MNI Webcast with Mary C. Daly

It's completely my pleasure to be here. Thank you for having me.

Well, great question, a great starting question. You know, I see the economy right now is in a good place. We have growth that is solid. The labor market is solid and inflation is coming back toward our 2% goal. We're not there yet and I want to make sure we acknowledge that. But we are making progress towards restoring price stability all while the economy the backdrop is again at a solid growing at a solid pace. So I see that as a place where we have a lot of opportunity to achieve what we've been looking for, which is getting restoring price stability as gently as we can without putting undue hardship on the labor market or on growth. So what indicators I'm watching to continue to tell me where we are to keep the temperature on the economy right is, you know, essentially what is going on with growth, but also what's going on with business investment, what's going on with consumer spending. Are we seeing any signs of softening that would be unexpected given we still have restrictive interest rates and on the labor market obviously looking not just at the headline numbers on employment growth and unemployment but what's happening behind the scenes today we got the initial claims data I see the economy is in a good place you can look at growth it's solid you can look at the labor market it's solid and then you look at inflation it's coming back to our 2% target we're not there yet I think it's important to acknowledge that but we're heading back to our 2% target. And that's really welcome news, especially for Americans who've been struggling under high inflation for so long. Now, when I unpack that, you asked a very good question. What am I looking at? Well, what I'm looking at are three things really. Business investment, consumer spending, and then what are firms telling us about what they're going to do with prices going forward? Are they going to pass them fully through? Are they finding ability to work around some of the initial impact of the tariffs? And what we're hearing is increasingly that one they feel that they fear a little bit that consumers are exhausted that they can only pass through so much. So even if they have that instinct they might not have that opportunity. So then they're negotiating where they can with the importing countries saying would you take half of the tariff I'll take half. Then along the production line or the supply chain, they're negotiating at every turn so that by the time they get to consumers, they're finding that the pass through that they do have to make is lower and some of it can even be taken out of margins. So their own margins and so I think of that as you know the full impact isn't one for one to the consumer. And you see this in consumer spending. Consumers are slowing their spending but they're not stopping. And I think of that as another supporting fundamental of the economy. So when I look forward at what we're hearing, I see a labor market that is absolutely cooling consistent with restrictive monetary policy and the need to fully restore price stability. I see growth slowing and moderating and I see consumer spending moderating, but I don't see any of these things tipping into weakening. And because it's not weakening, then it gives me some reassurance that we can continue the job of fully restoring price stability. And I see us as getting nearer to that. We're just not there yet.

Sure. Another great question. Appreciate that. So, you know, the way I think of it myself, and I've said this publicly before, and it really continues to be true, is, you know, I see the SCP as a great description of what the American people should want, which is a full range of views on what the most likely outcome of the economy could be. So, you know, I myself think of the most likely outcome as really coalescing around two possibilities. At this point, there's always three scenarios out there. You get an impact of tariffs, even though it's delayed and it's persistent. I don't see that as most likely. I don't see the evidence rolling in thinking this is going to be a very persistent impact. The other two are it's a delayed impact, but it is going to be a one-off which we can ultimately look through. And I think increasingly in my mind and I started with this view that this could possibly happen and I really haven't been dissuaded from it which is that it's possible it just doesn't materialize to a large increase in price inflation for consumers because the businesses find ways to adjust. They can take some of it from the importing country. They say you take half, I'll take half. They can take some of it from along the production plane. They can take some of it from margins and ultimately they pass less of it off to consumers. And so it's a shared tax, if you will, and it gets distributed so widely that it doesn't hit the headline numbers on inflation. So with that in mind, then I really am of the view that it's time to think about normalizing or adjusting perhaps not normalizing just yet, but at least adjusting the interest rate to ensure that we can continue to say the following. The economy is in a good place and policy is in a good place. So I see two cuts as a likely outcome, but you know, again, there's uncertainty bands around everyone's projections. Doesn't matter if you're a zero or two or a three. There's just a large amount of uncertainty there. And what I know is true of the committee again and again is that we're a data dependent group and we respond to the incoming information and what it means for the outlook for the economy.

Thank you for the question and nice to see you, Amanda. What I'm looking for is the continuation of what we've been seeing, which is modest. You know, the inflation in the recent months has come down. That's great. So, we're still on a 12-month basis printing above our target and comfortably above our target, but in a positive direction on the incoming information that does suggest that we're on a sustainable path down to 2%. So, I think that's good news. I'd like to see the labor market continuing to stay in the balance that I see it in. I see right now demand and supply for workers is roughly in balance and that is a positive thing. I'd like to continue to see that. And then with those two factors then I think just a normal the fundamentals of the economy would suggest that we can move to a less restrictive point of interest rates and so that would mean a cut. Now of course we talked about the uncertainty around that. So what would cause us to move earlier or cause me to want to move earlier? Let me make sure I'm speaking just for myself. Cause me to want to move earlier, it would be any sense there's weakening in the labor market, not just the cooling we would expect with restrictive interest rates. On the other hand, what would make me have pause about cutting the interest rate in September? It would be in the fall it would be something that would push inflation up and make it look like it was going to be persistent. That would that I don't see those things in my immediate forecast but those are definitely the risk that we face and I think with the uncertainty we have we have to always have an open mind be ready to move in whatever direction the incoming information pushes the outlook.

You know, well, we've already seen an increase in goods price inflation and that's consistent with tariffs. You know, there is some pass through to consumers. What really has to happen for me to be more concerned is for that to spill over into sectors that aren't tariffed. So, right now, we've been getting the positive news we've been looking for on housing services and on core services, absent housing, ex-housing, as we like to say. Those two aspects of inflation, those two categories, we've been waiting for restrictive monetary policy to really take hold and push inflation in those categories down. I would be unwelcome to see those categories push up and then we'd have to investigate of course whether or not those are just a monthly bump or if that's something that would suggest there's greater spillover. Here's what you don't want to happen. I see no evidence of it happening, but we definitely don't want it to happen is because it creates that persistent scenario is that, you know, the price of a good goes up and then the service provider, say someone who cuts hair says, 'Oh, I'm going to raise my prices because I see inflation in that other category going up.' That would be the spillover that would cause a more persistent shock. But I haven't seen that. I haven't been hearing that. I don't see those types of things occurring and the data don't support that. The data support the sectors that haven't had any impact of tariffs are just coming down as we would expect.

Yes, absolutely and thanks for the question. So if for those who don't know don't follow the Federal Reserve districts as closely as say I do. So I have the nine states in the western United States. This is a wide variety of industries. I have the inter mountain states you know Utah, Nevada, Idaho and then Arizona and then of course California, the tech, etc. So I feel we can cover a variety of states here and I was just in Alaska and they were talking to me about drilling and infrastructure etc. So, all of those firms are telling me a version of something. It depends on what industry you're in, but it looks like this. It looks like the first place they start is with the importing country. And so, they're looking for especially with the pauses, they've looked to get in early and import some materials quickly. You know, work with the country. The country doesn't want to lose the business and the firm doesn't want to lose the pricing. So, they're willing to share. So, you share at the import destination. And I think this is why if you look at the effective tariff rate that's in place today which depending on who's calculating it's around 16%. But then you look at the tariff collections data and it puts it more at 8 or 9%. Well that's why that gap is there because there's all this negotiation that goes on before it ever gets imported. That's one reason. There's probably other reasons but that's one reason that gap exists. So that's one place you can do it. Then once you're in the country with the product, we are hearing that say you import steel or lumber etc. that you're then saying okay I've got this here but I'm going to take it out when I distribute it or if I'm getting it from somebody I'm going to ask them to take a part of the cost increase. I'm going to take a part of the cost increase. So then this is especially true in houses and in home building and infrastructure around home building. You're doing this all the way down the wholesale, retail, etc. But by the time you get to the actual house price, then the increase, the marginal increase for the customer, the consumer buying a home is something much much lower than you'd get if you took a model and asked yourself, okay, what is the impact of this tariff on this good in an input output table into price inflation? So, I think it's these leakages. You could call it leakages. You could call it wedges and things just leak out, right? And then also something we're hearing again and again is that firms find creative ways to do things. They say, 'Well, I'll import then I'll get some from domestics. I'll look at these other countries.' So you spread your network. You find ways to work around. And all of that adds up to just a more muted impact on inflation that we would, you know, prints that we have to respond to the PCE or the CPI. We don't target the CPI, but that's another indicator. Just less of an impact than we've been seeing. And that's why I've been watching housing so carefully because housing services is coming down for all the reasons you'd expect with restrictive interest rates, but that's a place where, you know, I had some concern you'd see an input cost increase that would be passed on to housing prices, which push up housing inflation. So, if people were willing to pay it. You also asked the question about, you know, the difference in corporates saying they're going to pass things through. So, I do hear we're going to try to pass it through, but then I also hear the ability to do that fully just isn't as available in a world where and so this is something that I think is useful to point out. When inflation was printing at 7% and all the pressure was moving up. Well, firms had a lot of cover, if you will, to just say, 'I'll pass it along because everybody else was passing it along.' And consumers had a lot of more income than they have now, and they were saying, 'Okay, I'll get it.' There was just that pent up post-pandemic demand, etc. Supply shortages. All of this was more available. Firms can want to still do that, but the environment has changed. And with the labor market not giving any impetus for wage pressure, that cycle of where you push prices up and wages might rise, etc., just isn't there right now. You know, employers are not hearing, what we're hearing is they're not hearing much in terms of wage demands and they're finding workers available when they need them. So, I think those features all make for a more muted impact of inflation that would translate into a price level effect. And then of course you know with the other aspects than goods prices just going down inflation in those categories going down even while goods price inflation rises you know I just don't see the published evidence as consistent with a story of anything more than a price level shock that ultimately doesn't feed through. Now, that doesn't mean I'm taking my eye off the risk that it is more persistent, but I don't, you know, one of the ways you can make a policy mistake is to wait for something to materialize that doesn't. And so, it's useful now to recognize that waiting for inflation to rise or become persistent could leave us behind in terms of adjusting the policy rate. And I don't want to be doing that. I don't want to be behind on that because ultimately the commitment we continue to talk about, you know, I must have said this hundreds of times in all my outreach across the country and in my district is we want to restore price stability but do it without harming growth in the labor market any more than we have to without disrupting it, without causing pain. And so far we've accomplished that. We want to stay on point and accomplish that.

So there's, you know, it's a hard question to answer, but let me talk about how I think about it because I think it is critical to how we think about the economy going forward. So on one hand, and I'm not going to use the two-handed economist, but I am going to start with on one hand. On one hand, you would expect consumer spending to slow. We have restrictive interest rate policy. We have had for a number of years. Consumers have run out of their excess savings. That's been well documented. You know, in the post-pandemic immediate years, we had excess savings built up either because you got some support or because you didn't have much to spend on while you continued to work and that has more or less subsided. So, we're back in balance. And for many consumers, that means the labor market is their most important component of their spending. But then of course they're going to be more thoughtful about, you know, because they're more constrained, right? The labor market's important. And if you look at the sentiment surveys, you can see that people feel a little more worried about their future prospects in the labor market. You put those things on there and people will make decisions about how to spend that would probably or likely translate into a slowing in spending. So that's what we would expect. So then the question is, is it slowing more than we would expect given where we are, what we're trying to achieve at the Fed with getting price stability fully restored? Well, to ask that, you have to ask where are the signs that that's happening. So we've had some slowing, but we haven't had a weakening in consumer spending. And if going out and traveling and doing anything else is any indication, consumers are out there. They're continuing to be partaking. So, but we can't just use my observations as I travel around the district. So, we talk to retailers. What we're hearing is yes, they're being more thoughtful, careful perhaps sometimes trading down, moving to more bargain items, bigger versions of things, going to a big box store and getting bigger versions so that you can get a smaller price per unit. They're doing those types of things, but they haven't pulled back so completely that they're not spending. And that is the place to watch. But I do think in a more balanced world firms are going to have a harder time passing through when you compare it to how it was a couple of years ago when it seemed completely easy. So this is just in my mind so far a reasonably normal economy where there's a tension between consumers and producers. They get the price down to where the margins don't, you know, aren't constantly just protected and where consumers aren't constantly paying the price, but they pay a little bit more. And that competitive environment is usually what disciplines inflation.

Yeah, absolutely. So we do see cooling. I mean, if you compare it to last year, the monthly job growth is slower than it was last year. And I see demand and supply more in balance. We're hearing that wage growth is also slowing becoming more in line with productivity plus inflation. So, that's very encouraging. You know, when you look underneath the hood, so to speak, of the labor market, you do see that, you know, it's taking longer to find a job. Although job finding rates remain healthy and I look at a particular series and I like to look at that because I after the financial crisis it was one of the things that we really found a lot of leading indicator in and that is to look at that break the continuing claims up into their duration and then ask are job finding rates plummeting for those at higher durations or are the workers getting stacked up at higher durations in a very large sense and so far you see some extensions taking a longer time to find a job. So, you're moving out of that first 1 to 5 weeks, but we're not seeing it stack up at the longer ends of duration. And we're seeing the job finding rates remain reasonably healthy or reasonably consistent with average historical average overall durations of time spent in unemployment. I see that as a positive sign that tells me we're not moving sharply, as you asked, Pedro, from the softening and the cutting to a more sustainable pace to the weakening. So, I'd look there. The initial claims data today were positive. All the continuing claims data that came out of that were positive. You know, the job finding rate remains close to its historical norm. I see that as positive, but I don't see any signs that, you know, it's going to have a surge up either and we're going to have, you know, some people worried that wage growth would rise as immigration policy decrease the number of immigrants coming in, but we haven't seen that. So, I think that's a good sign. And, you know, as long as workers keep finding jobs and firms keep saying that they can find workers, that's an economy that's on a sustainable path. I'd like to keep it there, of course. That's why we're I'm thinking about potentially thinking about interest rates adjustment in the fall because you want to keep it there as you get to 2%.

Sure. It's a very good question. There was a lot of concern among external commentators and academics about whether immigration would really make the labor market restart in its frothiness. You know that there'd be a lot of demand for workers. We wouldn't have workers, wages would rise. We just haven't seen that at the aggregate level. And when you drill down and you get to industry level or areas of the country, you of course do hear some firms in those sectors in those areas saying that it's now more challenging to find workers because they might have relied on an immigrant workforce or they might have had people who are legal citizens here but just feel more nervous not potentially coming for the jobs that they might have come for otherwise. But it hasn't really apart from those pockets, it hasn't really come up to be in the aggregate data. That pattern I just described is something I'm absolutely hearing here in the 12th district. So in the 12th district, you can find different sectors, hotels, tourism, travel, etc. that might say or construction that might say, you know, this is more challenging now. But overall, I just don't hear those types of things. And even in those sectors, you're seeing some continued growth and not a lot of continued growth in the wage demand. So I don't see this right now as being a large threat to either the balance in the labor market or the potential runup in wage inflation. I just don't see that. But we obviously there are four policy agendas that the administration came in with. I would note that all administrations come in with a slate of things they want to change. This administration had four key ones that are relevant for the economy as I think of it for my role. Immigration policy, trade policy, deregulation, and tax and spending policy, which, you know, ultimately you have to put all those together and net out. And on both the tariff and the immigration, the impacts just haven't been as large to date as what was originally thought after some of the early announcements.

Sure. So in my modal outlook in my you know again with a lot of uncertainty around it. So I just say you know usually if we say modal outlook when there's less uncertainty we sort of have a lot of confidence in the modal outlook. I do not have said confidence in the modal outlook but I do have a modal outlook as all good policy and central bankers would. So let's think through the modal outlook. In the modal outlook, I see job growth potentially in the monthly series. If you look at the domestic labor force that you know would generate this that based on who's coming of age and who's going to move into the labor market at normal return to work practices, return to the labor market practices. I think that job growth would be around 100,000 could be even a little bit lower. So that would just be your normal model of what would you expect. So we're well above that now. And you know we have a lot of room before we get to something that I would think of as a steady state in the economy. Now to what extent does immigration play a role in that? Well as long as firms can find either technology solutions or a domestic workforce to take up those roles in terms of product well then it has a limited impact. There's this transition dynamic though that definitely is present where firms are used to using a workforce that largely has migrated from other countries and if they don't have that then they have disruptions. You would have expected to see those immediately and that's where you referenced some of the Beebook and other things that have pointed to those but they haven't happened on such a large scale that you know you're seeing that come up into the aggregate numbers or in any way that tells me that the modal outlook of a balanced labor market and with solid growth and lower inflation isn't a likely scenario and so that's how I'm thinking about it in the modal outlook. So then let's go round to my district and what our contacts are saying. You know, our contacts had already been and this happens in I'm a labor economist by training. There is no time when the labor market's very very hot, frothy and wages are rising rapidly where firms don't respond and say, 'I need to put some more technology to bear here because I can't be in a place where there's turnover constantly.' And as you all have seen, I'm sure when you go out and work and travel in the world, there's more kiosks in restaurants. There's a lot

More self-checking at a hotel. There's a lot more self-service in airports and things. And that's just to name a few. There's self-checkout. That's all technologically available, but it's now much more pervasive because of the tight labor market that just made it harder for firms to solve a different way. Well, that ultimately lowers labor demand. So that's more in line with the domestic workforce growth. And so those are just some examples. Now, if I may though, I will say that one of the challenges that the US has long had is that we have one of the lower labor force participation rates, especially among males in the industrialized world. And so continuing to find ways to increase that is something that's very important. And I never like to plug my own work on a streaming, but I will say that we just recently documented this in a paper that I did with two co-authors, four, three co-authors actually. And so, you know, there's the facts are there and there's a lot of opportunity to get that labor force participation of both men and women, but particularly men, back to something that looks more like our industrialized competitors.