Mary Daly on Why Alaska Is a Leading Indicator for the US Economy

Alaska is one of the states in the Federal Reserve's 12th District, which is headquartered in San Francisco. For Mary Daly, the head of the SF Fed, the state right now is a leading indicator for the US economy overall. In an interview recorded on a trip to Anchorage, Daly tells us what she's learning from businesses in the state, how it relates to the rest of the US economy, and how she uses what she's learning on the ground in order to best guide monetary policy. We also get her big picture views on structural trends such as AI and an aging workforce, and why she's growing increasingly confident that the tariffs will not contribute to sustained upward pressure on inflation. 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.

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  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 0:59Speaker 01

  But according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

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• 3:06Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alocke.

• 3:10Joe Weisenthal?

  And I'm Joe Weisenthal.

• 3:12Tracy Alloway?

  Joe, I don't know about you, but when I think about Alaska, I think about snow, glaciers, gold, oil, pipelines, northern exposure, small plains, and the 12th district of the Federal Reserve System of Banks.

• 3:29Joe Weisenthal?

  That's literally the exact list that I think, in that precise order.

• 3:33Tracy Alloway?

  What a coincidence. I can't believe it. All right. Well, we are in fact here in Alaska, in Anchorage, to be specific. And it's a really interesting time to be taking a field trip to the very, very northern state because Alaska actually has a lot of relevance to our current period.

• 3:52Joe Weisenthal?

  See, you know, we used to talk about how like Arizona was a very odd lotsy state.

• 3:55Tracy Alloway?

  Oh, yeah.

• 3:56Joe Weisenthal?

  And I still think, but this is a very odd lotsy state because there are so many specific things that we hear about here, whether it's a demographic shift, oil, obviously.

• 4:06Tracy Alloway?

  Logistics.

• 4:06Joe Weisenthal?

  Logistics is huge. It's you just feel the presence of the various train and plane hubs and ship hubs here in Alaska. So it is in housing, which has a very difficult housing environment here, too. So it is a very meaty area for us to do our coverage.

• 4:22Tracy Alloway?

  Absolutely, and we do in fact have the perfect guest to talk all about it. We are going to be speaking with Mary Daly. She is of course the San Francisco Fed President and therefore the President of the 12th District and Alaska is in that district and she's here on a trip and she's going to talk to us for quite a while. So, Mary, welcome to the show.

• 4:40Speaker 06

  Thank you so much. I'm delighted to be here and I'm so delighted that we're in Alaska together.

• 4:44Tracy Alloway?

  I was going to ask, how often do you actually come here?

• 4:47Speaker 06

  I come regularly, but it's not just me. Members of my team, economists, our engagement officers, our public engagement officers, they come too. Ultimately, we're trying to source information from all of our states. So we go to all the states in our district, there's nine of them, and we ask questions of all of them about how they're living in the economy, what are the things that concern them, what are the opportunities, what are the challenges?

• 5:09Joe Weisenthal?

  So, big picture, how's the Alaska economy right now? Or what constitutes the Alaska economy, actually?

• 5:15Speaker 06

  Well, let me tell you something I learned the first time I came to Alaska. It isn't an economy, it's a series of economies, right? If you go to the more remote areas that you can only say access by airplane, you can't even, there are no roads, they live in a cashless economy that subsistence. That looks very different than Anchorage where you're using your digital wallet to pay for things locally, that more familiar to the lower 48. And so, really, when you think of Alaska, you have to think of economies, communities, and you have to imagine that the leaders here and the population here has to come together to ensure that all the decisions they make serve the variety of needs they have. I think that's what makes it so rich. It really is at the forefront of so many things that can affect the national economy

• 6:00Speaker 06

  that it's a really great place to learn.

• 6:02Tracy Alloway?

  Is Alaska of particular relevance at this particular moment in time when, you know, uncertainty is the word of the day, we do have tariffs going on, inflation is still a lingering concern, and Alaska, of course, does already have a high cost of living?

• 6:16Speaker 06

  So, you know, think about Alaska as, right now, a leading indicator. They're sitting in the perfect storm, if you will, of all the things going on in our economy. They have a higher price level and they've suffered even more from rising inflation. They are... Thinking hard about how do they import and how do they do this, given the tariffs. They are a recipient of tremendous amount of federal spending related to strategic defense and the military capacity and even things like satellites. So they are right there. And so coming here and seeing how they're dealing with it, one, it tells me how resilient our economy is more generally to these different changes. And two, it provides me a leading indication of how businesses in communities, they're right there on the forefront, are going to respond to this.

• 7:00Speaker 06

  And I can use that information to look on the lower 48, especially my state, and ask, what are we seeing there? So it gives me early insight into the changes and how they're likely to affect the economy.

• 7:10Tracy Alloway?

  Joe, Mary just did the intro better than I did, I think.

• 7:14Joe Weisenthal?

  Resilient and scrappy feels like one of those things where like every town in the world or every city likes to describe their residents as such. But this is like the first place I've been where I 100% believe it. And when hearing the stories of people who've been here multiple generations is like, okay, I actually fully buy that. But it's interesting. So one of the, there's a lot to go down, but we've heard about declining population levels, particularly in Anchorage. And it's interesting to me because you're a San Francisco Fed President, so you have part of your district is wrestling with population decline. And then also San Francisco itself, this massively housing constrained destination for labor, right? People want to go to make their fortunes in a different kind of gold rush. But talk to us about like, you know, your perception of the economic challenges in a

• 7:59Joe Weisenthal?

  place where there's a lot of outmigration, where it's difficult to say keep young people around.

• 8:05Speaker 06

  It's very difficult. Alaska's not unique there. You can look outside of my district at North Dakota and other places and go to these rural communities and they'll say, we want to keep our people. And it's hard to do it, right? But what is particularly true in Alaska is there's several things going on all at once. And ultimately, when people decide to stay in a place or come to a place, they want An ecosystem of things that are important to their ability to thrive. They want to have work. And not just work they start when they're 22, but work that they can grow into and maybe change into as they age. They want to have housing opportunities so that if they want to raise a family or if they just want to own a home, they have that. At this point, there's even trouble getting property, even if you're just leasing it.

• 8:50Speaker 06

  So there's those types of pressures. So that's taking that risk. And then if you're trying to build a family, there's the schooling issues of population outflows mean that fewer schools are available. So then the equation starts to break down. And what really has to happen is they have to believe that they can stay because something more prosperous will occur, or that they really like the outdoors and being part of this beauty. And I think that that equation's not penciling it out like it was because ultimately, if people don't have jobs or a place to live, or see a bright future for their career and their family, then they will feel forced to go elsewhere. And I think that's where the state leadership and the Anchorage leadership and all the business leaders I meet with, that's their fundamental concern.

• 9:34Speaker 06

  One person put it this way, how do we attract people? That's important, but how do we maintain them? How do we retain the interest in us when our economy is not doing as well as some competing economies in the lower 48?

• 9:47Tracy Alloway?

  Well, on that note, can you talk a little bit maybe about the cost of living in Alaska? Because this is another thing that is somewhat unique. There are higher prices for just simple things like groceries. Housing might be constrained in a way that you wouldn't necessarily think about for a place as big as Alaska. But this comes up quite a lot, and I'm very curious how you're thinking about inflationary pressures on Alaska specifically, given that over the past few years, inflation was a concern for all of the states, but I imagine it was an extra concern here in this particular one.

• 10:21Speaker 06

  Absolutely. You start with this. Just the recognition that almost everything costs more in Alaska. Why? Well, you have to import a lot of the things that we take for granted, you know, whether it's healthcare products or things that you can use for your buildings or simple groceries and shoes and other things. Now, we import a lot of that stuff to the broader US, but the shipping cost to come all the way up to Alaska and then the distribution across the greater Alaskan region is very challenging. There's transportation costs that if you only take that alone, really drive up the prices. That's already a higher price level and then you add to it a higher inflation rate.

• 11:02Speaker 06

  Well, then the pain that anyone might feel in the lower 48, that's just magnified in Alaska. You put with that the fact that in the, you know, 20 years ago, wages in Alaska used to be higher than wages in the lower 48, but that gap has shrunk over the last 20 years. And so now the wage levels are roughly the same and the prices are a lot higher and inflation is driving those up more and things aren't getting cheaper to import into Alaska. And I think that's why people say, you know, it's just when I try to build a property, I'm a builder and now I have to pay higher costs to ship things in. And if I get tariffs on top of that on the basic inputs, that just doesn't pencil out anymore. And that's the equation they're dealing with. It's just more expensive.

• 11:47Speaker 06

  It's harder. It's cold here. It's remote in many places and all of those put challenges that ultimately raise costs.

• 11:53Joe Weisenthal?

  Probably like the biggest question right now in this sort of, for the whole US is the degree to which tariffs will be inflationary, the degree to which they'll be passed on to consumers or absorbed by whoever. What specifically are you hearing from businesses about what they can do and the actual impact of tariffs on their operations?

• 12:13Speaker 06

  Sure, I'll start with Alaska since we're here and I've been meeting with businesses since I came, but I'll go broaden it if you don't mind. So on the Alaska, we're hearing very similar things to what we hear in the lower 48. We're hearing that They want to pass it along to consumers because it's challenging to deal with, but that consumers are exhausted. You know, that's a phrase I hear a lot. Consumers are exhausted. I just don't know how much they can do. They're already trading down. If they used to go to one retailer, they're moving to the next level down, showing up in the dollar stores to try to find ways to make ends meet, or they're just foregoing things that they might do in the past. Those things put pressure on firms to say, well, if I raise my prices, I'm going to lose my sales and I have to pencil that equation out.

• 12:57Speaker 06

  So I see more of them eating it into their profits and then just hoping that they can either collectively go to Washington and get an exception for whatever they're trying to import or use, or they can weather a one-off tariff increase and then move to a more normal sort of thing. You know, in construction, you're hearing things like, well, we moved from steel framing to lumber framing, wood framing, because steel was tariffed and now we're looking for alternatives that we can make here or have lower import costs.

• 13:27Tracy Alloway?

  It seems like a serious trade-off going from steel to lumber framing.

• 13:31Speaker 06

  Well, you know, what's remarkable, and this is remarkable, and I think Alaska does this in ways that are even more innovative than other places I've seen, is construction and engineers, they know how to build things and they know how to make them durable. So you give them a set of materials. It's almost like when you do those cooking shows and they give you a box of things and they say to the people, make something delicious. That's what construction people and engineers are good about. They say, here's my box of things. I'm going to make a house that's durable, can last the cold climate, can be built on the permafrost. I'm going to figure it out. And I don't count them out because they're very good at this and it ultimately leads to the innovation that's needed to deal with the higher cost. The problem is it's happening all at once and it makes it really hard to innovate fast enough to offset the cost.

• 14:16Speaker 06

  So I'm hearing pass-through, but I'm not seeing a lot of it. You saw this in the published data, spreading it out past Alaska. Published data is coming out. Goods price inflation is going up. It's not spilling over into services inflation, either in housing or in services, you know, what I think of as supercore services ex-housing. That's good news. And the best sense from history and from what's happening right now is that there won't be much of an impetus so far to spill over that would get into a persistent inflation problem. You can't count it out, of course, but I don't think there's a lot of evidence that it's occurring.

• 14:49Tracy Alloway?

  I have a bunch more tariff questions, but since you mentioned history just then, one thing I'm really curious about, is there anything we can learn about how inflation expectations work from the Alaskan experience? So this is a state where a higher cost of living has been top of mind. When you start to see those idiosyncratic developments in terms of prices, when people are talking about something like tariffs, do you see expectations for future rates of inflation ramp up faster here than perhaps elsewhere in the US?

• 15:18Speaker 06

  So there's not a lot of good data on statewide inflation expectations, so we have to rely on talking with people. And when I talk with people, they worry more, but they don't, there's a difference. Inflation expectations, the way you can measure it is, am I asking for a higher wage? Am I going in and saying, I can't keep up, I need a higher wage? And we don't really see a difference here in Alaska than we do in the lower 48. We just see that when inflation gets to rising fast and the labor market's tight, then individuals say, I'm going to go ask my firm, and the firms are more willing to give it. But now that the labor market has softened, people aren't that interested in going in and saying, I want more money. It also is consistent with them thinking that the tariffs are a one-off.

• 16:01Speaker 06

  The best way I know to think about inflation expectations and kind of gather that type of information is look at short-term inflation expectations versus medium and longer-run inflation expectations. So all I can do is ask Alaskans that question, and I haven't seen anything different than the published data for the nation, which is, short-term are rising, medium and longer-run, they still believe that we can get inflation down to 2%. That suggests to me they think it's a one-off. Tariffs go up, you pay for them, and it's all about managing the increased costs, rather than thinking this is just another run of inflation.

• 16:49Speaker 00

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

• 17:05Speaker 07

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

• 17:13Speaker 00

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

• 17:21Speaker 08

  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.

• 17:40Speaker 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.

• 17:51Speaker 01

  This is the Bloomberg Tech Minute, brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 18:32Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that Candidates quote must be willing to work extended hours and weekends as needed. One major perk for all that hard work? Employees access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 19:13Speaker 09

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• 19:44Joe Weisenthal?

  Maybe it's a process question, but you know, obviously when it comes to the dual mandate, there's a lot of good government data. Actually, we should talk about data quality too. But I'm curious, like, what is the additional thing that you get out of these trips? Other, I mean, it's good to have anecdotes. It's good to make face to face as their regional Fed president. But when you think about incorporating your process or how it may even affect future votes on interest rate decisions, what do these trips add to official sources of data?

• 20:13Speaker 06

  Yeah, sure. Absolutely. So the most important thing is that I learn about how the economy actually works. It's very difficult to know how tariffs will affect an economy if you don't know how it works. It's very difficult to know how inflation will affect the economy or if the housing crisis that they talk about is really larger than the housing challenges you see in other places or it's the same. And importantly, it's not just a trip to Alaska that informs it. It's a trip to a variety of places that we serve. And that's why regional Fed presidents are out a lot because we're trying to collect the information. That's one big reason to learn about it. You know, when I take a tour of, you know, a port or a manufacturing plant or a drilling

• 20:55Speaker 06

  facility, I'm learning how those things work together so that I can better understand how the economy will. Perform when they face a shock. It's not all about the price of oil. It's about how many workers do they have? What's the drilling? Where are the bits? What are you working on? Where do you get your things? So that's piece one. Piece two is data are almost entirely backward looking. They tell you about what happened last week, last month, last year, but you can't make policy on backward looking data. So it tells you where we are in level terms, but it doesn't tell you where you're going. And so getting to talk with people and actually ask them questions like this, I ask this question all the time now. So you feel really uncertain. I'm sure that's worrisome. Are you changing your behavior because of it? And the first question is always, yes, we're very uncertain.

• 21:40Speaker 06

  And the second one has been, we're not changing our behavior entirely. So I'm continuing to invest, but I'm not necessarily taking on riskier projects. I want a good ROI if I'm going to keep going. So I think that's another reason to come. And then the third reason to come, and this is really important and I think underappreciated, is the Federal Reserve Act created 12 reserve banks and a board of governors and did so, if you go back and look at the original documents, to recognize that you can't make policy that serves the nation if you only are in DC. But that gives us a responsibility as reserve bank presidents to represent the people who we're serving in terms of learning about them and bringing their collected information to help us make national policy. So that's what we do.

• 22:25Speaker 06

  And when we come, people feel like we are doing the work on their behalf and trust goes up. And when trust goes up, as I've said many times and many of my colleagues have, trust is one of our most important tools because if people believe we can achieve price stability and full employment, then they behave as if we can achieve price stability and full employment. And that's a virtuous cycle that actually delivers it faster.

• 22:48Tracy Alloway?

  This was going to be my next question, actually. And again, it's kind of a process question, but if your job is to represent the 12th district and the 12th district has diverse states in it and Alaska perhaps in many ways is an outlier, how do you actually judge, I guess, or how do you make sure that you're representing different interests, perhaps different states might be at different places in the economic cycle? And you're dealing with basically an interest rate that tends to be a single, one-size-fits-all interest rate, a pretty blunt tool in many ways. How do you balance that?

• 23:23Speaker 06

  That's a great question. And I'll say it this way. Representing the economies and the voices of the people doesn't mean we're transactionally balancing the interest rates hurts you, it helps you, because we can't make national policy for any particular region. Not the 12th district, not the first district, not a state. And that's just part of the constraints of our job, right? We have a dual mandate for the nation. So you're aggregating up the data. But then it's a mistake to think that if you have the aggregate statistics, you know how the economy is faring. There are many places where, let's take tariffs and federal spending cuts and oil and gas drilling, deregulation. That's happening all in Alaska. So Alaska becomes the leading indicator in many ways for how this is affecting the

• 24:09Speaker 06

  economy. And so if I see it here, I can then expect to see it other places. In some time periods, that would not be true. Alaska would not be a leading indicator. It would lag the economic performance of the country and/or any economic changes. So you know your states and your economies well enough, and all my colleagues know their states and economies well enough, that they know where we are in the business cycle or the sequencing of things, to know which states are leading, which states are following, and then what states are being most impacted or less impacted, so we can make better policy. The other way I put it together is, and the interesting thing about having a very diverse district is you start to learn how similar people are. You know, everybody wants the same thing. They want inflation to be at target.

• 24:51Speaker 06

  They want to have economy that's sustainably thriving, that's sustainably available. They want to be rationally inattentive to inflation and whether the economy is going to be pushed into a recession. They just don't want to think about it. And that's a universal truth. It doesn't matter if I'm in Alaska, Hawaii, or Nevada. Doesn't matter. Idaho feels the same way as California in that goal, in that sense. And so I can go and see to that point, are people nervous? Are they optimistic? Are they cautiously optimistic? Today, I see concerns, but when you really push them, and this is true across the 12th district, people are cautiously optimistic. Some cities have more cranes than others, but everybody's got a crane.

• 25:33Joe Weisenthal?

  When we last had you on the podcast, when you were coming through New York City, we talked a little bit about AI and you represent the home of the most advanced AI models in the world. When you're out here talking to many of these sort of old school industries, do you talk to them or hear anything about tech diffusion, like the implementation of these? And is there anything interesting that you've picked up on that?

• 25:53Speaker 06

  Absolutely. Let me start with the most interesting thing I picked up and I'll expand it to the other things. I want to give a shout out to the small businesses. So, small businesses are, they can be remote across Alaska. It's hard for them physically to reach marketplaces that are not in their immediate area. They often have limited workforce availability in some of these places, or just small businesses in general, you're dealing with rising costs. And so you want to keep your portfolio of labor small. And they turn to AI to do things that augment their output because they're augmenting their skills. So it's that they can save time, they can do, you can write a marketing plan by asking one of the AI models, here's my inputs, can you write a marketing plan? And

• 26:36Speaker 06

  already you're ahead. Can you write me a pitch deck? Can you write me, can you tell me the five best marketplaces in the United States for the products I want to sell? All of this makes it better. And it's not, it's not limited to just that kind of marketing and growth sales. It's actually also about can I do things differently? So we were talking to a small manufacturing firm, not in Alaska, but I've seen, hearing the same things here, that said, we're able to use AI to do first drafts of plans based on the 30-year history of all plans we've ever made to create this one small part that someone asked me to machine. So those are the kinds of things that I'm starting to see spread. Then if you're a larger business here in Alaska, you want to use AI, just like any other company

• 27:19Speaker 06

  in the nation, to make sure you're not falling behind and get a competitive edge, right? These things, these tools are helpful and it's not just about reading your emails faster or writing a draft of something. It's about really thinking about your core business. What can I do with AI that helps me save? Time and helps me augment my existing workforce when we have often a workforce shortage.

• 27:41Tracy Alloway?

  How are you thinking about AI generally? And one of the reasons I ask this is because one of our frequent guests, Neil Dutta, was writing a guest piece in our newsletter today and he was talking about how there's pressure on the housing market, there's pressure on consumers, and then you have this third big trend in the US economy, which is this massive investment boom in AI. And in some sense, it feels like the AI investment boom is very, very divorced from the health of the consumer and other things going on in the economy. How are you factoring that into, I guess, monetary policy and how you feel about things more generally?

• 28:17Speaker 06

  Well, it's very true that the AI investment boom doesn't look like the, you just look at stock market prices and valuations, right? If you look at the companies that are invested in AI development, they look different than our AI support, they look different than the companies that are doing mainline manufacturing. I mean, this is a fact. But I don't see that as a competing interest. I see that as that's a structural development that's just going to keep going. And then on the other side, you have the cyclical aspects of the economy and people do feel stressed. They've been dealing with high inflation and it's coming down, of course, which is great news, but still the price level's higher. They're dealing now with job security issues, like whether, maybe even if they're not, it's

• 29:00Speaker 06

  not true that they'll lose their job or a layoffs around the corner, they're nervous and they say they're nervous. And so you sense that I'm not sure about the future kind of component. I don't see those two things as competing as much as we have to manage in monetary policy, the cyclical dynamics. And it's very good in many ways that there's something coming down the pipe that could be useful. The question I have right now is, are companies deploying the technology and diffusing it at a more rapid rate that offsets some of the concerns they had about tight labor market? And I am seeing a little bit of that. But mostly what I'm seeing is, how are we going to go forward? Faster, better, cheaper. How are we going to up our game and not raise our costs? In fact, how are we going to get costs down?

• 29:45Speaker 06

  And AI becomes something they can try. And, you know, a year ago, when we talked, or whenever, maybe it was only six months ago, when we talked, we were doing these CEO roundtables as part of our Emerging Tech Economic Research Network. So we do a lot of these across all business types. And they were saying, we're not doing it in front office operations. We're not doing it in our main product lines. We're only going to do back office. Now it's moving to the front.

• 30:08Joe Weisenthal?

  Oh, that's interesting.

• 30:09Speaker 06

  That tells you something's changing.

• 30:11Joe Weisenthal?

  Yeah.

• 30:11Speaker 06

  One of the things that I asked somebody why, and they said, it's just a lot easier to do it than you think. And we can discipline the models ourselves. We can prevent hallucination by checking.

• 30:20Joe Weisenthal?

  Yeah.

• 30:20Speaker 06

  So now they feel more comfortable.

• 30:22Joe Weisenthal?

  I feel like the change in model quality in the last six months is really remarkable.

• 30:26Speaker 06

  It is remarkable.

• 30:27Joe Weisenthal?

  And just, and like many of the concerns about hallucinations, they still exist, but they seem much less of a problem today than even six months ago when you were playing with the most advanced models. That being said, you said, you talked about, here's this potential productivity enhancer, and you said, I don't, coming down the pike, or I forget exactly the term, company's still trying it. As of today, it doesn't feel like, okay, we've seen some great product, general economy-wide productivity gains. However, what we do see is very high electricity prices, maybe data centers playing some role. There's still, per the ISM, continual shortages of electronic components, or these very intense,

• 31:07Joe Weisenthal?

  very intense capital demands at a time when AI hasn't delivered economy-wide productivity gains. Could there be an element where there's like a crowding out element right now, or like this productivity from all that investment that hasn't paid off yet?

• 31:21Speaker 06

  You know, there's always going to be this discontinuity, put in a time economist term, but there's always going to be this discontinuity where you're waiting for the proceeds of a technology you're investing in. Those take time. And the needs of that technology, especially something as power-intensive as AI, at a time when we're also trying to modernize the power grid, because some of it just hasn't been maintained across the United States. So we have a number of power company CEOs on our boards and councils, and they're always telling us, it takes so long to get a transformer because there's bottlenecks. Now they're worrying about tariffs on transformers and are the components of transformers. Then they're competing with Data center needs and companies that say, I'll just build my own power to support

• 32:04Speaker 06

  this. And so that's just a marketplace that was developed for a much smaller footprint in power and now has to ramp up. That's going to take time. And the proceeds from AI technology are just nascent. We're just not seeing them come through in productivity. Some of the easy wins that a company might have done probably are behind us. Or you know, you think, okay, do I need two copy editors or one? Well, if I have one copy editor in AI, I'm okay. But those are easy wins, right? The real transformational type of productivity things are for things we haven't even really thought of yet. You know, I always use this example of thinking about the original iPhone or smartphone against the BlackBerry. So when it came out, I'm like, this is just

• 32:45Speaker 06

  a fancier BlackBerry. And then ultimately, of course, I was totally wrong. This was a much more just transformational technology because we developed things on that technology.

• 32:57Tracy Alloway?

  I still miss the BlackBerry.

• 32:59Speaker 06

  Me too. I never had one. I typed so well on the BlackBerry.

• 33:02Tracy Alloway?

  Yeah, I used to file stories just on the BlackBerry.

• 33:04Speaker 06

  I could type entire epic novels on BlackBerry. And I've got the thumb problem of the thumbs meet in the middle. I'm on a mini. It's not working.

• 33:13Tracy Alloway?

  Okay, so just going back to the vibes more generally, one thing that's already come up multiple times in this conversation is the idea that if you ask people what they think about the economy, they say like, oh, it's not great. If you ask them what they think about their own personal economic situations, they say they're fine. And to the point about the tariffs earlier, businesses will say, we're very worried, but on the other hand, they don't seem to be changing their actual activity just yet. What's your thesis or your theory for why we keep getting that disconnect?

• 33:45Speaker 06

  So this is not an uncommon disconnect, by the way. People have been historically, and not all the time, of course, but when they have concerns about The national economic progress, they will tell you in poor sentiment. And when there's a lot of transition, right? Just think of the transformations we're going through. We're trying to bring down inflation, which has been tiring. Trying to think about bringing manufacturing and other things back to the United States. Think about deploying a workforce that's domestically driven. Those are big transformations at a time when people are looking at some of their neighbors and saying, I see Joe buying less things. He didn't get a new car this year. He always gets a new car. That's a lot of pressure. And so, but their own personal situation, they're still be able to go to the grocery.

• 34:30Speaker 06

  They can buy something for their kids. They can invest in repairing their home or going on a vacation. And so they feel okay. And they also feel personally secure in their job, but they're worried about the broader labor market. And I think that's natural. And my theory is that when there's so much change, people get worried. It doesn't matter if they think the change is even good. They just get worried and they're worried that we're standing on, one person put it this way, I'm worried we're standing on a precipitous cliff. I love the view because I'm looking out, I'm fine, but you know, anything can happen.

• 35:01Speaker 10

  Yeah.

• 35:01Speaker 06

  And so I think that anything can happen piece makes them nervous, which is one of the reasons, another reason to come out and talk to people is when they talk to people, I say, here's what we're doing. It, and here's how we would handle something if we did look a bit chippy in the economy. And that helps.

• 35:34Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands on experience. Matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 36:18Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 36:57Speaker 09

  This is Robert Smith from Business History. If you're listening to this, there's a good chance you're a small business owner. And like every small business owner, you started with a dream to do what you love and watch it grow. What you probably didn't dream about? Keeping up with cyber threats. That's where Mastercard can help. With access to tools that help identify cyber threats to better protect your business. Building your dream business, priceless. For cybersecurity in a changing world, there's Mastercard.

• 37:24Speaker 09

  Learn more at mastercard.com/smallbusiness.

• 37:27Joe Weisenthal?

  So you just gave a speech here in Alaska right before we're recording this episode. And you said something interesting in your speech. I now I'm forgetting that dork, but something about things are different, but they're not that different. Or that in the past, this is not the first time people have felt periods of change.

• 37:43Tracy Alloway?

  It's not the first time that central banks have had to deal with.

• 37:46Joe Weisenthal?

  Yeah, that's right. Oh, that's right. That's what it was. That basically, yes, things are very uncertain, but this is the story of central banking.

• 37:52Speaker 06

  It is indeed the story of central banking. If you were going to write a novel or do a whole nother podcast on central banking.

• 37:58Joe Weisenthal?

  Like, there's never been a time where it's like, oh, we know what's going on. We've got this. We know what the future looks like.

• 38:02Speaker 06

  Exactly. I mean, just let's think of my time at the Fed so far. So we had 9/11. That was pretty uncomfortably uncertain. Intraumatic at the same time, then we had the global financial crisis. That is a tremendous period of uncertainty that lasted a number of years. Then there was the pandemic. That was not a very certain or very clear time in our history. And so now we have uncertainty, but it is not something that we are unpracticed at. So I think that's why the important point to reassure people on is we don't wait for clarity before we act, because if we did wait for clarity before we act, we would be constantly behind.

• 38:43Tracy Alloway?

  One thing that does seem to be new, at least in my lifetime, possibly not if you were alive in the 1970s, but political pressure on the Fed. And we've certainly seen some instances of that coming from President Trump, who has not been shy about saying what he would like to see in terms of interest rates. How are you dealing with that?

• 39:03Speaker 06

  You know, we do have many periods in our history where there's been pressure to move the interest rate, because of course, that would be part of the way the president or the administration or Congress would like to see the Fed go. But that's why the Fed is independent, because ultimately, Congress gave us the monetary policy responsibilities so that we could make decisions that go past any particular administration, that are independent of political activities or political plans. So those are good things about the Fed. And ultimately, if you take a job at the Federal Reserve, and especially if you're in leadership at the Federal Reserve, Federal Reserve Bank President or Governor, you have to almost like tap a stone when you take the job.

• 39:47Speaker 06

  It's part of the, part of your oath, basically, that you're going to make monetary policy that serves all Americans and in a way that is not influenced by political leanings one way or another. So I make the same decisions, using the same information, using the same models and sources. Of course, the models and sources change depending on the kind of condition we're in in the economy, but the process, we talked about process a moment ago, the process remains the same. Be curious. Figure out as much as you possibly can, always learn, then take a decision that you think is right, that we collectively think is right for the nation and the outlook. And then have enough humility that you can ask the question, did we make the right decision?

• 40:30Speaker 06

  And what more do we need to learn to make a better one? And I think that always works. And that's immune to political pressure because ultimately I get up every day knowing that my work serves Americans. That's who I work for. And that's what we do.

• 40:44Joe Weisenthal?

  You made this point about how like, if you know, if you wait for the clear evidence, it may be too late, especially with the respect to the labor market. Once it slips, history says it tends to fall. Last week, it was the Fed meeting where there was no rate move. And then Friday, we got a jobs report that was not only disappointing, significant revisions. And revisions are a common thing, but and Tracy's been writing a lot about this and we've done some episodes. Response rates to public surveys have gone down. There are concerns about whether, you know, we need a fresh jolt of investment, but these are the main instruments, right? That you are looking at when you're piloting the plan, et cetera. Is this making it harder? Like, do you have concerns about that the quality of your visibility into the data

• 41:29Joe Weisenthal?

  is suboptimal right now?

• 41:31Speaker 06

  You know, I'm going to put it slightly differently than main instruments. I think they're key instruments, but we've been broadening our portfolio of instruments for monitoring for really since the GFC, since the global financial crisis. Because what you learn in the global financial crisis is you're not going to get enough information just looking at these main series to really know what's going on. Then we had to do that, of course, in the pandemic and we got all these real time series. We were using open table data.

• 41:57Joe Weisenthal?

  Traffic.

• 41:58Speaker 06

  Yes. How many people were going out or is it transit traffic, et cetera? So what I would offer is this, there's two things that I think about. We are revered, have been revered across the globe for our data collection and our data continuity and our data integrity. Those three things are. Important to any nation that's trying to follow things and not just the Federal Reserve, but to policymakers across the board, including states and localities, to businesses who need to know what does the economy look like so they can put it into their sales projections. And so making sure that we're investing enough in those of that information, making sure we know how important it is, I think is an essential goal.

• 42:41Speaker 06

  On the other side, I'm not simply relying on those pieces of information. And importantly, since we're in a turning point right now, kind of a by a transition point, it feels like a turning point where the economy is slowing, inflation is coming down because of restrictive interest rates, and we're we're trying to achieve that soft landing, that the data are always volatile. They're volatile on any turning point, whether we're turning from a downturn into an expansion, you miss the job growth. When you come down, you tend to miss the job loss or the net losses. So that's something I'm always I'm familiar with at this point. I've been doing this for a while. I know that's going to happen. The magnitude of the changes is pretty severe on Friday from the week before. Is that survey response? Is that seasonal adjustments because things are different?

• 43:26Speaker 06

  Or is that something else going on? I trust the BLS will unpack that and give us some answer about that. But, you know, ultimately, on the response rates, you know, I say that when I ask people, would you respond to a public survey? They've lost a little confidence in public institutions, maybe a lot of confidence in public institutions. And so the real call to action here for me is it is part, you know, the Federal Reserve is not all public institutions, but we should do our part to demonstrate to people and to talk to people, go to the critics and say, what is it that you're not trusting? And then tell our story. Maybe they have things that they're going to bring that we should listen to and basically lean into this idea that we do this work for them and that we want them to trust that

• 44:11Speaker 06

  we're doing it for them.

• 44:12Tracy Alloway?

  Can you talk a little bit more about the alternative data sources that are available to you? Because I hear this a lot, this idea that, okay, well, payroll seems to have a revision problem at the moment. Maybe there are other indicators we could look at. Or if a larger chunk of CPI prices are being imputed or estimated than they were previously, maybe there's something else we can look at. What exactly are these data sources? Like, what is most valuable to you right now?

• 44:37Speaker 06

  So, there's privately collected data. We talked about foot traffic and things, but there's the ADP employment data. You can think about that. There's the prices project. You can look at those data. Importantly, though, I think it's not just getting other sources of data. It's learning. So, say that a lot of the CPI prices are imputed. Then, we need to bring our best statistical minds to think about, if I take the ones that aren't imputed, and I look at how correlated they are with underlying inflation over time, what do I learn? Are they a good signal?

• 45:06Tracy Alloway?

  Is there a messaging challenge here, though? I think people are very used to, at this point, the idea of the Fed sees the non-farm payrolls number. The Fed sees, CPI obviously isn't your preferred inflation measure, but PCE or whatever. If you're looking at other things, or maybe if you're at turning points in the economy, and so, other indicators become more important at that particular amount of time, how do you communicate how you're factoring in that data into your monetary policy decisions? Because not everyone is going to be looking at the same things as you.

• 45:39Speaker 06

  We talk about what we do. And part of talking about what we do is to say, we have history and models that tell us a little bit about how the economy works. We have the incoming information, and we have all the periods of time when the information has been volatile, and we can understand the underlying trends. And then, we have the people we talk to. And what was interesting about the jobs report on Friday is it better matched in the direction of change, not in the magnitude. It better matched what I've been hearing. And so, a disciplining device for data that you don't know if they're really accurate is what you hear from people. Because people do not tell you, "I feel really, really comfortable getting a job," only to find out that the job market report is bad.

• 46:22Speaker 06

  What they will tell you is, "Boy, it looks really worrisome out there." And then, you get a jobs report that doesn't look like the rapid job growth. That was the thing that was out of whack. The rapid job growth from the month before is what I said, "Well, really? That's not what I'm hearing. What's the gap?" And we spent a lot of time digging in and unpacking that. But then, when the jobs market report got revised, I was like, "Okay, that makes more sense." Even if the direction, I mean, even if the magnitude is vastly different than anything I probably think will go forward, I think the direction of change is accurate.

• 46:54Joe Weisenthal?

  Okay, so there's the slowing and as you indicated, some number, who knows, rate cuts are probably coming in the future. Obviously, there are businesses, when you read them in the ISM surveys, we need rate relief. There are people who want to buy a house, we want rate relief. President Trump, obviously, maybe in part due to interest payments on the debt, wants to see lower rates. That being said, even as the market's pricing some cuts in the near term future, there's been the significant steepening of the yield curve. Long end rates haven't come down that much. So it's not obvious to me that even if you delivered cuts, that all these homeowners or businesses or the president would get the type of rate relief that they actually want.

• 47:36Joe Weisenthal?

  I'm curious, what would it take, in your view, to get meaningful change at the long end of the curve, which is where there's a lot of sensitivity?

• 47:46Speaker 06

  I love that question because I think it's hard to remind people on a regular basis that we are not the only game in town at the Federal Reserve. We don't control, we're not yield curve targeters, so we're not controlling all the things that would move the yield curve. What moves along into the yield curve is, of course, Fed policy, inflation expectations, those have been well anchored, so I don't think that's driving them, geopolitical risks, how we're viewed as a trading country or a reserve currency, what our debt looks like going forward in projections, and how we think we're going to manage all of that together, right? So, right now, it looks like the markets are just reacting to all of the risks. We have rising debt, we have geopolitical risk, we're not sure how our trading partners

• 48:28Speaker 06

  like us right now, and then all of this could be burdensome and mostly could push up the real rate of interest over time, right? The natural rate of interest or the neutral rate of interest, and so you're seeing that. And ultimately, the Fed can adjust policy in the short end in a way that's meant to balance the goals, but we can't control all the aspects of the yield curve.

• 48:50Joe Weisenthal?

  I know, because I've heard Chairman Powell and others say a million times, we don't comment on fiscal policy, that's not our business. Nonetheless, I'm gonna-

• 48:57Speaker 06

  They're right.

• 48:58Joe Weisenthal?

  Yeah, I know, I know. But, when you describe those various factors that push the long end up or keep it elevated- Could it be that it will be hard to get those back down to more desirable levels without some more substantial fiscal consolidation?

• 49:14Speaker 06

  Well, let me say this.

• 49:15Joe Weisenthal?

  Cuts.

• 49:16Speaker 06

  Let me say this. Yeah, let me say this.

• 49:18Joe Weisenthal?

  Okay.

• 49:18Speaker 06

  We were having these conversations about the rising neutral rate of interest before the election, before the administration changed. And so I think we should look to what are the fundamental factors in our economy that are changing the neutral rate of interest, not just in the U.S., but in the globe.

• 49:36Joe Weisenthal?

  Yeah, I'm really interested in this.

• 49:37Speaker 06

  The interest rates are not set nationally. I mean, we've set interest rates nationally, but interest rates are global. If you remember prior to the pandemic, interest rates and after the GFC, interest rates, the real rate of interest was just falling. Inflation was below most countries' targets and it was the sluggish growth. Inflation expectations are falling. How are we going to manage this stagnation that's going to come from this? Secular stagnation. Then, of course, inflation rises in almost every country and we're talking about the real interest rate going up, not down. And so we're looking at a place where it settles now at the neutral rate in nominal terms, settling around three or higher, not at 2.5.

• 50:20Speaker 06

  So that's a pretty big increase in the rate of interest, the neutral rate of interest. And frankly, the direction seems to be pushing it up, not pulling it down. And I think that's where I try to explain to people the most is that interest rate cuts, if you think we're going back to pre-pandemic levels of interest rates that were considered neutral, I don't think that's likely to happen. And that's, commercial real estate folks are really attuned to this and they knew that a year and a half ago. Markets knew that a year ago. But I think we're still working on businesses and consumers to recognize those were not, those are not days we're likely to return to, at least in the near term.

• 50:59Tracy Alloway?

  You've said that you think the time for rate cuts is nevertheless coming. And I take the point that maybe rates aren't going back to where they were pre pandemic. But like certainly, we are talking about cuts. Market is expecting cuts. What are you waiting to see before you get absolute certainty that actually this is the moment where we need to act?

• 51:18Speaker 06

  Well, I'm really not waiting to see anything as much as I'm looking to collect the information that shows that what I believe is happening is happening. So it's not like I'm waiting to see something and I'm going to go, aha, it worked. I mean, it's happening. We got to get on it. It's really about, we just keep getting.

• 51:37Tracy Alloway?

  Confirmation?

• 51:38Speaker 06

  Yeah, the confirmation, the evidence. So let's take the labor market, for example. So in advance of the July meeting, we do this all the time, but you know, since we just had the July meeting, let's talk about it. So in advance of the July meeting, we were hearing, we think the labor market's softening. So I'm asking the question, is it weakening? You know, softening is what we would expect. Weakening is a different signal. So you take the entire dashboard of labor market indicators and you ask, what's happening to the ones that lead? Initial claims for unemployment insurance are a leading indicator. They predict where the labor market's heading. They've been stable. You unpack and you look at all the states, you get their initial claims data. There's really no red flag states. There's only two that are showing a lot of pickup, DC, an area, and Michigan. Those are the two places.

• 52:23Speaker 06

  Otherwise, most of them look pretty stable. You think about, okay, what about job finding rates? Not just in aggregate, but by duration of unemployment. When the labor market's really weakening, people push out in duration. It's harder to find a job. But then you see those job finding rates really decline for out durations. You're not seeing that. So those are, wage growth isn't stumbling. You're just not seeing those things. And so for me, it was about, okay, we're seeing a signal that this might be softening to weakening, but we don't know yet. So then. You go back, leave the interest rate where it is because inflation is still printing above target and you have some more time, but the first labor market report we get has a bit of a tick up in unemployment and you get those jobs numbers. I will say maybe because

• 53:08Speaker 06

  your listeners will be interested in it, it's not a good time to look at levels. It's really not a good time to look at employment rate. I mean, you know, the, I'm not employment rates.

• 53:16Joe Weisenthal?

  Employment level.

• 53:17Speaker 06

  Employment level, like how much job growth do we have? Because we've had this very large swing in how many immigrants are in the labor force. The labor force went from people I'd estimate at 150 is the trend growth we need to have so that unemployment doesn't rise. Now it's in the seventies, maybe the sixties. That's a big change. So I look at rates, unemployment rate, job finding rate, quit rate.

• 53:36Tracy Alloway?

  Yeah, this is what Powell said as well, like, look at the unemployment rate.

• 53:39Speaker 06

  Yeah, look at the, you look at rates and the unemployment rate is a good thing to look at, but it will lag deterioration in the labor market. So you have to look at those other ones as well. So I'd look at initial claims for unemployment insurance because people have to go in and file. It's a good administrative record. And then I'd look at quits rates, job finding rates, those types of things. And there I didn't see signs of weakness. But you can't wait forever. And at this point, the piece of information I'm also getting is that there are very few signs that inflation, tariff-based inflation in the good sector is spilling over to the other sectors and inflation expectations are stable at the medium and longer end. There's not much of a case for persistence at that point. So then you think, well, if we really want to get the soft landing and

• 54:22Speaker 06

  give people what they deserve, which is lower inflation, 2% price stability inflation and a labor market that still sustainably works, well, we've got to start recalibrating policy.

• 54:33Joe Weisenthal?

  This is like a really stupid question. I feel like it's one of these things I should know or have researched before I came. But is there much sensitivity when, here in Alaska to the changes in immigration policy? Do you hear that from business?

• 54:47Speaker 06

  Yes.

• 54:47Joe Weisenthal?

  People like, well, I don't, I actually realize I don't know anything about like the role of immigrant labor way up here.

• 54:52Speaker 06

  So you hear this a lot in all communities, but so far, people have said, it's not really biting us. And the reason is, and they use that term biting us. And here's, so what's the reason? So then you ask, why? Because you use a lot of immigrant labor, why isn't it biting? And it's because labor demand is slowing. So we're losing members of the labor force. At the same time, labor demand is slowing, which is, I would offer, one of the reasons we're still seeing the balance in the labor market that we have. Because those workers are not coming or they're leaving and the domestic labor supply is consistent with the labor demand that's out there. But firms tell me on a regular basis that if they were growing like they were a year ago, they would have a shortage.

• 55:34Tracy Alloway?

  One thing I've been thinking about a lot recently is the idea of whether or not starting points kind of matters. So for the past few years, one of the big things that's happened is the US economy has surprised to the upside over and over again, and US exceptionalism has really been the theme. And so I'm curious if those years of unexpected growth, if that gives you more wriggle room or more runway perhaps in terms of having to cut. Do you feel like the starting point matters? If you were starting lower, would you be in more of a hurry?

• 56:09Speaker 06

  That's a really good question. So let me, let me think through, let me walk through how I think about it. I'll just walk through how I think about it. So yes, you have to take contextualization around it, right? You know, where you start matters. But right now, I don't think we're in that place where it's actually is relevant. Here's why. Two years ago, if we had a hot labor market and at times it was even frothy and inflation's printing at, you know, 5%, well, then that's a very different economy in terms of where we are than today. But right now, we have an economy that's really resilient. It has proven its resiliency. But we're also very close to getting to a point of maximum employment and price stability. So then if you have shocks to the economy and you're in this

• 56:54Speaker 06

  balance, well then, and you've got interest rates that are restrictive, you end up being more vulnerable. So it is true that the economy has outperformed everyone's expectations over the past several years. That's just a fact. And I think that bodes well for the momentum and the resilience of our economy. Collectively to weather shocks. But now, as we get the labor market's imbalance, we're starting to see some softening. We're starting to see some sentiment. We have been seeing sentiment come down. And then on top of it, inflation's close to our target and interest rates are still restrictive. That leaves us more vulnerable. Think back to 2019. 2019, we cut rates twice. And we did that in part because we had all these headwinds coming from overseas.

• 57:38Speaker 06

  So we weren't in a precarious place, but we were accommodating to the headwinds. We were trying to support the economy against those headwinds to ensure we didn't tip over. I see today as very similar. The only difference, and it's important difference, it's a very important difference. Inflation's not 1.8. Inflation is higher and expected to go higher, at least temporarily on the basis of tariffs. And so you're, it's always more challenging, and this will be a communications challenge, if we are lowering the interest rate in the face of rising inflation. Then the burden is on us to explain that we're not seeing persistence and to offer what is true, that if it turns out to be persistence build, we will turn around and raise the interest rate.

• 58:23Tracy Alloway?

  I do notice that everyone's talking about short-term price pressures, but no one's using the term transitory anymore. Is that?

• 58:31Speaker 06

  What word? I don't even know what you're talking about.

• 58:51Speaker 01

  This is the Bloomberg Tech Minute, brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 59:33Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 1:00:14Speaker 09

  This is Robert Smith from business history. If you're listening to this, there's a good chance you're a small business owner. And like every small business owner, you started with a dream, to do what you love and watch it grow. What you probably didn't dream about? Keeping up with cyber threats. That's where Mastercard can help, with access to tools that help identify cyber threats to better protect your business. Building your dream business? Priceless. For cybersecurity in a changing world? There's Mastercard.

• 1:00:40Speaker 09

  Learn more at mastercard.com/smallbusiness.

• 1:00:44Joe Weisenthal?

  Going back to the spring, as you said, it sort of looks like the tariffs aren't creating spillover. But there was this idea that it's not just the tariffs per se and the question of whether tariffs would be an inflationary driver, but also just like policy volatility, the sort of like the second derivative of tariffs, et cetera. And I don't know, I'm just going to state my opinion. I don't think we will ever have something under this administration of tariff certainty. You know, I think these are going to be moving numbers for a long time. That's just my personal opinion. But on the other hand, it does feel like the range of possible outcomes has narrowed. We've gotten deals and, you know, it feels like the range of possible outcomes is less wide than it was in April. Has that been a factor in your thinking? You know, okay, tariffs are going to happen, but does it feel to you like we have more certainty

• 1:01:29Joe Weisenthal?

  over what the trade picture will look like today than we had in early April?

• 1:01:32Speaker 06

  Absolutely. I think when the tariff announcements on Liberation Day were very high, it wasn't clear that countries wouldn't reciprocate and tariff us or that they would-

• 1:01:41Joe Weisenthal?

  There's been no retaliation.

• 1:01:41Speaker 06

  And no retaliation, that they wouldn't, that they wouldn't actually, that they would go to the negotiating table. And so all of that's happened. And then on top of it, it wasn't clear how firms would respond. Would we firms just sit on the sidelines and wait for it all to be over? Or would they continue to participate in their economy and in their growth? And so there was this period for the first three or four weeks after the original announcement, where firms are like, I gotta wait because I don't know. And in fact, some firms were not even bringing- The ships had sailed, they were already outside the port, they weren't taking delivery on the goods because they wanted to wait and see. But now, one of my contacts said, uncertainty is the new normal. We expect uncertainty for the next four years, and three and a half years, and so we're just going to live with it.

• 1:02:26Speaker 06

  And when you live with it, you don't change the fact that you want to grow, and you want to hire, and you want to do these things, but you do, you do make more careful decisions because you don't know what could happen. But we, if you wait for the uncertainty to clear, this is what he said, if you wait for the uncertainty to clear, you will find that four years later, you've lost your business. So we're not doing it.

• 1:02:47Tracy Alloway?

  So one of the things you've emphasized in your career is the importance of Fed communication and the messaging. And I just want to go back to the central bank independence idea, because one of the concerns, I would argue right now, is that, sure, individual Fed presidents, Fed governors, might emphasize that the central bank is in fact independent, but perhaps there's an optics problem if, in a month or so, the Fed decides to lower rates while the president has been relentlessly posting on Truth Social about the need to lower interest rates. A lot of people would say, well, you know, that's the kind of thing that you might see in a, in an emerging market, or something like that. How do you manage that particular optics problem?

• 1:03:31Speaker 06

  You explain why you made the decision. Ultimately, if we just put the decision out, we just raised a flagpole saying, interest rates have been cut 25 basis points, I think we'd be very vulnerable to what you just said, because then optics dominate reality. But what, which you do instead, the remedy for that, is be very open about how you're making the decision, how you're balancing the trade-offs. I mean, we're definitely in a trade-off space, right? Because we're not in the divine coincidence. The divine coincidence is a lovely place for central bankers to be, they wish they could live there all the time, where one interest rate solves both goals. Not where we are. If we lower the interest rate, takes some of the downward pressure off inflation, but we'll still get there. But we're supporting the labor market. If we completely

• 1:04:14Speaker 06

  support the labor market with no attention to inflation, we're likely to see it shoot up again. So not perhaps as high as it was before, but definitely there. So those are trade offs. We have to explain to the American people, we're making decisions under trade offs, and we're lowering the policy rate because we don't want to break the labor market in an effort to give you a little bit lower inflation a little bit faster. I think that's the burden on us. That's our responsibility. We have to do better at it.

• 1:04:38Joe Weisenthal?

  See, here's another question that I'm curious about over the length of your career. Do you feel like the stock market is more important to the economy than maybe it was 20 years ago? And, you know, people look at financial conditions, and there's many things that go into that, but one of them is just asset prices, which for many Americans who have some exposure to the stock market, it's just unbelievably fantastic time. And you were sort of, again, at ground zero of the companies that have driven, helped many people retire comfortably in America, the companies in your district. But when you think about like the sort of flywheel and momentum of the economy, does the sort of stock market component of financial conditions and the wealth effect, perhaps, is it more important to the economy than say it was when you started in central banking?

• 1:05:23Speaker 06

  Only from the standpoint that more people are accessing the stock market, but still not the majority of people, right? More people have it than have a 401k or have some kind of an index fund that they're investing in. But it's not so universal that it's a main driver. What I have noticed is that since the stock market rebounded, you know, is that a lot of people who thought they were going to return to work from the 55 and older went back into retirement or taking care of grandchildren. Because there was a lot of ideas, you know, that is a very sensitive group of people. And if you've retired and then you see your stock market valuations fall, your 401k fall, you think, oh, maybe I should do something.

• 1:06:04Joe Weisenthal?

  The rising stock market is contributing to labor market tightness.

• 1:06:07Speaker 06

  Well, if that was the main group we were relying on. But I think that is something interesting. I mean, what's really contributing to the lower labor force is immigration and the fact that we have a baby boom aging into into retirement. But I think the stock market is more interesting from that point. I think really what's Even more interesting to me is the fact that you have to look at a variety of things. You have to look from how banks are doing, how private equity is doing, how the stock market's doing, what does it all tell you? And so we are broadening how we calculate financial conditions. You can't just look at the interest rates. I used to, when I first started at the Fed, when we were talking to our boards and councils, we had a little chart of interest rates. It had the 30-year, the 10-year, the two-year Treasury, and it had a mortgage interest rate.

• 1:06:52Speaker 06

  Now you have to talk about financial conditions writ large. Are they tighter? Are they softer? What is more accommodating? What is it? And I think that's a change in the marketplace that's meant we all have to be very knowledgeable about the entirety of the forces that affect financial conditions.

• 1:07:07Joe Weisenthal?

  Since you mentioned baby boomers, there's something I've been thinking about a lot. And it's not really, I doubt it's a question that's particularly relevant for the short-term path of monetary policy. But when we got that jobs report last week, the only two, there were two sectors that drove the job gains, and it was like healthcare and social, some sort of social assistance. So very similar things. It's clearly that this aging population is itself going to be a sustained source of labor demand, probably for month after month, even in a possible recession, right? Like, this seems like mechanical. When you look out at the long term and you think about the American economy, how much concern do you have? I don't know if you'd call it a crowding out effect or something, that like, the productive

• 1:07:47Joe Weisenthal?

  base of the economy, more and more of it will have to go to in some way, especially given the sort of demographic pyramid such as it is, in some way supports seniors.

• 1:07:58Tracy Alloway?

  We're all going to be working in nursing homes.

• 1:07:59Joe Weisenthal?

  Yeah.

• 1:08:00Speaker 06

  Well, this has been something that we know is coming for 30 years. I started my career, I started writing my dissertation on aging and taking care of people, and how does that change the economy? And what do we have to do? And how does it change growth and output and potential? And one of the things you can see is, is if you lose workers, then they go into retirement, you're going to constrain labor supply, labor growth, but you're also going to tip the pyramid of what we have to produce and what we have to take care of. And that's happening. You can see healthcare is growing, et cetera. Education now, just in state budgets, if you look at state budgets, there's a battle between, do we take care of our older citizens, or do we invest in education? And it sounds, you know, it's dire sounding, but honestly, that's the trade-offs.

• 1:08:45Speaker 06

  We're a nation now who has a very, an aging population with increasing needs, and...

• 1:08:52Speaker 06

  The younger population and even the economic productive capacity has to support that. So the answer to that is you have to grow the economy and you have to be strategic enough. And this is not the Fed's job, but this is something that I think many Americans are trying to do, many governments are trying to do, national and state and local. How do you create an economy that can support those and still support the citizenry that is in their working age? Humanoid robots. And their families. Well, you're going to use technology, of course, and you're going to think about, you know, making more strategic decisions about what do we need to do to ensure that we have a diverse economy, et cetera. The concentration in education and healthcare and other things that we've been seeing, that's not new. Right.

• 1:09:37Speaker 06

  I mean, that was been going on. People were talking about that a couple of years ago or a year ago. What's interesting is how durable will that be, right? Healthcare makes good jobs and it helps the economy because it puts resources, they earn a living, they come back, they buy things if they want to be in healthcare. But we don't have enough people currently interested in healthcare to support that if it keeps on growing. I think that's another challenge that you're seeing and hospitals across the country are trying to manage that.

• 1:10:01Tracy Alloway?

  Since Joe asked you a wealth effect from stocks question, I'm going to ask a very similar question in relation to crypto, because this is actually something that has changed quite a bit since we last spoke to you. I mean, crypto prices are still going up, the industry seems to be expanding, the administration is clearly very, very crypto friendly. Are we at the point where crypto perhaps matters from monetary policy, either from a sentiment perspective, that wealth effect perspective, or from a financial stability perspective, which of course, you know, as San Francisco Fed President, that's under your mandate as well?

• 1:10:38Speaker 06

  So the way I think about crypto and the conversations about stable coins and other things, so let's separate crypto from stable coins for a minute. Put in a big umbrella and people think it's the same, but it's actually very different. So a stable coin is another way. To fund yourself so you can do, you can trade, right? It's, I can do a cross-border transaction. I don't have to wait. I don't have to do currency changes. And so those things are just about a technology or an innovation that smoothes out the exchange, particularly across borders. The crypto is an asset. This is just, it's a digital asset. So you can invest in it and it can grow, but it can also decline. And I think there's appetite for other kinds of assets to invest in. You don't have to invest in a mainline blue chip company. You can invest in this and you can get some gains.

• 1:11:23Speaker 06

  So the question for me is always, how do we incorporate that? Maybe it's enthusiasm and also that risk into our assessment of how loose or tighter financial conditions and how vulnerable is the economy to financial stability concerns? So you're right to ask, you know, is it big enough now that we would look at it? I think it is big enough we would look at it. It's not that it's big today, so it's material. It's that it's big and growing. It's getting bigger every time.

• 1:11:53Tracy Alloway?

  Yeah, the direction of travel matters.

• 1:11:55Speaker 06

  The direction of travel. I feel a little bit like back in the 90s, you could see people doing some, well, maybe really the 2000s after the dot-coms, you saw people doing internet purchases. And we would collect retail statistics on how many things were bought on the internet. And people would regularly say, that's not big enough. Don't worry about it. But you know, you, you have to look ahead, right? It might not be big enough today, but you don't have time to practice and develop metrics and practice your evaluations and learn from that if you wait till it's giant. So I think absolutely we have to think about it right now and assess it as part of what we do. And the good news is we are assessing it. And I don't see special particular risks to this. And I think Congress is doing what Congress is supposed to do, looking over the parameters

• 1:12:38Speaker 06

  and saying, what's a, a stablecoin process that can work? How do we reinvent these types of things? That's what you want, but that doesn't have those powers. We're implementing our policy that in the economy we have and our elected officials are deciding the parameters of those exchanges.

• 1:12:55Joe Weisenthal?

  I think I actually just have one more question and it's very sort of. Straight down the middle macro, but you know, there's this obvious slowing in some areas, et cetera. You've described the state of the interest rate setting as still in restrictive territory, at least modestly restrictive, yet inflation is still durably above target, not massively, the way it was a couple of years ago. Why is that?

• 1:13:20Speaker 06

  It takes time. Once inflation gets up, it takes time to bring it down. And you know, the reason you would adjust policy before you totally get there, let's put tariffs aside for a minute, and let's just think about the regular dynamics of the economy. If you wait to see the whites of the eyes of 2% inflation, you will be too late because policy tightness today is not just a reflection of where interest rates are today, it's a reflection of where interest rates have been over the last 12 to 18 months. And they've been modestly restrictive, so they're gradually slowing the economy and gradually bringing inflation down. And the thing we had been waiting for, at least I'd been waiting for for a long time, was for this to start showing through to the housing sector. And it has been in the last several months. And so that's a really big and important sector that has to have inflation

• 1:14:03Speaker 06

  come down for us to achieve our 2% goal. So if you started extrapolating, services inflation excluding housing is coming down, housing's coming down, the goods sector without the tariffs was coming down. And so you get all of those things, and that's pushing you to 2%. We have to adjust policy before we get there. Because remember, anything we do, if we left it exactly where it is, has another effect for another 12 to 18 months. Who knows what exactly the lags of monetary policy are? The only thing people can agree with is it has a lag.

• 1:14:32Tracy Alloway?

  Just in terms of the importance of speed here, if you got confirmation of significant weakening in the labor market, could a 50 basis point cut be on the table?

• 1:14:43Speaker 06

  You know, in central banking, and this is true at the Fed, but I think other central banks as well, you never want to rule out a tool simply because we haven't used it before. And we did use our tools in an aggressive way. But one shouldn't take that to mean I think that's the likely outcome. But I do think we should think of all of our tools and all of our meetings as being available to us at all times. Because the job isn't pick a tool that's exactly the one that everybody expects you to use. The job is

• 1:15:12Speaker 06

  Restore price stability and do it without tripping up the labor market and leaving people with lower inflation, but no jobs.

• 1:15:19Joe Weisenthal?

  I actually have one, one last question.

• 1:15:21Speaker 06

  This happens a lot.

• 1:15:23Joe Weisenthal?

  But the dollar, you know, you look at a lot of charts since April 2nd, there's been the bottom, but then they jump back up. We haven't seen that with the dollar. And I'm curious, you know, people are concerned about political continuity and stability and institutional stability in the United States. And the attacks on the Fed are real, even if the fact that it doesn't change how you do your day to day job. And dollar weakness could itself be inflationary because we do have an import bill, et cetera. I'm just sort of curious, like, how you think about the sort of, I guess, maybe medium term, when you're thinking about, okay, you have to hit your mandate, these things are really outside of your control.

• 1:16:00Speaker 06

  Completely outside of our control.

• 1:16:01Joe Weisenthal?

  Completely outside of your control. But like, how do you think about them in terms of hitting your mandate at a time when, yeah, there are these sort of like factors that affect macro that seem outside of your control?

• 1:16:11Speaker 06

  Well, you know, if you take the, just take the idea that we import things, if the cost of those imports goes up, either because the dollar is weaker, we don't make dollar policy, just want to say that. We take the dollar as outside of our world, it's just another input to our equation. But if you have a weaker dollar and you're paying then more to import things, or you have tariffs, so you're paying more to import things, well then that's just going to raise the rate of inflation, so put upward pressure on inflation. So then the Fed has to think, okay, what are the things creating upward pressure on inflation? And what are the things creating downward pressure on inflation? And how do we navigate that to get to 2% inflation? That's the job regardless of whether, you

• 1:16:52Speaker 06

  always have things that are pushing inflation up and pulling inflation down. Our job is to net those things and say, what's left? And whatever's left, we use the interest rate to achieve.

• 1:17:04Joe Weisenthal?

  I'm sorry, I have one last question.

• 1:17:06Tracy Alloway?

  I knew this was going to happen.

• 1:17:07Joe Weisenthal?

  At some point Chairman Powell is going to be replaced. I don't know if the president will try to fire him, but his term will expire and a new nominee will come up. From the perspective of a regional Fed president, what is an important quality of the chairman in terms of like being successful and working with the rest of the FOMC?

• 1:17:28Speaker 06

  You know, I think you could be a regional Fed president, you could be anyone who works at the Federal Reserve, in the Federal Reserve system, you could simply be a citizen of the United States, so someone who cares deeply about how the country goes. And the requirements are always the same. You put other people first above your own self, you think about decisions that serve the American people, and you do that without flinching if the criticism comes, as long as you're doing and you're using your committee and you're getting to a judgment that you think is best for the American people. That's an important quality. And the other important quality is to listen. The diversity of the inputs we get from all types of people, businesses, communities, markets, that's important. The disagreements or differences of lens that people put on things and say, well, I

• 1:18:13Speaker 06

  don't see the world like that. Any leader, no matter what they're leading, has to be able to listen to be successful. That's my personal belief. You have to listen, you have to know what, you know, you put your best ideas out there, you have to be willing to listen to criticisms or support, and then you have to turn around and ask people, let's use this disagreement to our advantage as opposed to using it as a way to divide. And I think that's historically what have made the most successful Fed chairs, but honestly, it makes a successful committee member. We all have to go in with the idea that this is not about us. This is about the people we serve, we know who those are, the American people.

• 1:18:50Tracy Alloway?

  Joe, we should run for Fed chairs. All we do is listen. That's basically it.

• 1:18:55Speaker 06

  But then you do have to decide.

• 1:18:57Tracy Alloway?

  Yeah, all right. All right, we're not that good at that. All right, Mary Daly, thank you so much for coming back on Off Lots.

• 1:19:03Speaker 06

  My complete pleasure, and I'm so glad we did it in Alaska.

• 1:19:06Joe Weisenthal?

  I'm so thrilled that we get to travel to Alaska.

• 1:19:09Speaker 06

  Thank you.

• 1:19:22Tracy Alloway?

  Joe, that was a real treat of a conversation, being able to interview the San Francisco Fed President for over an hour in Alaska, of all places. But I do really like how she summarized the idea of the state as like this really good microcosm at the moment of all these different cross-currents in the US economy, particularly tariffs, inflation, housing, immigration. And I also liked how she explained that the important thing about running a regional district is kind of knowing which states are more useful to look at for leading indicators versus others at different times. I hadn't thought about that before.

• 1:20:01Joe Weisenthal?

  No, that is really interesting. And that was obviously a real treat. This whole trip is a real treat to get to come to Alaska, which we had never been to, to learn about new economies and so forth. Also, to just get that much time with a member of the FOMC, a regional Fed President. Because, yes, there's always uncertainty, right? But we have a lot of uncertainty these days. And there are so many short-term and long-term questions that are super interesting to me, whether it's the sort of demographic things, whether it's the diffusion of AI, but also just like what is going on over the last few months with the impact of the tariffs on economic activity. Like, we have both short-term and long-term questions right now that are very big.

• 1:20:43Tracy Alloway?

  Well, that was another thing that stood out to me, the idea that the revisions in the most recent jobs report weren't in themselves like that surprising because they actually confirmed what people had been expressing in sentiment surveys for like some months now, right? And so for Mary, it was sort of like, oh, actually, the aberration is that this wasn't showing up in the jobs numbers, the official jobs numbers, sooner.

• 1:21:09Joe Weisenthal?

  Yeah, that's interesting because I remember like those ISM, for example, reports from April and May.

• 1:21:15Tracy Alloway?

  Yeah.

• 1:21:15Joe Weisenthal?

  They did not show this, the employment sub, they were very bad, but this employment sub in this season in particular were bad. So it does sort of, yeah, the revisions, although no one, people don't love seeing, oh, this data was wrong. It certainly fits more with the broader story. It makes things a little bit more cogent. So it's interesting to hear that.

• 1:21:33Tracy Alloway?

  You know, the other thing I liked about that conversation. You didn't mention whales once.

• 1:21:39Joe Weisenthal?

  Now you've brought it up.

• 1:21:40Tracy Alloway?

  Now I've reminded you. So, okay, listeners, steel yourself for Joe inserting a lot of whale and Moby Dick commentary into the next few episodes.

• 1:21:49Joe Weisenthal?

  Is the, is the soft landing the defense of Moby Dick? No, I don't think so. It's, it's a moral thing to pursue.

• 1:21:56Tracy Alloway?

  Okay, shall we leave it there?

• 1:21:57Joe Weisenthal?

  Let's leave it there.

• 1:21:58Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alocke. You can follow me at Tracy Alocke.

• 1:22:03Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the stalwart. Follow our guest, Mary Daly. She's at Mary Daly Econ. Follow our producers, Kerwin Rodriguez at Kerwin Armin, Dashell Bennett at Dashbot, and Cale Brooks at Cale Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have the daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 1:22:27Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we go on field trips to Alaska, 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.

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