speaker 04

  I love the Waymo.

• 35:10Tracy Alloway?

  I was literally about to talk about the Waymo. Okay, I went in my first ever Waymo.

• 35:15Speaker 04

  Oh, okay.

• 35:15Tracy Alloway?

  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?

• 35:50Speaker 04

  So we're already seeing this. And one thing that if you go back to, you know, Robert Solo, 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 1996. And 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.

• 36:14Tracy Alloway?

  Oh, wow.

• 36:15Speaker 04

  It was literally, 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.

• 36:24Tracy Alloway?

  So this would have been the early 2000s when he was talking about like the big boom.

• 36:27Speaker 04

  This is 97, 98, you know, really before we even got there. And 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. And they're, 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 2000s, but it's still a cool example. So before we had, you know, 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.

• 37:13Speaker 04

  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 produce 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 just going to see it everywhere except in the data. And sure enough, it turned out to be right. Productivity was all over the place.

• 37:58Speaker 04

  And eventually, when the data got revised and we got better at figuring out 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 ChatGPT 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 it's, 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, you know, CIOs. And we're asking them, what are you doing?

• 38:43Speaker 04

  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 impetus of change is there. And so it's not all about the Waymos or the Zooks. You have to write in the Zooks 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.

• 39:27Speaker 04

  And I think that's potentially a huge benefit. It could take a decade, but it's, it is happening.

• 39:33Joe Weisenthal?

  First of all, it must be fun to be this SF Fed president. I'm sure every regional Fed president thinks their region is great, but A, you have so much territory and B, all the coolest stuff in the world is happening in your district.

• 39:46Speaker 04

  I agree, actually, but you know, I shouldn't say that.

• 39:50Joe Weisenthal?

  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 you 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

• 40:35Joe Weisenthal?

  to be refinanced in a couple of years. I would love to see lower rates. Setting aside what the ideal mix of deficit reduction, et cetera. If we want to get to a sort of sustainably lower band for rates, and you mentioned it's a global phenomenon, does a lower deficit spending seem like one of the key components to it?

• 40:57Speaker 04

  You know, I don't make those fiscal decisions.

• 40:59Joe Weisenthal?

  I know it's not a decision, but I'm trying to like it.

• 41:01Speaker 04

  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. 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 are spending more money.

• 41:34Joe Weisenthal?

  Right.

• 41:34Speaker 04

  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 you keep going. And I, so I think this is a global, a global issue. And then, of course, we still have the aging population that's working through it that we have to pay for. And that's true in almost every country, industrialized country in the world.

• 41:53Joe Weisenthal?

  Energy transition.

• 41:54Speaker 04

  Energy transition, then you got 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.

• 42:06Joe Weisenthal?

  Yeah.

• 42:06Speaker 04

  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.

• 42:23Tracy Alloway?

  The nice thing about having the podcast as a platform, Joe, is that you can personally lobby the Fed for a lower refi rate.

• 42:30Joe Weisenthal?

  Except as we've seen.

• 42:31Speaker 04

  We're independent.

• 42:32Joe Weisenthal?

  You can cut rates and it doesn't even lower the mortgage rate. Anyway, sorry, keep going.

• 42:36Speaker 04

  No, I just, I think ultimately they, you know, this, that's another thing that we, we control the short term interest rate and it, 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 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?

• 43:18Speaker 04

  And in all likelihood, it'll be higher than we saw prior to the pandemic.

• 43:22Joe Weisenthal?

  I just have one last question and a 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.

• 43:35Speaker 04

  Of course, we forget. No, I'm kidding. I'm kidding.

• 43:40Joe Weisenthal?

  People who are Fed Watchers sometimes talk a lot about the hawk dove meter and who's rotating in and out one year and is this person more hawkish, more dove-ish? You're currently a voting member right now. How significant is it when you think about, especially now that we have the dots and people pay a lot of attention to the dots and everyone puts in a dot 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 not?

• 44:21Speaker 04

  I've never seen an effect.

• 44:22Joe Weisenthal?

  This is really interesting.

• 44:24Speaker 04

  I've never seen an effect in my entire history, working for the Fed, even when I was just staffing the FOMC and not on it. 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, you know, curious and skeptical. If you come in and you say, you know, I already know the answer, you're not actually as useful as you come and say, I, I'm thinking about it this way, or you thinking about it differently? And we have those rigorous debates.

• 45:05Speaker 04

  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. I've worked for four chairs at this point. I've never seen any, any difference. And one of the things that also is true is that chairs are willing to take dissents. 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 four

• 45:49Speaker 04

  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 luckily, we have a very transparent Fed. So you can go and read people's speeches and remarks, see their interviews, hear their podcasts, hear ad lots. And you can, you need to make your own determination as a citizen.

• 46:22Tracy Alloway?

  I noticed in the beginning, you were still talking about like working towards a soft landing. And my question is like, when do 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.

• 46:38Speaker 04

  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 gave a speech. It's because it was about this.

• 46:46Tracy Alloway?

  Yeah.

• 46:47Speaker 04

  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 50th 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 to restore it. So I would say, so I actually redefine or define for people what I mean by a soft landing. It's a durable expansion that allows that to occur.

• 47:31Speaker 04

  So I'm not at all satisfied right now. But I just want to keep going because, you know, I grew up in the 70s. 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 Volcker did the Volcker deflation. They both lost their jobs. And now the whole family's in disarray. And I just remember that. And I think, you know, I didn't go. I would 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.

• 48:11Tracy Alloway?

  All right, Mary Daly, San Francisco Fed President. Thank you so much for coming on Odd Lots. And I should say, Mary has her own podcast, so you should definitely check that out, too.

• 48:20Speaker 04

  Can I say the name?

• 48:20Tracy Alloway?

  Yeah, of course.

• 48:21Speaker 04

  Zip Code Economies. Please, please join us. And you can come to any state in my district and I will travel with you.

• 48:27Joe Weisenthal?

  Amazing.

• 48:27Speaker 04

  If Hawaii is your destination state, I'm going back this year to see how the Hawaii economy is doing. Going to Alaska, going to all the other states.

• 48:35Tracy Alloway?

  I want Alaska.

• 48:36Joe Weisenthal?

  Yeah, I would do Alaska. I've actually been to Hawaii. So even though it sounds nice on a cold New York day right now, I would do Alaska.

• 48:43Speaker 04

  The cool thing about any of these states, whether you're sitting in Idaho, Utah, Alaska, Hawaii, is you're going to see, this is the thing that I loved about the 12th district. Once I moved to the 12th district to take the economist 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 you say it all comes down to the same thing.

• 49:18Tracy Alloway?

  All right. Thank you so much. That was fantastic.

• 49:20Joe Weisenthal?

  That was amazing. Thank you so much.

• 49:21Speaker 04

  Thank you.

• 49:34Tracy Alloway?

  Joe, that was a really fun conversation.

• 49:37Joe Weisenthal?

  I think if I were going to be any Fed president, it'd have to be Hawaii.

• 49:42Tracy Alloway?

  Listen to Joe on this podcast lobbying for lower mortgage rates and for the 12th Fed district.

• 49:48Joe Weisenthal?

  Well, and lobbying for us to take a trip to Alaska and Hawaii.

• 49:51Tracy Alloway?

  I'm on board with that one.

• 49:52Joe Weisenthal?

  Would you say the Northern Mariana Islands?

• 49:54Tracy Alloway?

  Yeah.

• 49:55Joe Weisenthal?

  And the Northern.

• 49:55Tracy Alloway?

  The only reason I know that, by the way, is because it was the tiebreaker round for a recent quiz that we held in, in Los Angeles for Bloomberg clients.

• 50:05Joe Weisenthal?

  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.

• 50:12Tracy Alloway?

  All nine states and three territories. I wouldn't have been able to do it. Mariana Islands, no way.

• 50:18Joe Weisenthal?

  But 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 outlook for 2025, 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.

• 50:53Tracy Alloway?

  Yeah, and I think there is that tension between, you know, wanting to see how everything shakes out and also 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 taking into account potential future policy.

• 51:11Joe Weisenthal?

  The housing question is going to be really interesting, right? Like, so what are the residual sources of inflation? If it's no longer the labor market, and of course, she defended the beverage curve, it's an employee, it's back in balance. 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.

• 51:48Tracy Alloway?

  Complications, definitely the word of the day. Let's see, so again, we're recording this on Friday, December 20th. 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.

• 52:04Joe Weisenthal?

  Absolutely.

• 52:04Tracy Alloway?

  All right, shall we leave it there?

• 52:06Joe Weisenthal?

  Let's leave it there.

• 52:06Tracy Alloway?

  This has been another episode of the All Thoughts Podcast. I'm Tracy Alockway. You can follow me at Tracy Alockway.

• 52:12Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our guest, Mary Daly, San Francisco Fed President. She is at Mary Daly Econ, and you can check out her podcast, Zip Code Economies. Follow our producers, Carmen Rodriguez at Carmen Armin. Dashal Bennett at Dashbot and Kel Brooks at Kel Brooks. Thank you to our producer Moses Andam. And for more Odd Lots content, go to Bloomberg.com/oddlots, where we have transcripts of 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.gg/oddlots.

• 52:52Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we have Fed presidents on the show, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

• 53:43Speaker 07

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