Mr. Wessel good morning. Im david wessel, director of the Hutchins Center here at brookings. I want to welcome everybody and i am very pleased to have mary daly, the president of the Federal Reserve bank of San Francisco with us today. Mary daly, who is an economist, joined the San Francisco fed in 1996, and she worked on a number of issues, labor market dynamics, income inequality, and rose to be the director of research and became the president in 2018. Now she is one of 12 reserve Bank President s and, except for new york, the other 11 are sort of considered the same. But mary daly has the distinction at her district because we drew the lines in 1913, which represents a fifth of the nations population. But unfortunately for her, they do not do population weighting when you vote on the fomc. Ms. Daly no, but maybe they should. [laughter] mr. Wessel so, president , i wanted to start by talking a little bit about how do you read the economy right today, and there seems to be a sense in the federal Market Committee that we need to raise Interest Rates at least a couple more times in order to bring inflation down to the 2 target. I wonder how you think about that. Ms. Daly sure, absolutely. And thanks everyone for being here, and thanks for having me. So, let me start with the economy. One of the surprising things about the economy is just how much momentum it continues to have. So, what has been notable is if you started at the beginning of year end at last year in december, if you looked at the summary of Economic Projections that the fomc put out in december, it was forecasting Slower Growth than we have now, higher increase in the unemployment rate, and more slowing in inflation than we see. So the data have come in in a surprising strength with inflation persistently printing too high. So, against that backdrop, you think, well there is more that we need to do. We need to continue to raise rates in order to bridle the economy more so that demand comes back in line with supply. But in that context, we also had the banking stresses in march, and those banking stresses can act like a credit shock and they can themselves restrain. So we are balancing the risks to the economy Going Forward against the incoming information, which is about strength. And i am very supportive, in fact a proponent of slowing the pace in tightening and doing that by standing pat at the june meeting, but also recognizing like the median of the sep projections does, that we are likely to need a couple more rate hikes over the course of this year to really bring inflation back into a path that is a long and sustainable 2 path. The important thing about all of this though is the word in projections is projections. Those are things that you suspect could be true, but we have to be data dependent right now to really understand how to make policy. Mr. Wessel so, when Interest Rates were at 0 and inflation was at 9 and unemployment was at historic lows, i dont think you needed a phd to decide that Interest Rates probably had to go up. But the fed has raised Interest Rates quite a bit, 500 Percentage Points in a five Percentage Points in a relatively short there of time, and as you said in public, the decisions get harder as you get closer to your destination. So i wonder when you look at the economy today, do you worry more about the fed doing too much and unnecessarily causing a deep recession, or do you worry about the fed doing too little and failing to get inflation down towards the 2 target . Ms. Daly thats a great question. In my mind, the risks have become more balanced. If you look to even last year, the risks were decidedly, and i said this publicly, a lot of my attention was on doing too little, that we could really run the risk of doing too little. And then we would end up with persistently high inflation, which we know is a tax on everyone but especially a tax on those least able to bear it. That was where my focus was. Over the course of time, as the economy has started to show signs of slowing and importantly, we have put in over 500 basis points of tightening already, what i then see is the risks as more balanced. But today, right now, with the labor market still being very strong, with gdp growth coming in above what we need to do to get demand and supply back in balance, and inflation persistently high, yes it is coming down but still not 2 . It is not our target. I am still waiting on doing the risk of doing too little is outweighing the risks of doing too much. But that gap is getting narrower and narrower. Thats why our decisions get harder. So thats why the decisions get harder and is why i was completely supportive and think it was appropriate to turn back the dial on the speed at which we adjust and a standing pat in the june meeting is just slowing the pace so we have more time to assess the economy and determine that. Ultimately, we do not want to make any error. You dont want to go too far and you dont want to go too little. But it is a tough problem, so more time to evaluate is really what we took in june. Mr. Wessel more time to evaluate but if you are looking at everything we know today, you still think we need at least a couple more rate hikes . Ms. Daly i think it is a very reasonable projection to say a couple of rate hikes will be necessary, but i am also holding myself to what i think my team calls extreme data dependent where i am going to be watching and looking. People ask me this question, and i think it is an important one how many more public data releases will be get before the meeting . Cant you decide today . I say, well, if data just meant public data releases, probably we could decide the last one that comes out we will make a decision. That is not actually what we mean by data. We mean talking to firms and households and worker groups and community groups, and you can do that all the way up to the meeting. Then you have debates and conversation at the meeting, which help us make the best decisions. Mr. Wessel besides looking at all the data that comes in and the economists who work for you parsing the different ways to slice and dice inflation and labor market data, how else do you go about getting information about what is going on in the economy . Ms. Daly Regional Reserve banks are very wellequipped to do this, and it is one of the things if you are president of the reserve bank you take quite seriously and have teams of people helping you with. So there are very formal ways we do that through the beige book. Many of you have heard of the beige book. We have a formal survey that the banks do and put together. Another way we do this is boards of directors. We have board of directors for the head offices of each of the 12 reserve banks but also the branches. We have councils, a Community Advisory council, Economic Advisory council, a Community RepositoryInstitution Council and we are looking at those councils regularly and meeting regularly to understand what the economy is doing and what they see in the economy. I also have ceo roundtables and worker group roundtables. We have teams out in the field each month doing focus groups to collect this information. As you might imagine, i enjoy talking to people, so im out in my community and travel all over my district. I have nine states, a big portion of the population and the geography. I spend a lot of time just talking with people. Mr. Wessel talk about your sunday afternoons. Ms. Daly ok, my sunday afternoons. I will do that. On sunday afternoons, i like to go to fairly sizable retail outlets. It can be outlets that you buy lots of goods at or one to buy homeimprovement things. I like to go to retail outlets. I like to Wander Around and talk to people. Ive managed to do this without getting thrown out of the store. I tell them, look, i am an economist and really interested in how youre feeling about the tradeoff between jobs and price increases. Interestingly, what i keep hearing i like to go to areas where those margins will be more binding for people. If i go to the wealthiest areas, they say, neither one is affecting me. It is the low and moderate income communities where they will be least able to bear these tradeoffs that i go. I keep hearing the same thing. I have been hearing this for well over a year. Inflation is our number one problem. One young man, this was several months back, he was so striking to me. He has a daughter, wife, and he tells me, i say, what is problematic for you or what do you worry about . He says, i have more Job Opportunities than i can take because theres only 24 hours a day and seven days in a week. I am working already three jobs and i cant do anymore jobs. But every time i come to this store, i can afford less in my cart. He picks up the eggs and milk and says, i cant afford this. So im making more money than i have ever made in my life and i am falling behind. He said it was a treadmill. In my mind, it is a treadmill of indignity. Inflation, you work hard you do everything youre supposed to do and inflation erodes. People say, why are you so determined to get inflation down . One of the key reasons is because of people like that yet young man and the other americans whose tradeoffs might be less severe but still believe in the fed to have price stability. The current inflation rate is not the definition of price stability. That is how i spend my sunday afternoons. It informs me as a policymaker. Being resolute is something we need to do. Youve heard all the policymakers say it but being thoughtful how we carry that out is also important. I dont want to take that young mans job nor do i want him to have to worry about the price of eggs doubling every time he goes to the market. So those are the kinds of things i learned on sunday afternoon. Mr. Wessel the people look at you like you are some kind of a nut . Ms. Daly i have that midwestern personality that i get away with a lot of stuff. I dont think im very threatening. I think one of the things you have to have as a policymaker, i am an economist by trade and by training and some people dont think you know mr. Wessel they dont think you have in a personality ms. Daly a personality or emotions emotions, what are they , good for mentality . Truthfully, people want to tell their stories about how they are faring in the world. But you have to be willing to listen and not say, well, heres how i think youre feeling, do you agree . It is, how are you feeling . What are your struggles . I dont ask if you care more about employment or inflation. I say, how is the job going for you, or how are you faring in terms of the basket of goods youre purchasing . Those questions tend to invite people to speak without thinking im crazy. If i was just Walking Around with a book and i never take a book, if i was Walking Around with a book saying ok, one, inflation, two, employment, i might get thrown out of the store. Mr. Wessel how do you make sense of where we are in the economy now . I think most of us thought if you raised Interest Rates by five Percentage Points, the labor market in particular would be at least, if not screeching to a halt, we have 200,000 jobs last month and people say, wow, we finally got it down. From what you said, that is about twice what we need to keep up. Why do you think the economy has been so resilient given the amount of tightening . Ms. Daly i think that is going to be a question many economists and lots of young researchers study. How did this happen . There are many theories. I want to start with things that must be material. First, we put a lot of support into the economy. The fed did. We had Interest Rates moved to zero rapidly with lots of support through the Balance Sheet and Forward Guidance. That was one piece of it. The fiscal agents also gave lots of support to the economy. We were fighting a pandemic and the desire i think of all policymakers, monetary or fiscal was to not let something that , nobody had created, nobody had done this to themselves, do rail derail lives and livelihoods are long period of time. There is are pouring and resources to support to get people to the pandemic. But that support, coupled the fact for many people, theyre just stuck at home, cant do anything. So you start saving money, saving money accidentally because you cant use the money. The job market for many people remained strong. We know if the people who got laid off en mass that were given support, but if you were a tech worker, were living well. Youre working at home, dont pay commuting. Your salaries are going up. You have lots of demand for your services. So those are all money in peoples pockets. You get stacking up of lots of support for the next part of the puzzle, which is we dont like to be locked down as people. I have learned that. We got locked down for good reasons, or health reasons. Then we came out with a vengeance in spending. We end up with lots of money to spend and a great desire to do so. And supply did not cooperate. That is true. National supply chains were not cooperating. Global supply chains were not cooperating. Covid left its wake in different ways at different times across the world. So it just took a long time for Global Supply chains to get to back to where they were. Meanwhile, demand recovered very rapidly. It doesnt matter what country youre in. All countries demand recovered rapidly once the restraints were lifted and people had income. Then we miss it. I think when i look back, three reasons why the economy has not slowed more given what we have done. One, there are longer lags than we assumed. Two, the Monetary Policy record is weaker than it used to be. Three, the economy has more underlying momentum than we have really understood. I think all of those could be true and we should study all of them, but i really do see again and again and again this idea the economy has a lot of momentum. It takes a while. And we do have lags so that is why we have to be so datadependent. Just reflecting on your own way of being, we really want to get back out and participate and so does everyone else on the globe and we have the income to do it so far. Mr. Wessel what do you look at to know what you say your data dependent, what date are you talking about . Ms. Daly i look at a wide range of data. Many of you may know but it is useful to remind everybody. We have a lot of data that we a lot you see in the newspapers on inflation, employment. Dashboards underlying each of those things. It is not like we look at a single data point and say, ok, now we know what is going on with inflation and employment. We have a labor market dashboard looking at geographics, collection of realtime data, data that looks behind. All of these are publicly available published data. Those are rich. We have our model of things that understand how theyre behaving relative to history. But the first thing you learn when you go to school is data is a plural term. Data plural is also qualitative and quantitative data. Systematically collected, both of those pieces of data are important. And so we learn a lot from our , conversation. Not just the sunday conversations, but the colleagues at the fomc are having out in the communities, talking to the firms. We put that together. They are important because the data we get from published sources, there are a few leading indicators but by and large they were telling us what happened last month or the last six months. But even if they are realtime, they are just as of today. But what we really need to know to make policy well and reduce the chances that we will make over under correction errors is to look forward. We have surveys about what are people planning to do . Are they planning to hire more . Are you planning to quit . Are you planning to raise wages . These are all things that help us fill out the picture. I believe it makes better policy for us. Mr. Wessel what do those tell you now about what is happening . Ms. Daly what i hear, and we just had her Economic Advisory our Economic Advisory council meeting, people who have businesses all over the nine western states, a very diverse set of states. I have the intermountain states, coastal states, alaska and hawaii. This is a very Diverse Group of businesses and firms. And what im hearing is there are signs the economy is slowing. Here is an example. It is easier to find workers than it was last year. And then right after that, they say, but it is still hard. Input prices are not rising as fast as they were last year, but they are still rising. It is not as easy for me to pass along Cost Increases to final goods or my sales but i still can. So what im hearing is things are Getting Better in terms of the sustainability were trying to get between supply and demand your not there yet. It is too early to declare victory. That is why if you look at the sep projections from the fomc for june, summary of Economic Projections that we released where it says the median was two additional rate hikes this year, i consider that a reasonable projection with a great deal of data dependence around it. We may end up doing less because we need to do less. We may end up doing more. The data will tell us. It is data like these. Mr. Wessel i would say when you look back over the last three years how the fed handled the pandemic, how we got this unwelcome, unanticipated burst of inflation, how the economy performed differently than many of us, including those at the fed forecast, what are the two or three lessons youve learned about making monitoring policies Monetary Policy in the past three years . Ms. Daly great question. I will start pricing we will continue to learn these lessons. We are just really at the beginnings of learning things we will need