Thank you, Jim. Thank you, Laura. Thank you everybody for being here. It's great to have an audience of folks associated with business and from Harvard Business School and associated with the San Francisco Fed. And it's a thrill to be here with Mary Daly. So, let me say a few words about Mary and then we'll get right into it. She wanted me to keep this brief so I'll take a couple of liberties. I've known Mary since the mid-90s since she was actually head of research at the San Francisco Fed and then in 1996 she joined the San Francisco Fed. She became the president of the San Francisco Fed and member of the FOMC in 2018 and I've had a thrill working with her for years since then. Her background shows a PhD from Syracuse. She has an MS from the University of Illinois at Urbana and very importantly she has a BA from the University of Missouri at Kansas City. I'm from Kansas City so I particularly love that. She has been a visiting professor at Cornell and UC Davis, has been an adviser to the Congressional Budget Office, Library of Congress and the Social Security Administration. Her research focuses on employment, wage trends, economic growth, and economic shocks. She has an advanced understanding based on all that research of the Federal Reserve's maximum employment and inflation mandate. One of the things that's always been important to Mary and it's very important to us at the Fed is to hear from businesses and the private economy about what's affecting your business, how you're experiencing as business people and as households. And in that regard, we thought it would be great to do this event today. So with that, Mary, it's great to be with you.
It's a complete pleasure, Rob. Thank you so much for having this conversation with me. I look forward to it. I haven't seen you in a couple of months, so I'm excited to see you.
And so I get the liberty of asking you a few questions. Maybe I always wanted to ask you actually when I asked, so I'll start with...
What made you decide to become an economist? How did that happen?
Well, I'd like to say that I dug deep into my soul and I realized this is what I always wanted to do. But I knew I always wanted to work with and for people. And I really liked the idea of being a detective trying to figure problems out. But I started thinking I could be a psychologist. Early in my development, or my training in college, I realized that was not actually going to be good for the people who I might try to serve because I'm extremely impatient. I'm driven to change. I'm an early adopter. And that's not really great when people are trying to find their way somewhere. But a nice professor mentor of mine said, you know, you can think about economics because it's a subject about people, but you're really far away from them and so you can't do any harm. Now, in all seriousness though, economics is one of my true passions in my life now because I always have to bring my curiosity. You have to have a great deal of ability to think about different things, manage different inputs and then come to a decision, but then have that humility to ask again and say where have I missed something? What do I need to keep track of and learning from other people and being in conversation. So ultimately, it's been a terrific career, a terrific discipline for me and it allows me to talk to people like you and all of you. So I appreciate it.
And what got you to join the Fed back in 1996?
You know, I thought I would be an academic. So I got a PhD and like every other PhD in my class and who I knew, you have an idea you want to be an academic. But I'd gone to Maxwell School in Syracuse, which is an interdisciplinary public policy program with economics, public policy, public administration, thinking about not just how to study and do research, but how to make it practical in people's lives. And I appreciated that part of it. And when I came to the Fed, you know, I'm a microeconomist doing labor economics and fiscal and public policy, and this is a macro shop doing monetary policy, but they were interested in the skill set I was bringing. And there is a dual mandate, full employment and price stability. And I thought this is a great place for me and maybe I'll stay a year. And I've stayed a little more.
So you went from being head of research here to president of the Fed. You might just explain to people what does a Fed president do?
Yes. And you can compare notes with me. Okay. So here's the thing that I like most about being president and I think Rob you would share this view is that your day-to-day is different every day in many ways but you always have the same core responsibilities. We want to make good monetary policy which means we're listening to people who are living in the economy not just thinking that our textbooks and our models and our data are going to be sufficient. We're really thinking about what are people doing, how are they investing and saving and thinking about prices and employment, etc. So, that's a big part of our job and something that I really appreciate. We're also leading our teams. You know, most reserve banks, all reserve banks, really, the 12 reserve banks, most of our people are in operations doing supervision and payments and working in information technology to make sure we can do electronic payments and keep them safe and sound. And so we're leading, we're doing cash processing. So we're CEOs, we're running businesses, and because our mantras, if you will, or our touchstones are we're fiduciary stewards of public funds and we're fiduciary stewards of public trust that we have to act like a private sector CEO and really drive to efficiency, effectiveness, resiliency, delivering in our case to the shareholders, which are the American people. So I really like that. And so to do that well, and we've always appreciated having Rob as someone who has thought about this a lot, you have to be leading. So you have to be thinking constantly about how am I leading, how am I showing up, how am I looking forward, focusing on later while I'm working on next and now. And those are the types of things that keep me busy. And I enjoy that. So I enjoy doing things like this, but I also enjoy inspiring a team to do our best work even in times when there's a lot of change.
So I'm just to flesh out a little bit, you might tell people how many people do you have at the San Francisco Fed.
So at this point roughly a little bit under 1,800 probably. And one of the things we do is we cover the nine western states in the 12th district. And so while most of our people work in operations in IT or in payments or supervision, those are where most of our employees are. And the number of people who are doing economics is actually relatively small, less than 1% of our total teams. And so this is how the reserve banks are generally distributed across the United States with that real focus on just delivering core services.
And then you have some systemwide responsibilities. All Fed presidents do. What are your systemwide responsibilities?
Well, my systemwide responsibilities are, you have to have a pretty large span in this role. So I work on making sure the research departments are holding themselves to the highest standard. All the reserve bank presidents are responsible for their individuals, but we have to work together in terms of interrogating the most important issues. We have research and make sure we have the computing and technology and we're doing all our work well. I also work on the banking side of things with Vice Chair Bowman. It's her core responsibility, but we work here to make sure that our teams are understanding and she's getting what she needs to do the kinds of work she wants to do. And then we talk about communities and public engagement. I'm on the payments committee. So I'm working on everything from how do we do cash to how do we think about FedNow and how should we even think about stablecoins evolution in a world where the Fed might have to be in that environment. So those are the responsibilities I do. I do a lot of work on AI. So I dabble in technology but a lot of work in AI. I'm what do they call me in the system? An AI champion. So I think I am an AI champion. I just believe strongly that it has a lot of possibilities and that most importantly making our people aware of it and aware of its power is the best way to have great responsibility to use it well.
So people might be surprised in addition to going to the FOMC meeting every six weeks and you've got 19 people around the table, seven governors, 12 presidents. How often are you, people might be surprised how often you're working with the other presidents? You might talk about that a little bit on committees and other activities.
I spend a lot of my time with the other presidents and the reason is because, you know, I was trying to explain this to someone the other day so I'll do the same here is that, you know, we are running, you know, reserve banks are set up, there's 12 in the United States, they're really private pseudo private agencies or firms and but we are meant to work together to make sure that when it's practical and efficient and effective we're actually doing things collectively because you don't want things to run differently in the Atlanta district than you want them to run in the San Francisco district. And so, while we're local in our geography, we are national in our thinking. And so, we have to work together. We have to make good decisions, the best decisions we possibly can at any moment in time about workforce, about technology, about how to deliver on our goals. So, you know, my day-to-day, if you asked right now, how much time am I spending with my colleagues? It's a good fraction of my week really and they usually get up much earlier because they're on the east and so my day starts really early talking to my colleagues in the east.
Okay. So with that background let's talk about the economy. And why don't I just throw it to you to talk about your outlook for the US economy.
You know, I'm hearing from businesses that there's a cautious optimism out there and I have to say I feel that cautious optimism when I talk with communities, with firms and even with workers. Cautiously optimistic. Now the cautious optimism is highest I think in the firms who are saying, you know, we weathered a lot of change last year, right? There was policy changes, there were tariffs, immigration policy, deregulation, tax policy. But now firms are starting to really see the lay of the land and then interestingly for the firms we talked to which were a range of industries, all the industries you can think of, they've just been surprised how strong consumer spending has been and how well the consumer is doing despite the fact that we have slowed a lot in the labor market relative to the previous years. And so that means they're cautiously optimistic. So still a little bit of uncertainty, but the uncertainty is more manageable now and the footing seems stronger. So I'm cautiously optimistic on the economy, on the labor market. You know, we've got it in a better place in my judgment. We took 75 basis off the policy rate. You see the labor market, you know, not being in that state where it looked like it might falter. Now it's in fact turned a little bit the other way. That's good news. And inflation continues to come down outside of the good sector, which of course once tariffs roll off, we expect it to come down. Something to continue to watch. But for those are our dual mandate goals are price stability and full employment. Both seem to be in a good place. Policy's in a good place. And we have the opportunity now to think through what information is coming in, what impact will AI have, how will productivity evolve, how will demand strength evolve, and how should we manage policy going forward.
So just for background for the group, the Fed, as you remember, raised rates up to five and a quarter, five and a half percent. Stayed there for a while and then starting in September of '24 first lowered rates 100 basis points, then paused for a while and then as you said 3/4 in the fall and are now at three and a half, three and 3/4. As you approached three and a half, three and 3/4, there clearly was more debate. Which the press, it's healthy and the press enjoyed following. Tell us why particularly as we got to December, just explain to the group what the pros and cons were and why there was so much debate about whether to do that rate cut in December.
I really love that question Rob. Thank you for asking it because, you know, when you get to the point where it's, let me start this way. When inflation's far above our target and the labor market's going strong the policy decision is easy. It's just about how fast, right? Raise rates and how fast do you go? Usually as fast as you can go without creating so much volatility, you've injured something. So when you're on the opposite world and we have a pandemic and the labor market's terrible, it looks really bad for the economy, it's super easy to just everybody agree and lower rates. The hard part where you get this debate is in a situation where there's close calls because you've got competing things going on and you're not really sure what the outlook will be. You have forecasts but you don't know for sure. So in December, you're in this space of should we wait a little bit longer to just get more information to have even more confidence that inflation's coming down to its 2% target or should you put a little more weight on the fact that the labor market looks vulnerable if not weakening and ward that off because you were trying to balance, we were both all trying to balance getting it to a place where you're making progress on inflation but you're not doing it at the expense of the labor market. And so there's a lot of vigorous debate. People have different views. It's a place where I strongly believe reasonable people could disagree without being unreasonable and so I see that level of debate as not only okay but exactly what you all should expect from us. If we weren't debating then I think we would rightly be criticized for all being in an echo chamber and probably being more likely to be wrong.
Okay. So let's talk a little bit about part of the elements of this unemployment as you talked, the labor force looked a little weaker in the fall and we knew fiscal stimulus is coming but it still was weakening and so you basically wanted to buy some insurance for that. But inflation was a little bit sticky and the tariffs were an element of that and there were other elements. You might talk about the Fed has done a good job, seen inflation go from as high as 9% all the way down to let's say two and 3/4, something in that neighborhood. Why is the last mile from two and 3/4 to two? Why is that so challenging?
So we obviously we think about this a lot and there's a whole discussion not usually here because there's not that much evidence that the last mile is harder than the first mile but it turns out that this last mile has been more challenging. So why is it that that's just always true of the last mile? It's like running a marathon. Or is it something else? And I would offer it's something else. It's a series of different shocks. And you know, I said I studied shocks. Shocks can be good. Shocks can be bad. But it's a series of different shocks. So inflation's coming down and then we have the tariff announcement. So then there's some input cost increases and of course those are going to get fed into goods prices and you see that not nearly as much as a standard model would have predicted or many forecasters anticipated but still something and so that means that inflation's a little higher than what we had forecast and that's the tariff effect. Then there's the other part of it which is just the services inflation and so let's break services into two components, housing and everything else. So, housing services, that's just notoriously slow. And the reason is because you have to wait for rental prices to roll over, right? You got to get new renters in. They're going to get lower rents or you've got to get the leases to turn over. They're sometimes on a three-year window. All of that just takes time. And so now in the last year, we've seen housing inflation start to come down and it just keeps coming down. That was just a delayed reaction relative to and it's really similar to what we expected. So, there's that. And then the third thing is the services, you know, all the other services, they are, you know, two-thirds of costs for firms are labor and so it takes time for the labor market to slow to come off of its frothiness to get to a solid place for wage growth to follow and for firms to be able to say well even if things are going up I still don't have to pay two-thirds of my cost in this rising place. You know, workers now if you do measured productivity and inflation are not even keeping up with those two things. They're just a little bit below, but they're kind of, you know, now things are more in balance. So then firms don't have as much impetus to pass through. And then I think some of the good news on inflation potentially is that firms are using technology and you can think of it as Gen AI, but some of it's just average machine learning that they just got good at because they needed to. And so just building technology in to manage cost so that they can not pass along price increases to the extent that they might otherwise but they can still continue to meet demand. So I think that's why it's been sticky. That's why the forecast is for it to continue to come down as the labor market remains just steady, not too hot, not too cold as the housing services keep coming down and as the tariffs roll through and off.
So picking up on that, we've got as we head into '26, we've got two powerful forces that I know you're dealing with. One is we've got a new fiscal stimulus, which is tax on tips, tax on overtime, accelerated depreciation, tax refunds coming in the first quarter. So, that's stimulative on the one hand. And then second, we've got these phases of AI. And I'll just lay them out and then you should comment because I know you do a lot of work on this and have spoken a lot about there's the infrastructure part of AI which is this, you pick it, five, six, 700 billion a year where it looks like we're going to spend another 600-700 billion, numbers keep going up in capex, power, data centers, creating compute. And then we've got the second part of AI which might be in the early innings of downstream adoption which as you mentioned could improve productivity. How do you factor all those moving pieces into trying to think about your outlook and monetary policy?
Sure. And that's a terrific question. So when I look at it, you know, the capex is everywhere. And so I think people are, the first curiosity was is this a bubble? Is it just too much? I think people are kind of reassuring themselves now that there's there there. And so there's real demand for these services and these services aren't being built just to hope people come. It's not the field of dreams. It's actually building to existing demand. So I think that's and that's just going to keep going. So the place where people have worried that that will be potentially inflationary is in the model it might tell you it is is if you're stacking up against a constrained labor market and you need construction workers and you need cable layers and all those things and you can't get them. But right now with the labor market more subdued, you know, you don't see those pressures as much. But that's in building materials. So, so far we haven't seen inflation coming from that, but that's a possibility that people have mentioned. And it takes a while before those things turn into a productive resource. Right now, they're just being built. Okay. So, then what are you doing with the adoption? As you mentioned, we're in the first or second inning of, I know you like baseball. I won't reference football. So, we're in the first or second inning of this. And so it's very early days, but what we're seeing is as companies do it, you know, they're going from the experimentation phase of maybe we should just get used to it. I remember when I first talked about this in '23, companies were telling me, well, my employees have it, so I better know what it is. And so they're trying to get it so that they can help their employees not use it in a way that might be, you know, something they don't prefer. So now they're like, okay, now we're laying out work, workforce training. We're trying to interrogate the possibilities with this technology, but really what we're seeing early on is cost savings, automation in somewhat siloed aspects. So you might automate some component of your, so you have a lot of financial people in the audience, you might automate some component of your loan system or your lending system but those aren't being transformed. And so for technology to go from just a one-time savings because you've changed something from having this much, the capital-labor ratio to this much and you got the cost savings to something that transforms, you have to change the whole entire production process. You have to reorganize work and business and we saw that in the '90s with computers and that was a fraction of what AI is capable of. We just don't know when it's going to happen. And so I think the big thing for monetary policy now is not debating whether it's going to be affecting 2026, but when will this transformation emerge and then what does that mean for policy? So, we're going to have to look deeply at the green shoots, as I think of them, things where there's examples where businesses are doing them, but you don't see them at scale yet, because those are going to be part of our predictive analysis to say we don't want to get too far ahead to constrain an economy that has a possibility of productivity coming down the drain, but you don't want to be so hopeful on productivity that you forget you do have above target inflation. And that's the balance of things that I think will really dominate this year and next year.
So when we talk to companies, our firm, we're seeing lots of open jobs, you know, plumbers, electricians, technicians, probably haven't seen this many. I can't remember when we've seen this many open jobs and the immigration policy may be having some effect. On the other hand, we also see college graduates struggling to find jobs and then we see businesses tell us we're going to be able to do certain, controllers department is going to have less people. And I know you're looking at all those things and sometimes it's hard to tease out how much of the labor market weakness is cyclical slowing versus there's a structural change and we think we know AI is going to create more labor force structural change. How do you think about the role of the Fed in the cyclical versus the structural? Does it have a role in both?
