Regional President Speech

Federal Reserve Bank of San Francisco ABOUT US OUR PEOPLE JOIN US What We Study Our District Research & Insights News & Media / NEWS & MEDIA / EVENTS Fireside Chat with Mary C. Daly at the San Diego County Economic Roundtable DATE Friday, Jan 19, 2024 TIME 1:15 pm PST LOCATION San Diego, CA 58:33 President Daly’s fireside chat at the San Diego County Economic Roundtable.  Transcript Tony Young: The San Diego Workforce Partnership collaborates with businesses, community- based organizations, elected officials, and funders to empower job seekers and employers. And we’re honored to have Mary Daly, the distinguished president and CEO of the Federal Reserve Bank of San Francisco here to enlighten us on her expertise. Alongside her is Daniel Enemark, the chief economist of SD PIC, engaging in a fireside chat about the future of our economy. In 2024, we stand at a pivotal moment. Now is the time for business, government, and community leaders to unite, uplifting all San Diegans and constructing an equitable, resilient workforce. Our focus is clear access to skills, jobs, and careers that promote self- sufficiency. Over the past six months, the San Diego Workforce Partnership has prioritized cultivating partnerships between employers, educators, and job training professionals, securing more than $9 million to invest in sustainable employment opportunities for more than 30,000 San Diego residents that we serve annually. Yet over 200,000 residents still unemployed or walking the streets every day. Our work is far from finished. When we support one another, our economy thrives, and San Diego succeeds. And I’m delighted to welcome Daniel Enemark and Mary Daly for a captivating conversation about the economic future that lies ahead. Your presence here today reflects the commitment needed to drive this change, and thank you very much for you being here. Let’s start this journey together toward a more prosperous San Diego for everyone, and as a representative from the Workforce Partnership, I appreciate all of you all as we move forward today. Thank you. Daniel Enemark: Thank you. Mary Daly: Thanks, Dan. Daniel: Mary, thank you so much for being here. Move this. Can everybody hear me? Audience: Yes. Daniel: I could go on and on about Mary Daly, but I’ll just say this. A year ago, Lauren and I were talking and I said, “You know who my absolute dream guest for the 40th Annual Economic Roundtable would be is Mary Daly.” And this feels like a dream come true and I’m just so thrilled to be sitting here with you and having this opportunity to talk with you. Mary: Well, thank you so much. That’s extremely flattering. I really appreciate it and I actually feel like, “Oh, wow, I’ve already accomplished part of my bucket list, make a dream come true and it’s only January.” So, I’m already in. Daniel: Checked. Mary: So, I’m checked. I’m in good shape. Hopefully, the year goes well. Daniel: All right. Let’s just jump into it. Mary: Sure, absolutely. Daniel: First, I’d love to hear and I think we’d all love to hear your outlook for the economy. What are the key takeaways from 2023? What’s your forecast for 2024? Mary: Absolutely. Let me start with 2023. Remember, we began the year last year with high inflation and a booming labor market, and we were tightening policy at a rapid clip, and the conversation then was, will the Fed’s tightening cycle fail and inflation will just completely never come back down or will we have a recession? That was the context and the sentiment was pretty low, despite the fact that the economy was booming. And I would go out and do CEO Roundtables, community talks, and what I’d hear is it’s too frothy. It’s unsustainable. I had visuals given to me. One gentleman said, “I feel like I’m riding a bike when I was a kid and I’ve lost the pedals, those bikes where you lose the pedals and it’s just going down the hill and there’s nothing you can do and you just hope for the best and hang on.” And then, another young man who I met at a local retail outlet, he was there with his wife and two kids and they were on a Sunday shopping. And I’m asking him questions, don’t identify what I do for a living, but I told him I was an economist and I’m interested in how people are experiencing the economy. And he said, “I feel like I’m on a treadmill. I’m on a treadmill because I’m making more money than I’ve ever made. I’m working two or three jobs. I have no more hours in the day. And when I come here to buy groceries, there’s less and less in my cart and I’m spending more and more of my income.” And he said, “I can’t keep this up. I want to do better. What can I do?” And I told this young man, which was a heartfelt rendering he was giving me about his life, I said, “I’m working on it. It’s going to take some time. Keep at it.” Now, I don’t know what happened to that young man, but I do know what happened to the economy. Throughout 2023, even with the banking stresses, which gave us another negative we had to work through, we end the year, ends ’23 with inflation much, much lower. We’re not there yet and I’ll talk about that in a moment, but it’s much, much lower in American families and businesses, and communities are feeling a relief from that high inflation stress. We also end it with the economy starting to slow, so it looks like that froth is gone, and that froth being gone actually helps people feel like, “Okay. Now, I can get a foothold and I get a plan.” So, now, where are we today in 2024 and where do I see us going? Well, I’m going to start with a couple of things. The economy is in a really good place. If you saw the sentiment numbers, the confidence numbers this week that come from the various surveys, people feel better. There was last month a Vibecession. That was the last thing I was hearing about. Kyla Scanlon taught me this. She’s an influencer, a journalistic person who does a lot of TikTok and things and she tells me, “Oh, it’s a Vibecession. People feel bad. The data are good. It’s a bad vibe.” That was six months ago, and I think, “Okay, I’m listening.” But now, I’m seeing sentiment data and confidence data be better. When I had a Business Roundtable here in San Diego this morning, what did I hear? Cautious optimism. I’m seeing an economy that is responding to monetary policy and coming into balance and inflation coming down, but not falling off the cliff and making a worrisome situation, and that’s good. The second thing that I feel is in a good place is policy. Policy is in a good place. We got policy rate adjusted so it can do its work. We see that it is having an influence. So, now, we’re in a great place in the following situation. We know that policy’s in a good place, the economy’s in a good place, and we can start to be more patient to see what we need as a Fed to do next. The other thing that we can do is we can take a deep breath and we can say, what are the important work we need to do as communities, as people, as businesses to plan for our future? That’s the second thing I heard in the roundtable this morning that I really wanted to share is that we had a lot of conversations about things that we were going to do to build our future forward. When I was at CEO Roundtables last year, I only heard about inflation and how hard it was to hire anybody. Now I’m hearing, what about workforce housing? What about education? What about making our communities strong and vibrant and building an ecosystem? So, I’m optimistic by nature, but I always tether myself to evidence. I’m an evidence-based optimist, and I would say that the economy in the situation looks brighter than it did at the beginning of last year. There is a lot of work to do. There is no denying it, and I’m going to do my part at the Fed, but it’s a lot of work to do for all of us to really get to where we want to be, but we’re starting from a better place for sure. I hope that helps. Daniel: That helps a lot. For those who might not be familiar, President Daly, in addition to being president of the San Francisco Fed, is also one of 12 voting members of the Federal Open Market Committee, which arguably makes her one of the 12 most influential economic policymakers in the world. The FOMC kind of sets interest rates, so that has a huge impact on our economy. And you as part of that, have a kind of dual mandate, right? One is to keep inflation low and the other is to maintain full employment or to keep unemployment low. When you look at the year ahead, which one of those seems more daunting or which one seems more like a risk, which clearly in 2023 your focus was inflation? What do you see when you see- Mary: That’s a great question. You’re right. We have what we call the dual mandate. If you follow the Fed, you’ve heard about the dual mandate, full employment, price stability. If you’re ever talking to people in your friends and family, we explain it this way, when people aren’t fed followers necessarily, is that everyone who wants a job can have one. That’s full employment. And the dollar in your pocket or your wallet holds its value. That’s price stability. So, for us last year, inflation was so far above our target and the labor market was booming. As I said, firms were telling us they couldn’t find workers and workers were telling us they could have every job they wanted, so that was an economy where our only focus to achieve our goals needed to be inflation. So, we had that in mind, vigilance and resolute commitment to getting inflation down. At this point with the economy in a good place, the risk is more balanced and the policy in a good place, what’s happened is that dual mandate is back in a collective lens, right? I’m looking at both because what I want to do is I want to make sure that we deliver on low inflation, but do it without taking jobs by making the unemployment rate rise. So, I would say that we’re balancing those goals at this point. The risks to the economy are balanced and the risks to both sides of our mandate are balanced. So, we don’t want to loosen policy too quickly only to find that inflation gets stuck way above target. That would be a miss. That would be a very scarring miss. And we don’t want to try to get to two so quickly overnight just to get that squeezed out, that we end up having this big run-up in the unemployment rate, and then we’ve solved one problem for people. We’ve brought inflation down, but we’ve given them another problem. We’ve taken their jobs. That is not a soft landing in case you’re wondering, and we want definitely to… Just in case you don’t know. But we definitely want… Because a soft landing is more. I mean, the reason I used to spend so much time talking to people is because you really understand what a soft landing means. You have to look at the eyes of people who want two things. You have to think of that gentleman I met in Walmart. Well, I shouldn’t have said that. That gentleman at the large retail outlet, you have to think about that and you have to think about that gentleman. And if we end up having an economy that delivers on 2% inflation and takes away jobs, we haven’t made him any better off. In fact, maybe worse off. So, that’s the commitment to the dual mandate, and I think both of those goals are in balance. Daniel: Yeah. Speaking of the soft landing, that’s all we heard last year was are they going to achieve the soft landing? The window for a soft landing is getting narrower and narrower. And then, all of a sudden, people are saying, “It’s immaculate disinflation. You pulled it off. You did this incredibly. You did the impossible.” Do you feel like you’ve achieved the soft landing or is there a continuing risk- Mary: No. No. No. No. If anybody asks, the golden chalice is not yet ours, right? We do not declare victory. I think it’s very important, and I mean this with all seriousness, there’s a cost to declaring victory too soon. There’s so many costs. But say that we say there’s victory. Well, then what we could end up with is inflation getting stuck at 3.9%, which is what is just printed, right? That’s not price stability. 3.9% is not price stability. 2% is our target for price stability, so there’s a gap. That’s a 1.9 percentage point gap. There’s a lot of work to do there. That doesn’t mean that we don’t have the tools or not getting closer. We are definitely getting closer. Look at all the progress we made last year. It just means we have to stick with it. We have to continue to work on it, and we have to do that in a different way than we did last year because this year, we also have to keep our eyes on the labor market, which is starting to slow. So, we have to calibrate very carefully to ensure that we continue to bring inflation down and we ensure that we do it as gently as we possibly can. So, I say that the job is really one about calibration this year. What does it take? It takes patience. It takes gradualism. There’s this term used in monetary policy. Ben Bernanke wrote a speech about it called Gradualism, and the gradualism just means you take the time to look. You’re facing a lot of uncertainty. You make sure you really get a look at the data. You look at it. You study it. You do it twice, three times. And then, you take action. Because if you’re quick to act, you can actually make mistakes, and mistakes aren’t just things that they’ll write about in history books. They’re things that affect people, their lives, and livelihoods. Daniel: You mentioned that we haven’t yet achieved that 2% price stability or 2% inflation rate. What’s keeping it elevated right now? Why is it 3.9% versus 2%? Mary: That’s a great question and I love detailed questions like that. I’m an economist by trade, so who doesn’t want to talk about the composition of inflation? Probably you. Probably you. But I’m going to talk about it anyway. We’re going to make it fun. You can tell me. I’ll ask for a show of hands, is it really fun? Okay. Really, it’s actually very interesting and extraordinarily useful in the post pandemic management of the high inflation. It’s quite a bit different than how it’s historically meant. Pandemic comes as we all know, and it basically shuts down the economy, and when it shuts down the economy, it simply destroys supply chains across the globe. It stymies demand, but then quickly, two things happen. Federal relief comes in and supports families who didn’t have incomes, and the rest of us who did have incomes because we kept our jobs, just went home and worked. And then, we masked up in piles of savings that we didn’t ordinarily have because we had nowhere to go. And we did drain off some of those savings by going online and spending an enormous amount of time buying things, physical things, bicycles, stationary bikes, TVs, headphones. So, when we’re all fighting over the TV, everybody has their own headphones. Zoom equipment. I mean, in my family, we bought a lot of stuff, as did every other American family. Right? Everybody bought a lot of stuff, and what was interesting is the switch of our spending as Americans. The pattern of our spending, it shifted quite dramatically away from services in two things, to goods. That is very unusual. Two-thirds of spending is on services and only a third on goods. That shifted half-and-half. Okay. So, then, what does that mean? Well, that means that demand for goods and things is growing rapidly while supply of things is completely faltered, and that’s inflationary. So, goods price, inflation shot up. We’ve been used to computer prices falling, bicycle prices falling, TV prices falling, even car prices falling. Those things all rose in price while all that was happening because that’s thing one. The second thing that happened… Huh? Daniel: The microphone a little closer. Mary: Oh, sorry guys. Second thing that happened… I couldn’t tell. I have no idea what I’m doing with the microphone. With the microphone. I’m very, very capable with monetary policy. Just being clear. Okay. Back to it. So, goods price inflation rises rapidly. The second thing that happens is that, and this is really important, people want bigger houses. They want a lot of housing. Now, they have money, so they go out and they’re buying houses hand over fist. Housing prices are going up, so that boosts housing price inflation and rental price inflation, as people move out of cities and they move into bigger areas where they feel like they have more outdoor space or just bigger environments because it’s the pandemic. So, that’s happening. And then, the third thing that happens is that labor, people working, especially in- person settings, people are afraid. They don’t want to come to work and it’s challenging, so all of those workers, many of them just simply leave the labor force. They retire if they’re older. They simply leave and go home if they’re not. And that leaves a big hole in the labor force. That happens at the same time that demand for lower wage workers has gone up because we have all these need for Amazon drivers, and all the delivery services that we’re getting to our home, food delivery, goods delivery. So, this is just a big imbalance between demand and supply, and both of those things in housing and in services other than housing, that completely boosts core services inflation. So, then we end up with core services inflation high, core goods inflation high, and an economy that is growing and there’s no sign of relief. So, we raise the interest rate, and what happens is while we’re raising the interest rate to get the demand side of this back in balance, the supply chains also recover. So, now last year, what we had is goods price inflation came down largely because the supply of goods started to come back through. Shipping improved. Factories opened. The supply chains recovered. Goods price inflation come down. At the same time, demand for goods started to wane and people shifted back over to services, and what’s happening is more workers are coming to work now. Wages have been rising. Tracks people into the labor market, and the Feds raised interest rates. So, people are and just demand is in general slowing. So, right now, two things are happening. Goods price inflation’s coming down and services price inflation’s coming down, both for housing and also for these other services. And while others may call it an immaculate disinflation, I call it a purposeful march towards the normalization that comes from the post pandemic supply chain recovery and the normal way that Fed policy rates work. Raise interest rates. Demand slows. Daniel: Not quite as catchy of a name as immaculate disinflation. Mary: Well, you’re a policymaker. If you look for a catchy name, you’re typically going to be too narrow in your thinking and you’re going to be wrong, so I’ll leave that to the media guys who dream those things up. But it is catchy, immaculate disinflation. It just isn’t immaculate. It was purposeful. Daniel: You wrote a great paper called The Economic Gains from Equity, and for the nerds in the audience, I encourage you to go read this paper. I’d love to hear from you, why should we care about racial equity and what can we do to address it? Mary: Let me say that when gaps in groups, whether it’s race, ethnicity, gender, rural, urban, any location, you can look at gaps between people who are first generation college students and other college graduates, you can think of so many places where there’s gaps in opportunity. Why does that matter? Because talent is distributed evenly across the population, in all likelihood. Why wouldn’t it be, right? And if talent’s evenly distributed and you see gaps in opportunity, that means we’re maybe missing the best coder ever to walk the earth, that might be living in rural Idaho and we don’t even know that person’s there because they have never been given an opportunity to touch a keyboard or to give it a try. So, the concept of equity, the gains from equity is that we’re leaving talent on the table. When opportunities aren’t even, talent is regularly left on the table and we can’t afford that. We’re a nation that needs growing in higher quality labor force. We need to increase productivity to ensure that the pie for the next generation, the economic pie, is larger than the one we inherited. So, the point of writing that paper is to say, closing these gaps is not simply about fairness. Closing those gaps is about the economic well-being of our society, and that is something that is easy I think for all of us to commit to. We need to do that. It’s our responsibility to the next generation. Daniel: Yeah, I appreciate that. By many- Mary: Thank you. Daniel: By many traditional measures, GDP and unemployment, the economy is doing well. You talked about vibe earlier, right? There’s still a sense among many people, though maybe consumer sentiment is improving. There’s still a sense among many of us that the economy doesn’t work for all of us. Housing and childcare unaffordable. Middle class jobs are often inaccessible without a very expensive college education. How do you reconcile those two views of the economy? Is the economy booming? Is the economy busting? What’s- Mary: Sure. One thing that I think I find helpful, and when you talked with people and you dig in, you can see this. Last year, it didn’t feel like it was working anywhere. Right? Even in the basic thing like my gentleman who was at the retail outlet, he’s working his jobs. He’s making better money, and he still doesn’t get to do what he wants to do, and he still feels like he’s on that treadmill. Right now, I do feel like people are stepping off the treadmill a little bit and just as they walk, they gain ground. They’re not on that treadmill, but it doesn’t mean… That’s what we call the cyclical part of the economy. Right. Cyclically, we’re getting at a better place. The inflation rate’s coming down. Things are getting better. We’re better off. What’s still hard though is we face these structural things about how the economy works that needs treatment, and we spent a lot of time at the roundtable that I had this morning with business leaders talking about things like how do we create an ecosystem? These are things that business leaders brought up to me, the ecosystem that says, “Okay, I can offer a job. I can offer training. Where’s the workforce housing that makes that equation complete?” So, if my hiring barrier isn’t how much I can pay or is a worker skilled, it’s can they afford to live near the place that I’m offering the work? Well, then that’s a barrier that will take a public, private community partnership to create the bright ecosystem. Those are challenges that we haven’t had to… Well, they were there before the pandemic, but now, the pandemic and the post pandemic recovery has put a bright spotlight on them, and that’s not something that’s just here in San Diego. That’s anywhere you go, in the 12th district. I have nine states in the Western United States, and I travel across the world and across the United States. I see the same problems in same places. Communities everywhere are struggling with how do we make sure we have enough housing for our populations? How do we make sure that housing is at price points where various parts of the workforce can afford it? How do we get the right skills to the right places? The reason I focus so… Well, these are the jobs I have. I have one tool, the interest rate, and I have two responsibilities, full employment and price stability. It’s a narrow lane, but it’s an important lane. The reason it’s so important is that none of those things you just mentioned and we just talked about that solve people’s feeling the economy doesn’t work for them, are even on the radar when inflation’s 7%, that just aren’t even talked about. They get swept aside while people frantically try to keep up. Now, as inflation’s coming down, we can start to bring those things back to the forefront, and I can turn the job then back to you all who are working in localities and communities and states, and our fiscal agent, folks in Congress, and state legislatures to really take on this other work, which is we’re through the pandemic. The worst of the inflation surges behind us. Okay. Now, what do we do next? Daniel: Speaking of what we can do next and what we can do locally, as Chairwoman Vargas mentioned, San Diego’s really big. It’s the fifth-largest county in America. 1% exactly of all Americans live here in San Diego County and it’s incredibly diverse. What can we do here to make our economy stronger, more resilient, more equitable? What can policymakers, businesses, educational institutions, nonprofits, what can we all do locally to improve our economy? Mary: One thing that I see and I see this all over when I travel the district, is just what we’re doing here. Come together. Talk. Learn from each other. You have an opportunity to meet people who don’t work in your industry or business because ultimately, what I see in any of the successful communities that solve problems is you get right to the heart. It takes partnerships. It is very challenging for the government alone to do something, whether it’s the local state or federal government or just businesses alone to do something or community groups alone to do something. You have to build these partnerships and say, “Collectively, what do we do?” The second thing that I think is really important, and I learned this in my own organization, I have a lot of ideas. I’ve stopped saying I have a lot of good ideas. I just say, I have a lot of ideas about what we can do. But what really important is you have to pick two or three to all swim in the same direction to say, “Okay, what are we going to accomplish?” And I think we probably don’t do enough of that in our communities to say, “Oh, we have all these leaders here. What two or three things are we going to put all of our weight behind collectively because they’re the most pressing things to do?” Those are just some basic things. I will say this though, and I told you this when we were having a chat before this event, I live in Oakland, California. I love Oakland, California. I moved there in 1996, and I’ll be honest with you, I came from Missouri. Missouri’s great, but I walked into Oakland and I turned to my wife and I said, “Oh, my gosh, I’m home.” Why did I love it? I loved it because it’s diverse. It’s vibrant. You can meet different kinds of people, et cetera, and they have one thing in common. They love Oakland, and their love of Oakland means they’re going to try. Now, we get a beating in the press and some of it is probably relevant and deserved, but I still love it. But when I want to think about how to make Oakland better, you know where I come? San Diego. I’m not kidding. I come to San Diego and I meet with people who are doing workforce housing, or I met with someone who’s working with the criminal justice system in there for my Zip Code Economies podcast to move people as they move out of incarceration into jobs. And I said, “How do we do that? How do we think about that?” So, I talk to people here in San Diego because you do have that same thing. You have that thing where people who live in San Diego are proud to live in San Diego. You recognize all the problems you have and you want to make it better. You did it, guys. I mean, you’re proud, right? So, I think capitalize on that. Put your things together. One of the things we’re thinking about in the Fed and one of the powers we have is to convene, and our community development group and our regional executives that have a footprint all over the nine Western states, we’re meeting people like you all over Salt Lake City, Boise, Idaho, outside of Portland. And everybody’s thinking about the same problems, but we can convene all of you to share with each other how you’re thinking about things and learning. The lessons are going to be the same. Align on some strategic goals and do partnerships with public, private, and community to really get the job done. So, thank you. Daniel: You mentioned your podcast, Zip Code Economies, which I encourage everybody, get out your phone now and subscribe to. If you think I can’t subscribe to a podcast by an economist, it’s too arcane, that’s not the way it is. One of the things- Mary: That is how people think about it though, until you saw it. Daniel: I’m sure that people are afraid, but it really is very accessible. There is one great episode where you interviewed two twins who worked with Reality Changers here in- Mary: Yes, here in San Diego. Daniel: Yeah. Cheers for Reality Changers. Yeah. It’s a wonderful podcast. I encourage people to listen to it. You also mentioned having two or three ideas, and back in the green room, you mentioned that you had two or three messages for your colleagues, and I wonder if you could share them with this audience. Mary: What happened is every year, we bring in our new board members. We have boards of directors in all of our offices. The San Francisco Fed has a head office in San Francisco, a branch office in LA, a branch office in Salt Lake, a branch office in Portland, and a branch office in Seattle. That was original from 1913, to ensure that we have these nine Western states, so we have to cover a vast territory. The Salt Lake branch covers Idaho and parts of Nevada and Arizona, and then LA covers the Nevada and Arizona, and all these different groups are linked together, and we have a Hawaii and Alaska. So, we have then these board of directors members, and then we also have councils. We have an economic advisory council, a community advisory council, and a community depository institution advisory council, which we never say that whole word. We always say CDIAC. Anyway, these folks, these new members all came to the bank this week, Wednesday and Thursday, and all of our board and council members, the whole full teams came and we introduced them to what we do at the Fed and why their service to us is so important. And I said, “You’re going to hear a lot of things over the next two days, but I want you to remember three things. There’s only three things that are really important when you start your service.” And I think these are three things that I want all of you to remember about what the Fed is like. The first thing is that the economy is about people. We are not simply looking at the data and aggregate numbers and calculating models and looking at empirical work. We have that. We absolutely use that, but the thing that you always have to go back to is that the economy is about people and you have to be out talking to people, business leaders, worker groups, community groups, civic leaders, if you’re going to understand the lived economy. That’s why I spend time at retail outlets asking people questions. While it’s a small data collection project that I do, it actually gives me the lived experience of the people, and that’s why you have teams of people working at the San Francisco Fed who are about collecting this qualitative information that makes such a difference in how we can do our best work. The second thing to remember is the data are plural. Data is not a point. It’s not six points. It is plural, and it’s really like a pointillistic painting. If you think about a painting that’s pointillistic if you’ve never seen one, it’s a million dots that make a picture that if you back weirdly far away from it, you see only as a painting, but when you get up close, you realize that painting is made of all those little dots. And the artist had the patience and fortitude and persistence to ensure that all of the dots were made well, lined up, and gave the painting the depth that it has when you look at it from afar. The discipline that we need if we work at the Fed is to remember, the economy and those data points, that’s a pointillistic painting. And if we miss whole swaths of dot because we think we got it from afar, we will miss including lenses and voices that matter to us. That brings me to the third thing that’s important. Every voice, every lens, every perspective matters, everyone. So, we need to be making sure that we’re out there talking to people. I spend time in Alaska, Hawaii, rural Idaho, San Diego, downtown Oakland, East Palo Alto. Every state in the district, we are going and we’re going to not just a community, not the fly-in city, but the communities that also make up the fabric of those locations. My colleagues and the beauty of their Federal Reserve system in 1913 is that the people who put this together, they put a group in Washington, the Board of Governors, and then they recognized the importance of knowing information from the communities that were meant to serve, and they said, “We’re going to have 12 regional Feds and those regional Fed presidents and their teams, apart from their daily responsibilities to do payments and banking and monetary policy, we’re going to have them out there actually collecting information from the very people who are affected by our policies.” And that has been a durable and important component of what the Federal Reserve banks do, and it’s one of the reasons I love my job so much because ultimately, you only make good policy if you’re out there. So, the economy is about people. Data are plural. Every voice, every lens, every perspective matters. You guys are so kind. Daniel: You and I are similar in that when we go shopping, we pester people with questions. I do that too. In fact, every restaurant I’ve been to recently, particularly fast casual places, I always ask, “Hey, do you mind me asking, what’s the starting salary here?” And the dollars number I always get is $16 and something cents. So, that’s within a dollar of minimum wage. We have this $20 minimum wage in fast food coming, a $25 minimum wage, which you heard about in the Business Roundtable this morning for healthcare workers. Have you thought at all about what kind of impact do you expect that to have? Is that going to contribute to inflation here in California? Is it going to reduce overall employment? Do you have any thoughts? Mary: This has been a long, long studied economic topic, and the minimum wages has been long thought about by economists, and not just policymakers. The economists are trying to figure out what the impact of the minimum wage is. It really depends, when the minimum wage is raised, who it’s raised for, whether the communities or the firms can bear it, et cetera. So, I think there is no clear definitive answer about whether it reduces employment or changes inflation. I don’t think there’s definitiveness there. And there’s a big debate about whether it’s better or not as good as just putting an earned income tax credit on. So, if you get to the economics of it, you don’t get a compelling answer. The minimum wage, and I’ll just say it, is a social tool. For most of us, it’s about not finding it very comfortable to think that people work a full-time job and can’t afford to buy the gas to get there or feed their families. That’s what ultimately we have to decide as societies. The Fed doesn’t play a role in that. It’s just what we have to decide as societies. What can we bear? And then, what firms have to do is decide, okay, at that price point, do I need to hire fewer workers and invest in more technology? Do I need to change the equation? Do I need to hire different people? Ultimately, those things will work themselves out, but if you look to the economics to compel you on the minimum wage, you would find that there’s just a range of views and a range of findings and it depends on what year you studied it. If you look at the reasons people often vote for the minimum wage or in the surveys, what people say about the minimum wage, it really is that they find it extraordinarily uncomfortable to repeatedly be confronted with the fact that people who are doing their jobs and doing everything the way they should cannot afford the basic things of living, transportation, housing, and food. And that’s just hard. Daniel: Yeah. Thanks. For those of us who don’t get to go to the Federal Open Market Committee and cast a vote, could you tell us a little bit about how that decision- making works? You said something that was kind of surprising when we were meeting with the students earlier. Mary: Sure. Sure. It feels like it’s all behind the scenes, right? Because the meetings are closed door. So, let me tell you the things I can. They’re all confidential, so I can’t share the details of what we do, but I can share the thing that I think was so meaningful to me. The first time I went to the FOMC, I went as a staff person. You’re only allowed a limited staff too as people know. But what is really remarkable, and I think it’s one of the reasons, one of the main reasons I love the Fed so much is the independence that we have given to us by Congress is cherished and closely built, right? We build it, and the way we build it, there are many ways we build it. There are many ways we earn it. It’s basically the right to be independent. The importance of being independent. One of those ways is the FOMC is a big room, and all of us live in society. So, every FOMC participant lives in society, lives in their communities. When we cross a door… It’s much like that door. You open big double doors. You cross a threshold. And once people cross that threshold, there is never a mention, not one of politics of issues that would be politicized. What we talk about is the economy, our goals, our mandated goals of full employment, price stability, what we need to do, and we fiercely debate and discuss with big differences in how people see things. One, from the way they bring the information and where their communities are. And then, we come to a collective decision. So, it really is exactly what you would hope for if you were an American, is people are doing the job they were asked to do without the noise of thinking about politics or any other thing that they have on their minds. And I think that’s a really cool thing. The thing that I told you that is really important is I’ve come on as a voting member this year, and while that is true, I’m a voting member, reserve bank presidents rotate, that’s actually not meaningful from the way the FOMC works. The 12 reserve bank presidents rotate their voting, but every one of us is as meaningful as a voter or not a voter. It doesn’t matter. We build our influence and our reputation based on evidence, what we bring to the table, how we reason the arguments. And what that tells you ultimately is that the FOMC is a construct where the best idea wins. Right? And the best idea is the product of the collective membership debating, discussing, and deciding what are we going to do for the American people. At the front of our bank in San Francisco at the head office, we have a sign. They put it up the day I became president. It’s like a touchstone. That’s why I keep putting my hand up. It says, “Our work serves every American and countless global citizens.” And when the FOMC comes in, I feel like we have that touchstone, even though it’s not there. They have Latin words on the wall. But it really is our work serves every American and countless global citizens, and we take that responsibility very seriously, and that’s how we do our business, voting or not. Daniel: I love that. I am going to be looking at some of the questions that have come in, so when I look at my phone, don’t think that I’m ignoring you. Mary: I won’t. Daniel: But the last question I’ll ask you is whether you could talk about your personal process for decision-making and particularly those three points. Mary: I can. Yes. Okay. I was saying to the students since… By the way, Rick said it. I’ll just give a big pitch for this. I met some students here this morning. I did the Business Roundtable, and then I went to meet with students. Boy, we are lucky because these students, they were impressive. They asked thoughtful questions, very well considered, just in dialogue. The thing I always like when I meet young people is that I see the hope in their eyes, but what I love even more is when I see the hope in the practice, when they have the idealism and the hope, but they put it with the skills and the wherewithal and the thought process and asking hard questions and challenging. So, if you ever need inspiration, just ask for a meeting with 10 or 15 students here or anywhere probably, but definitely here, and you’ll see what I saw. I walked away feeling terrific. But one of the students asked me about how do I think about things? How do I think about policy? And the very first day I became president, I was giving a town hall for the bank, and someone asked me, “Well, how are you going to make policy? That’s really hard.” And I said, “Well…” I have stickers now. I don’t even know if I have any more with me, but I made them into stickers because I want everybody to know this is a life thing you could use too. But here’s how I make policy. I’m voraciously curious. I mean, voraciously curious. I want to look at everything, talk to anybody I can, look at the models, read history, put it together, figure it out. When I get to the meeting, I’m confident about the decision I’ve made because one, it’s so important, I better be thoughtful and confident, but also because I’ve done all the homework. And then, the day I make the decision, I’m humble about what have I missed, what can I learn tomorrow, and I go back to voraciously curious. And this virtuous cycle of be curious, be confident, be humble is how I make policy, and that’s what I put on the sticker. When I told the students, I said, “No matter where you go, if you use those three things, you’re going to be successful.” Daniel: I love that. We’re going to go on to some questions from the audience. Mary: Oh, terrific. I love audience questions. Daniel: One of the first questions is 2024 may be a critical year for the commercial property market. To what extent will this affect regional and local economies and banks? Mary: Sure. That’s a terrific question, certainly on the mind of many, many people. It is true, just for those who don’t follow commercial real estate markets, that commercial real estate, much of it is repricing, refinancing this year because when leasers, owners, et cetera, found that the interest rates were going to rise, they locked in low interest rates, but many commercial interest rates for commercial properties are on three-year cycles. So, now, the refinancing is coming and you have to redo it, so you redo it, but now you’re at higher interest rates. So, if you hear people say they’re reckoning, that’s the reckoning, right? That’ll be this reckoning. Now, that is going to be something that has to be gone through, so what can you say in the back of your mind to say, “Okay, how bad will that be”? Well, let me offer some things. Commercial real estate is a big word that covers a lot of diverse sectors. Not all commercial real estate is the same. You can break it into multifamily housing, warehouse, and storage space, and office space, but even office space has to be broken down into city office space, which is where a lot of the workers left, and suburban office space, which is doctors, lawyers, title insurance companies, you name it. They’re fully in person, so they’re still there. So, that space in the suburbs and in places where you’re really filling it with those kinds of in- person service providers, that’s not at risk. And industrial warehousing is booming, and multifamily, we have too few units, so that’s not at risk. What’s really problematic is this downtown office space. So, then, downtown office space, well, certainly regional banks have some skin in those games, but they’re not the big investors in those spaces. Those are usually conglomerated investment pools. They have a variety of different investors, and they will have to find another method of funding themselves. So, we had a commercial real estate roundtable late last year, and I asked people. We had private equity firms and commercial real estate owners, and leasers, banks, and what we heard in that… Now, I’m going to narrow it down to this office property since that’s where the worrisome pieces are. Is that these folks have known this. The reckoning is not a surprise. It’s been being planned for. People know it’s coming, and they’ve started triaging. So, there are certain properties, if you’ve got class C office space, then you’re probably trying to figure out how to lease that to doctors, lawyers. Other people say, “Move closer. Class C’s available. We don’t have the competition for it.” If you have class A space, well, it’s beautiful and you can find different people in downtown San Francisco, where people say the end of the world has come, especially if they don’t live there. We did have big companies you’ve heard of move out in the tech space, and then AI is moving in. So, people do come when that space is available and the price point is right. So, the real piece of the puzzle that’s in trouble is that class B space where it’s not new. It’s not that attractive. It’s not going to attract the new techie people. We use a lot of investment. And there’s so much class A sitting there. Why would you do it? And it’s too expensive or big for the smaller office places. So, that will be the place. And then, some of the owners or leasers are saying, “Well, I’ll just take it to ground.” I don’t know that they always mean tear it down. They mean turn the lights off and wait for the times to be better, and they can do that. And then, there are other private equity firms who are like, “At some point, the price point is going to be sufficiently good that I can swoop in.” So, from the Fed’s perspective, what I worry about or as a policymaker what I worry about or what I think about… I wouldn’t even say worry. I would say what I think about on commercial real estate is I want to understand what the drag on the economy will be. So, I’m focused on that, and I also want to understand what the stress on the banks will be. So, we’re monitoring that, thinking about that, regularly talking to all the entities, and everybody knows it’s coming and they’ve been working and planning for it. So, now, as it starts to go through and digest, it’s about how does it shape up for any particular firm? Daniel: Yeah. That’s helpful. Thanks. You do think that a solution to the economic gaps across the country can be solved by increasing access to higher education. There seems to be a shift in employers relying more on soft skills or maybe on a skills- based hiring, rather than degrees and specific job training. Mary: We were just having this conversation earlier today in the roundtable, and we were also having this conversation. I’ve been doing various events and outreach events, even in San Francisco when we’re having this exact conversation about what are firms doing? Firms have known for… I mean, it’s been in conversation for the last four or five years. Do we really need to wait for a person to get a four-year degree only to provide them on-the-job training or ask them to go get the certificate when we need very specialized skills, or could we just take them out of high school and give them this training? That gets talked about a lot, but nothing gets done much about it, but the shortage of workers has put a highlight on that. So, now, we’re hearing more firms in all kinds of sectors, a wide range of sectors just hiring and running people through certificate programs and running through people through training programs. And then, that’s caused a surge in interest among community colleges in thinking about how can we provide those training certificates? There’s a college in Utah, The University of Utah, Utah Valley University, where they were a community college, and now they also offer four-year degrees. They’re just looking for, “Okay, what do these need and what skill sets can we get and get people into jobs quickly?” So, I think that what we’re seeing is a transformation. That transformation is far from complete. It’s going to require really a mindset shift. Employers are going to have to not only desire to do skill-based training, but actually push it down into the organization, so that people realize you don’t always need the college degree signal if you’ve got the skills. But then you have to have skills-based hiring metrics and other things, and that has a chance to really equalize things, but we’re not there yet, but we have to work on it. I’m hearing that. Firms are working on that. On the other side, we have to think about how do we get more certificate programs and more training programs, more what I would call divisible educational opportunities, where you go and maybe you get a six-month certificate. You work. You say, “Okay, now, I can take a year and I get this yearlong training program.” But we don’t really have that much infrastructure for this. So, right now, I think we’re in that transition period, but it certainly is part of the conversation. Much less, I’ve long been a proponent of college because you can look at the data that lifts up. But someone asked me, wouldn’t you be for apprentice programs? And I said, “Absolutely, if we had them.” But if I tell communities from who are historically disadvantaged, go get a training program, there’s none available. So, there’s two choices. You can stop at high school or you can go to college, but if we can fill that gap, well, yes. And the important thing and this is something else that I said or that I believe because I’ve been all over, it won’t just be for people who can’t afford college. It’ll be for people who don’t want to be in college, and there are a lot of those people who don’t come from disadvantaged backgrounds. They just want to do something different. They want to work in different things, and they don’t want four years to get there. So, I think that’s why I say it’s a mindset shift. We have to change our mindset to get people what they need and when they need it. Daniel: Yeah. One of the things that you talked about just now, but also earlier in the Business Roundtable was that it’s not just about at the very top level of a CEO saying, “We’re going to hire people without bachelor’s degrees now.” Employment is competitive and there’s two people, and often, it’s just tempting to pick the one that’s got the degree. One of the things that I’ve talked about with businesses, particularly when I was out with the Workforce Partnership was if somebody has acquired those skills without the benefit of a degree, often that’s an indicator that they’re more of a self-starter, that there’s somebody who have overcome often obstacles to get those skills, and that’s why it’s so important to hire people like that. Mary: Well, I think one of the ways that we make sure that we are doing it effectively and in a way that has sticking power, staying power is if we’re saying we’re going to do skills-based hiring, then let’s have skills-based metrics. And that’s what I’m seeing missing in many organizations. They say, “Okay, we’re going to go do skills- based hiring,” and it doesn’t last beyond a tight labor market. But if it is embedded into the hiring manual, into the assessment papers, and you basically have the interviewers asking skill-based questions, then you actually have a chance for that living past just the tight labor market. So, these are things that… Again, I just want to be very clear. The Fed plays no role in these things. I don’t have any tools for these types of things. So, why do I talk about them? Why am I even willing to talk about them? It’s because we have a mandate of full employment, and in order to achieve full employment and really think about what that means, we have to have a workforce. And in order for the workforce needs, the demand for workers to be met without being inflationary, we have to have a workforce that could match it. So, when people ask me, what do you think we need to have demand and supply come together? Well, I can say we can keep raising the interest rate to make sure demand doesn’t outstrip supply, but we can also work on the supply part. I can’t control that, but I can definitely identify where the gaps are. Daniel: That’s great. I’ll ask you one last question, and then we’ll send people off to break. You’ve talked about your vision of the San Francisco Fed as a public service organization, and I just wanted to know if there was any examples you’d like to share or how you realize that vision of the San Francisco Federal Reserve Bank being a public service organization. Mary: Actually, it’s a premier public service organization. The reason I say that is we are in public service, and I think everyone who works at the Federal Reserve Bank of San Francisco or any Federal Reserve in the system understands we are in public service. But you’re absolutely right. When I took the job as president and in my many interviews to get the job, they asked me, “What’s your vision? Why do you want this job?” And I said, “The Federal Reserve Bank of San Francisco and Federal Reserves across the system, we have all the tools and capabilities. We’re mission- driven. We’re earnest. We are sophisticated. We’re well-trained. We want to put all of that to being really a premier public service organization, the best in public service. And what that means is not simply doing our job well. It’s actually figuring out how to continually do it better and to serve more people and to meet people where they are and source more information and build trust.” Ultimately, someone asked me, “What’s your most important tool?” And I think they wanted me to say the Fed funds rate, but I said, trust. Public trust in our ability to do our work and our willingness to meet our commitments is our most important tool. I’ll give you an example of that from this year or last year. If people believe when we say we are going to bring inflation down to 2% and they believe it, well, then they buy into it. And then, they say, “Okay, inflation is going to come down.” And if you look at inflation expectations for consumers, you see the more as we speak and then they get the data, they see inflation expectations have just come down. So, that’s a measure of our credibility, and our credibility can only thrive when trust is high. So, that’s what being a premier public service organization means to me. It’s ensuring that we build as much trust as possible. We talk to people who don’t understand or even agree with us, and we do it with openness, transparency, and respect for their views and their questions, and that’s what my team and I strive to do every day. Daniel: President Mary Daly, thank you very much. You got this. We’re going to have a short break. Also, I did not mean to drop a mic. We’re going to have a short break, and before we go, if there’s a Rodney Colburn, they’ve lost their card, so find Lauren. Sure. All right. All right. We’re on a little break and we’ll be back here in five minutes. Summary President Mary C. Daly will join Daniel Enemark, chief economist at the San Diego Regional Policy & Innovation Center, for a fireside chat at the 40th Annual San Diego County Economic Roundtable to discuss inflation, the labor market, and the economy. The conversation will be livestreamed and will be made available as a recording after the event. STAY IN THE KNOW Sign up for notifications on Mary C. Daly’s speeches, remarks, and fireside chats. Subscribe About the Speaker Mary C. Daly is president and CEO of the Federal Reserve Bank of San Francisco and helps set American monetary policy as a Federal Open Market Committee participant. Since taking leadership of the SF Fed in 2018, she has chartered a vision of the Bank as a premier public service organization dedicated to promoting an economy that works for all Americans and supporting the nation’s financial and payment systems. Read Mary C. Daly’s full bio. Related:

Mary C. Daly (2024, January 18). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20240119_mary_c_daly

@misc{wtfs_regional_speeche_20240119_mary_c_daly,
  author = {Mary C. Daly},
  title = {Regional President Speech},
  year = {2024},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20240119_mary_c_daly},
  note = {Retrieved via When the Fed Speaks corpus}
}