Remarks by Mary C. Daly

Good morning. I’m Clark Ivory, the CEO of Ivory Homes, which is headquartered here in Salt Lake. I just came from Farmington this morning, which is a little town just north of here. You might have seen on the news we had a little deluge of water coming down. This has been an amazing snowfall year, and one of our subdivisions was impacted. Fortunately, none of the houses were impacted, but we are going to have to see a road rebuilt. The snow in Utah has risen almost as fast as interest rates over the last year. And unfortunately, rates may not come down quite as fast as the snow is going to melt. It’s my pleasure to be here as a member of the board of directors of the Salt Lake Chamber. And on behalf of the Chamber board and Derek Miller, I’m delighted to welcome you to this very special event.

It is my distinct honor to introduce our speaker today, Mary C Daly, president and CEO of the Federal Reserve Bank of San Francisco. Mary began her career at the San Francisco Fed in 1996 as a research economist specializing in labor market dynamics and economic inequality. I met her in 2006 when I was asked to serve as a director of the Salt Lake branch of the Federal Reserve. Mary immediately caught my attention as being inquisitive and incredibly insightful. It was both of our pleasure to work alongside of Janet Yellen, who became a really dear friend. I’ve always been so impressed with the San Francisco Fed. Mary serves as vice president and head of macroeconomics. She has previously served as vice president and head of macroeconomics, senior vice president and assistant director of research, and executive vice president and director of research.

She assumed leadership at the San Francisco Fed in 2018. Not bad for someone who came from a really self-made background. I think you were even a high school dropout at one point, but knew how to make your way through college and onto great heights. As president and CEO, Mary leads an organization that is responsible for 12 Western states in the most diverse district in the Federal Reserve System. During her tenure, she has chartered a vision of the San Francisco Fed as a premier public service organization dedicated to promoting an economy that works for all Americans in supporting the nation’s financial and payment systems. A member of the FOMC, Mary has a direct role in achieving the federal reserve’s price stability and full employment mandates. While she will not be making comments on where the FOMC is going to go with interest rates here in the next meeting. She will be addressing how she sees our current economy, what concerns her, and what she sees as the strength in our economy.

After Mary’s remarks, Randy Woodbury will join Mary for a conversation. Randy is the board chair of the Salt Lake branch of the Federal Reserve, San Francisco Fed, and he’s also the vice chairman of the Woodbury Corporation, a company serving Utah since 1919 in real estate development and management. I have great respect for Randy. He has an exceptional grasp of commerce and the real estate market. Randy is also a member of the Salt Lake Chamber Board of Governors hosting us here today. Please join me now in welcoming Mary to the Salt Lake Chamber for what is sure to be an informative and engaging conversation. Thank you.

Thank you. Okay, thank you so much. Thank you for that lovely introduction. And I do remember meeting Clark and thinking, “Wow, this guy’s got it going on.” So I was not wrong. But good morning to everyone who’s here. I see some familiar faces. It’s nice to see some Fed family, people who have been on our boards or councils, and also all the people from the Chamber. It’s really truly great to be here in Utah and I’m especially delighted to be with all of you at the Salt Lake Chamber. This time, live and in person. Last time I was a big head on a screen today I’m live and in person. So thank you very much for the invitation and I look forward to a great discussion. Now, top of mind for so many, are recent stresses in the banking system and what they mean for businesses, consumers, and the broader economy. So let me start there.

The most important thing to know is this, the banking system is sound and resilient. As my colleagues, Chair Powell and Vice Chair Barr have said, the Federal Reserve, the Federal Deposit Insurance Corporation or FDIC, and the Department of Treasury took decisive actions to protect the U.S. economy and to strengthen public confidence in our banking system. And these actions demonstrate that we are committed to ensuring that all deposits are safe. We will continue to closely monitor conditions in the banking system, and are prepared to use all of our tools for any size institution as needed to keep the system safe and sound. The strength of our financial system rests on having a wide range of institutions, including regional and community banks. And we are committed to supporting all institutions and the valuable role they play in our financial system.

And finally, as many of you know, the Federal Reserve Board under the direction of vice chair for supervision, Michael Barr is currently conducting a thorough review of the supervision and regulation of Silicon Valley Bank before its failure. This review will be completed by May 1st, at which time the board will share the results publicly. Now, while the recent banking stresses, as I noted, have caught a lot of attention, there are only part of the economic picture right now. So in the remainder of my time, I want to discuss the full slate of factors that the FOMC must consider as we work to assess the economy and calibrate monetary policy in this uncertain time. But before I go on, if you’ve heard me speak before, you’ll see this is familiar. I want to say that my remarks today are my own, and do not necessarily reflect the views of anyone else in the Federal Reserve System.

So let’s start with the economy. By almost any measure, the U.S. economy remains strong, GDP growth, consumer spending, and the labor market all continue to outperform expectations. And moreover, these indicators, the ones I just mentioned, are expanding at rates well above levels consistent with returning inflation to the FOMCs longer run goal of 2% on average over time. We see this strength most clearly in the labor market, the US economy at a close to 350,000 jobs per month over the first three months of this year, if you average. And this far exceeds the 90,000 jobs per month, we need to just keep up with labor force growth, the people coming in who are just starting their careers or the people who are reentering after an absence. So we need 90,000, we’re getting 350,000. And this has kept unemployment historically low and job vacancies unusually high, especially for firms in rapidly growing sectors, including travel, leisure, and hospitality among many others.

But if you just walk anywhere around the Greater Salt Lake area or anywhere in the Twelfth District, you see that. You see help wanted signs, you see store hours still being constrained. You see that businesses would like to expand more or stay open longer, but they really are constrained by their inability to find workers. Now, the positive news is that there are a number of signs that the labor market is starting to cool. I hear this when I’m out with my contacts, all of you, and I hear that it’s a little easier, but it’s still not easy. So it remains the case that the labor market is extremely tight, and it is likely to only come back into balance gradually.

The sustained imbalance is in the economy, whether it’s in the labor market, or consumer spending, or GDP have translated into persistently high inflation. Something I think you’re all aware of, and it’s well above the Fed’s 2% target. And the most recent data, the most recent readings we’re getting on inflation tell the story. If we look at the personal consumption expenditures or PCE price index, and that’s the Fed’s primary measure of inflation, it rose 5% over the 12 months ending in February. The latest reading of data we have on that series. Now, that’s down from a peak of 7% in the middle of last year, but it’s not yet close to the levels consistent with price stability because it’s reading at 5% and price stability is 2%. So there’s a long way to go. And American families are feeling the impact. And this is apparent in sentiment surveys where we ask about inflation, and it’s well summarized by a single striking fact. I mean, this fact is really striking.

For most workers, inflation is rising faster than wage growth, consistently eroding purchasing power and leaving them worse off over time. My colleagues and I at the FOMC are deeply aware of the toll that high inflation takes on the economy and the lives and livelihoods of all Americans, especially those who are at least able to bear it. And we remain resolute and committed to bringing inflation down to our 2% goal. It is essential for both sides of our mandate, and we have the tools and the resolve to get the job done. And that brings me to policy, and what lies ahead in terms of our decisions. We have taken aggressive action over the past year moving the federal funds rate from near 0 to between 4.75% and 5% as of our March meeting, the last meeting we had. And these actions we have taken have been warranted and consistent with our commitment to restore price stability.

While the full impact of all this tightening we’ve done, which has been pretty rapid is still making its way through the economy and the system, the strength of the economy and the elevated readings on inflation suggests that there is more work to do. But how much more depends on several factors, all with considerable uncertainty attached to their evolution. For one, there is the banking stress and the impact that it could have on credit conditions. History tells us that as banks evaluate the changing economic outlook, the prospects for a slower economy, and manage their liquidity and balance sheets, they are likely to tighten credit availability. And we’re already starting to see this in the data. Credit standards have risen over the past year, and are expected to increase further in coming quarters. When I talk to bankers in our district or nationally, they’re telling us that they are going to tighten credit standards as they have been. That’s a normal reaction to an economy that’s slowing.

And when we look at recent data on lending activity, it already points to declines in lending volumes in several sectors. So how much total credit tightening will ultimately occur is not yet known. But what we do know is that tighter credit conditions translate into less spending and investment by households and businesses, resulting in a slower pace of economic growth overall. So we will need to monitor this impact carefully as we determine our own policy path and our policy adjustments. A second factor affecting the economy and our decisions is developments in the global economy. While we’re a very large national economy, we still are in a global world and global monetary policy tightening, international bank conditions, and greater fiscal restraint in many countries all translate into slower global growth. This slowdown in global growth serves as a headwind to U.S. growth and could also temper some of the run-ups in commodity and goods price inflation. Again, the extent of these global headwinds and their impact on U.S. growth and inflation is unknown, so careful monitoring will be required.

Finally, there is the impact of our own monetary policy actions. As I mentioned, the FOMC has increased the policy rate considerably over the past years, and it will likely take some more time for those increases to take their full effect on the economy. But how much more time and how much additional slowing in the pipeline is unclear. So like the other factors I’ve mentioned, we will need to carefully monitor the situation as we assess what it means for policy. But in all of our actions, the FOMC is guided by a commitment to our mandated goals of full employment and price stability.

When we are off either of our goals, Americans bear the cost and we have an urgency to restore balance. But that urgency must be coupled with an awareness of the uncertainties we are facing and the risks that those uncertainties pose to the economy. So looking ahead, there are good reasons to think that policy may have to tighten more to bring inflation down. But there are also good reasons to think that the economy may continue to slow even without additional policy adjustments. So we will need to make all of our decisions calibrated by data. Not just last week’s data or last month’s data, but all of the data, looking back and looking ahead as we navigate the uncertainty that surround us. That is what prudent policymaking requires, and it’s what restoring price stability and achieving both of our mandates demands. Thank you very much and I look forward to our discussion.

Well Mary, thank you. It’s a pleasure and an honor to be able to share this platform with you today. And your comments are… They’re fascinating. Everything that we face in our business world and every one of us in our various fields, these are certainly unprecedented times. And for monetary policies, we try to navigate this. So I do have a few questions I’d like to ask that are top of mind for the folks that we have here that all of us are facing.

Perfect.

So first off, how is the Fed able to address the financial stability concerns and inflation at the same time? What policies are the most effective and is there a risk that those start bumping into each other and offsetting results?

Well, that’s a terrific question. It’s one that many people have. So let me start by saying that managing our financial stability issues and monetary policy, they work together, they’re not competing. So let me talk about financial stability first and then I’ll talk about monetary policy and the tools we use for both.

So on financial stability, the recent failure of two banks, which had unique features but caused some stress more broadly, were an example of how the Federal Reserve with the backstop from Treasury immediately goes in and provides liquidity to ensure that there aren’t broader risks. Since we’ve done that, which you’ve seen as bank stresses have moderated, they’ve stabilized. And so that’s an example of treating financial stability concerns with swift and decisive actions.

Now, let’s go to monetary policy. Well, that’s a different tool set doing a different job. When we do monetary policy, we’re looking at our dual mandate goals of price stability and full employment as I just noted. We’re doing fine on full employment. We are well off on price stability. So we use our interest rate policy, raising the interest rates and calibrating how much more we have to do to ensure that we can restore price stability. Both are important, both financial stability and price stability for the continued growth and sustained growth of our economy. And that’s what we’re dedicated to. But we have the tools on both sides and they don’t compete with each other.

Okay, that’s good to hear. You said you can’t, nor would you ever speculate on what the FOMC might do at a coming meeting. But can I ask where do you think we are in the process? Do you believe that we’re nearing the end of the tightening cycle? And does the Fed really need to get inflation back down to 2% this year to say, “Hey, job well done”?

No. And let me start there on the question. I’m going to point at you to the summary of economic projections. So four times a year, the FOMC publishes its economic projections, including its projections for inflation, the labor market, and the federal funds rate. And in March, which was the last time we did that, you saw inflation in that number, the median inflation forecast still being above 3%, which is my own forecast. It’ll be a little bit above three. Now of course, we could get it down to 2%, but that’s not how you balance the economy. We have two sides of our mandate, full employment and price stability. We also recognize that if we force an unnecessary contraction, that hurts the very people we’re trying to assist by bringing inflation down.

One of the barometers we use to see if we need to be more urgent than that is inflation expectations. What you see in inflation expectations is Americans, whether they’re businesses or consumers, market participants, they believe that we’re going to bring inflation down to 2%. So that allows us to take the time that we need, which would be another couple of years to really do that job. Now in terms of the tightening cycle, which was the first question you asked me, but I reversed them, the tightening cycle, I’d like to think of it in stages and I think this is a helpful way to think about it. So stage one, when we were at zero, was to get the rate up to restrictive territory so that we were actually pulling back on the reins because we were highly accommodated, which was stimulating the economy. We needed to get it up so that we could pull back on the reins.

Now that that job is done, that phase one is complete, now we can take smaller steps. And you’ve seen us do that, moving to 50, then to 25. And we’re at a point now, again, I’ll direct you to the summary of economic projections, we’re at a point now where we don’t expect right now in our projections, the median, we don’t expect to continue to raise rates all up every meeting. There is a sense where we’ll get it up to a level and then we’ll wait. Policy will still be restrictive, but it gives us more time to see the impact and also off the offsets that I talked about in those uncertainties. So I don’t want to forecast the end or not the end of the tightening cycle, but I just do want to reassure everyone here that it’s not raised until we get to 2%. That is not the way to do optimal policy and it’s not the way to generate the smoothest transition we can.

You’ve said today, and I’ve heard you say many times, that it’s important for the Fed to remain data dependent.

It is.

So which signals in that data then, with what you’ve just been talking about, would make you lean towards the need for more tightening or possibly easing off on that?

Sure. So let me start with the signals that I went over, the uncertainty. So we have the banking, the credit, where credit will contract, how much it will contract, we have the global stresses and whether that slows growth globally or a lot or a little. And then also we need to watch how our policies are taking effect. And so when we do that, those are things that put the brakes on the economy without us making any more policy adjustments. So I’m going to watch how those three things evolve and what impact they have on the economy.

Now, when I get down to specifics, what I’m looking for, and we had some good news today on the CPI, the headline release showed that it’s going down. It’s going in the right direction, but it’s still elevated. It’s not consistent with price stability. And I’m going to be looking specifically in the CPI and in our other measures to see if core services are coming down. And really, core services minus housing. So that’s a really long phrase, but it’s a meaningful one because that is about how the labor market and service providers are interacting. And we need that to start coming down. It’s a big portion of where we spend our money as consumers and businesses and we need to see that coming down to feel confident that we’re on our path to 2%. So I’ll be watching that.

I’m also watching the labor market. We got some signs of cooling. We’re getting those signs of cooling, but we’re not there yet. So I think what I’m looking at today, I say, “Oh, the economy is making the adjustments I would like it to make,” but we’re not there yet. And how far away from there yet we are is why we watched the data so carefully.

It was a good way to start the day.

It was.

The first thing when I picked up my phone this morning was to see that Wall Street Journal announcement, I’m going, “Oh hey, it’s moving in the right direction.” And I’ve wondered, through this whole process, through this whole cycle, how long does it really take for a bump in the interest rate, to change in the rate, to trickle through the economy and actually end up making a meaningful difference?

Sure. And there’s a lot of discussion and debate and it’s changed over time. So what was really interesting in this tightening cycle is that the FOMC’s policy adjustment to financial markets were incredibly rapid because of what we call forward guidance. We said we’re going to raise the interest rate, but we’re going to continue to raise the interest rate. And financial markets adjusted immediately.

Clark [inaudible 00:22:08] and I were talking about mortgage interest rates, they adjusted overnight really. We said we’re going to tighten and they went up and that slowed the housing market. So that part of it was rapid. But there’s a lot of uncertainty, frankly, about how much time it takes for that tightening interest rates to show through to the economy. I think it’s colliding with a tremendous amount of momentum. We came out of the pandemic extremely strong as a nation. You have this momentum and then you have lags in monetary policy that take some time. The estimates range from 12 months to 18 months. That seems reasonable. It probably is a little shorter than that, but I’m not really certain. But we’re starting to see, we started raising rates last year in March. We did our forward guidance, and you’re seeing now 12 months later, the effects starting to come through. So it doesn’t seem like a bad estimate to take 12 months, but there’s a lot more in the pipeline that will continue to work its way through.

That seems to make sense to me, especially where our region here was over overly heated. We had so much going on that I feel like it’s taken maybe longer, but I do feel like we’re finally seeing that type of stuff. One other thing, as you were talking, you were commenting on the labor market and how it remains historically tight. Can Fed policy really address the root causes of those imbalances? I mean, how much of that structural and what’s just trickle down carryover from the pandemic problems?

Sure. And the way we look at that, I’m going to give you a little more detail so you can see how we think about it or how I think about it, is that there’s an absolutely a cyclical hit to the labor market that we saw in the pandemic. People were worried about their health. Some people got thrown out of work, it was hard to find other jobs. There was this whole change in how people thought about their work. They had issues with getting childcare and other elder care so that they could provide and actually leave for work. And then inflation, actually, we did a number of inflation round tables. I think some of you participated. One of the things we learned is gas prices really kept people from working as much as they’d like because they couldn’t get to the place of employment, they couldn’t make it work. So all of those features would be in the cyclical bucket. And those have more or less diminished, and you see labor force participation up to pre-pandemic levels, you see people coming back in, and yet we still have a shortage, and that’s where Fed policy comes in.

So we have an interest rate tool that slows the economy to the level of available supply so that we can keep inflation at 2%. If we had more supply, if we had a working age population that was working at the rates of other industrialized nations, well then we could grow more quickly, but this is what we have. And so what the Fed does, we don’t change those types of things. What we do is respond to those things to keep inflation low.

And so we are going to continue to want the economy to slow to get back to that 90,000 jobs per month level in order to feel confident that wage and price inflation will moderate, and people won’t have that striking fact I told you, which is inflation’s just eroding their wages month, after month, after month.

You started off talking about the banking sector and mentioned that lending standards have been tightened up and lending activity has been curtailed. We’re certainly feeling that in our business. But at what point do those tightening credit conditions actually become a concern for the economy and the financial system? And what is it you’re looking for there to read those tea leaves?

So let me start by just reiterating what I said at the top of our time together, that the banking system is safe and sound and resilient. And what banks are doing now and what they have been doing is tightening credit standards, looking at their liquidity and balance sheets, and managing those relative to the projections they have for the economy going forward. That’s what we want banks to do. It’s one of the contributors to why banks are so safe and sound. You want them to ensure that they continue to play valuable roles in financial intermediation.

But when an economy is slowing, this is what happens. The banks respond by saying the economy’s slowing, I need to get things in balance myself, and it is another reason why that could put the breaks on the economy in a way that we wouldn’t have to adjust the policy rate further to do. So that’s one of the reasons I’m watching it so carefully. How much does that put the brakes on the economy so that we don’t have to tighten more? We don’t know the answer, but it’s one of the things we’ll focus on.

I mean, in our own shop, we’ve talked about just concerns about liquidity in the marketplace. And the fact that it’s just happened in 30 days, it was like, poof, the valve’s been shut off. And so I mean, our question is where’s all the money gone? Are our concerns unfounded?

So let me separate liquidity into two things, because I want to make sure that everyone here understands the Fed’s action, backstopped by the Treasury, was meant to provide liquidity to banks so that they didn’t have any liquidity stresses. And so that’s done and that’s what is working well.

The other side is that banks are just looking at they’re just a business like every other business, and they look at how much can we land and feel comfortable with our liquidity and our balance sheet? And that’s going to contract. And I think this is just when you ask where have things gone, this is just part of the transition that happens when the economy goes from very rapid growth to slowing.

I think we’re all trying to figure out after the pandemic, the dynamics are working as we expect, but they’re just working in different ways. Think of the pandemic. We go from, “Oh my gosh. We’re in a terrible ditch,” to we’re booming, and now we’re going from, “Okay, we’re lending, we’re growing,” and now the slowing is coming.

But that’s pretty consistent with that 12-month timeframe I gave you. Started raising interest rates, started talking about raising interest rates more. This is when it starts to happen. I think of this as just part of the natural dynamics of how an economy slows. It can be challenging, but this is how we get back to price stability.

Thank you. Maybe a couple of questions that are more direct to just our region here. How’s the Fed working to ensure that the financial systems in Salt Lake City and around here remains resilient in the face of risks and potential disruptions?

So let me give two answers to that. The first one is the one I’ve mentioned a couple of times here, is that the Fed took that decisive action, along with the backstop from the treasury, that they work together, we can’t do that without the Treasury’s backstop, to open a facility, the Bank Term Lending Facility. I think that’s what it’s called. I always forget the acronym, but it’s basically a term-lending facility that allows institutions to come and get liquidity provision, and that’s been very successful and that is a key stability. Important about that facility is it’s for all banks, community banks, regional banks, the banks that you rely on here in your local community, so that is a direct support for banks of all sizes.

The second thing, though, is that we talked about monetary policy, and it’s not for financial stability, but we are very cognizant, and I said this in my remarks, we’re very cognizant that things are going on in the economy that we need to pay very close attention to. And so that brings us back to we don’t keep raising interest rates until we get to 2%, and we don’t keep raising interest rates with blinders on about these other factors. So one of those other factors is how much will banks pull back on credit provision? And I see that as supporting the overall growth, getting back to a sustainable pace. So we’re going to step down on growth, it’s going to feel different than it did last year, but the outcome of that is going to be moving us towards an inflation rate that’s 2%.

And one of the things I really think about every day is I don’t want people to think about inflation when they wake up in the morning. I don’t want you to pick up your phone when the CPI is released and say, “Oh my gosh. What’s happening?” Ultimately, you want inflation to be 2% because that’s a level that people understand, and they can put it in the background. A sustainable economy where people make good decisions about how to allocate their time or their business investments is one where inflation isn’t a material concern. It’s one where they’re making decisions because of the ideas they have about how to run a business or the work they want to do and how they want to manage their careers.

And right now, those decision-making parts are being disrupted by people making trade-offs about whether they can take jobs and build their careers and about businesses thinking, “Well, what’s the price of something going to be? Do I really have the affordability going forward?” And that’s why I am so committed, and the FMC chair, Paul, has said this, we are so committed to bringing inflation down. It is actually a tax and a lot of a toxin on the economy, and bringing that down is the very thing that will restore the confidence and the sustained growth rate that we all enjoy.

We’ve all enjoyed for a long time touting the strength of our economy here and how well Utah and Idaho and this region has been doing. And they say sometimes there’s a risk in drinking your own bath water, so—

I didn’t hear that one before, but there we go.

What is the Federal Reserve’s outlook for economic growth in Salt Lake City and the surrounding region here? And what are those factors that you see important in that outlook?

Sure. Absolutely. And I have the Twelfth District, and that’s nine western states, so I have the coastal states, I have Alaska and Hawai’i, and then I have this Intermountain Region, which I think of it broadly as Utah, Idaho, Arizona, and Nevada.

And if you look at states in this Intermountain Region, inner region of the district, what you see are similar features. A lot of interest in living here, a lot of people wanting to move here and start businesses. They have very good prospects for growing their business with populations that really want to be working and getting the skills. There’s just so much energy here.

If you think about in that whole region, Salt Lake and Boise, Idaho, are the poster children for fast growth, thinking about how to manage that with development, et cetera, but really wanting to have smart growth, good growth, and expansion. And that’s not changing. That’s a structural feature. And plus, look outside. I mean, you fly in, you think, who doesn’t want to live here? Right? I’m just always grateful you’re in my district. I’m like, “Okay. If I can’t live everywhere, at least you’re in my district so I can go everywhere.”

But I think when people think about that, they really think this is a great place to raise my family or have a career, it’s a great place to form community, and it’s most importantly a great place to grow a business, so that’s a strength. So when I look out at the transition we’re all making nationally to go from this unsustainable pace of growth to something more sustainable, I just think of Utah, Salt Lake, Boise, Idaho, a lot of the Intermountain regions, that transition will be a transition, but it won’t be a falling off of any cliff in terms of growth because you have all the fundamentals. And I think you know this as well as I do, you have all the fundamentals that you need to just continue to prosper.

That’s great. Maybe lastly, I’m curious what you see as some of the biggest risks in the economic outlook that you’ve laid out for us? And we’ve seen some layoffs start to happen, especially in tech, and we talked earlier about it’s even hitting the banking sectors. Is the economy eventually headed for a recession, or do you still think this can be navigated to a soft landing?

So my modal outlook, as we call it, the one I think is most likely, is that we don’t have a recession. In my projections, we have growth that slows quite substantially. We need growth to slow to bring inflation down. We have a labor market that slows, and that’s another feature of a slowing economy getting back in balance. Remember, we’re not slowing for the sake of slowing. We are out of balance. Just go back to that 350,000 jobs per month relative to 90,000, that’s an imbalance. We have businesses that want more workers than they can get, we have inflation that’s printing high, so we need to slow the economy to get things back into balance.

But slowing the economy when we’re on such a fast pace doesn’t mean recession. It means slowing the economy back to a more sustainable pace. It’s going to feel different than it did last year, but my modal outlook is we don’t have a recession, but we do have a substantial slowdown, and we transition to a place where we have something closer to 2% inflation over time, and that’s going to be this great relief that keeps your phone in your pocket on CPI day. Or look at your grandkids or something.

Yeah, yeah. That’s usually what I’m looking at first thing in the morning. And maybe just one last question before we open it up to the audience here is what areas of lending may be lagging the tightening cycle so far, and when do you expect to see some meaningful correction and change in that?

So what I’m looking at now, and the data are just coming in, so we knew that credit conditions were tightening, and they’re tightening broadly. But when we’re looking now at lending, we’re seeing data come in, and we don’t really see a pattern forming yet, so I’d say there’s just general declines in lending activity, and we’ll be watching that carefully.

But what banks do, and this is what you want them to do, is they look for sectors where they feel like lending is productive and earns a high rate of return, and if they see sectors that are more at risk, then they don’t lend to those sectors as readily. And I think the thing I want to come back to kind of end this whole thing is banks are doing what we want banks to do, not we the Fed, we everyone. We want banks to manage their situations prudently, keep their capital secure, keep their liquidity well managed so that they can continue to perform the valuable functions that we need them to perform in the system, which is why I feel confident when I say, as many have said, Chair Powell, Secretary Yellen, Vice Chair Barr, the banking system is safe and sound and resilient.

I’m going to keep those thoughts in mind ’cause we have meetings with two or three of our bankers over the rest of this week and the coming week. So I’ve really enjoyed being able to engage with you in this and now’s a good time, I think, Forrest has switch to some questions that you may have from the audience. Yes. [inaudible 00:36:51] Got the microphone coming.

You got a microphone, yeah, so your voice can be heard.

Sue Johnson from, I used to be on the Salt Lake Fed.

Nice to see you.

Nice to see you. I was there when John left and you came in. It was wonderful. So I realize you don’t run the FDIC, but making all the people that had deposits over $250,000 in Silicon Valley Bank whole, what are the potential ramifications for that into the future? I know this is the non-correct term, but did your enforcement arm of the Federal Reserve Bank use all the levers they had with Silicon Valley? I know they saw the smoke coming from the sky, that there were issues afoot. Were all the levers engaged that were possible? Thank you.

So let me say this. So the first thing is that Vice Chair Barr, as I mentioned, is completing a thorough review of Silicon Valley Bank and the supervision regulation that preceded its failure. That review is coming out May 1st or by May 1st, and it will have released to the public with the details of some of the questions that all of you have. It wouldn’t be appropriate for me to offer an opinion because that review is in place, and that’s actually the function of the vice chair. He has that review. So I won’t comment on that because I don’t think it’s appropriate. The second thing, though, is broader, and I won’t comment on the FDIC particularly.

What I will say is that the institutions of regulation, with the Treasury, are meant to do the following thing: ensure that stresses that come in a couple of institutions don’t spread to other well-managed institutions who are then trying to make sense of their world. That’s what the backstop in lending facility did. That’s what the decisive actions on the Sunday did with all the regulators in Treasury. I think that is a strength of our system that our individuals in Washington, our agencies in Washington joined together and did this piece that has calmed bank stresses. Remember, relative to four weeks ago, the banking system is not in … it’s stabilized. We’re talking now about liquidity management and things that banks normally do and that is a feature of our system.

Great.

Another question in the back. Howard, do you get the microphone?

Howard Headlee, and I’m with the Utah Bankers Association. I’m interested in your thoughts on the role of fiscal policy and how we got here, and can you actually get us to where we need to be in terms of price stability without cooperation from Congress?

So let me start with the final part of your question. The answer to that question is yes. Ultimately, inflation is something that’s really in control of the Fed. It’s the reason we have one of the mandates, price stability for employment is because we have the tools to do that, so we absolutely can do that. When I think about fiscal monetary policy, et cetera, and looking back on the actions taken by both agencies, both groups, one I’m with, the other one I have no decisional authority on, which is fiscal, both of those groups in our society we’re really trying to fight a pandemic that through no fault of anyone’s had come and not leave the country with a wake of pain and difficulty.

So those actions, while we might review them in history, I think the job was always about doing more. It’s better to leave people more whole than less whole through something that was a really substantial shock, something we hadn’t seen in 100 years. So history will be the judge of whether that was too much or too little, but the thing I would like to leave you with is that absolutely the Fed has the tools to restore price stability. We have the commitment and we have the resolve. Now we’re in a situation where we’re trying to judge, engage what the tactical nature of our policy adjustments will be to accomplish that. That comes back to one of the questions you asked earlier.

We’re not going to be able to accomplish it in 2% by the end of the year in all likelihood, not with the forecast that we have in mind or I have in mind, but that’s okay because we’re headed to 2%. So far, people think that we’re going to get to 2%. I think that combination of people believe we’ll get there, and we are working towards it are the very things we need to demonstrate that we’re going to restore price stability. We’re going to go back to a sustainable economy, and we’re going to go back to, as I said earlier, making the decisions about how we do our work. Whether you’re in banking or industry or you’re worker trying to figure out what to do with your career, those are the issues we want people to make, not the inflation decisions. So I’m confident we can do this job.

There we go.

Josh England, former Salt Lake Fed Director. Mary, thank you for being here and thank you for the way you serve our community. You mentioned improvements in labor force participation. I wonder if you could put that in context, and what do you think the prospects are for further improvement?

So that’s a terrific question, one I think about a lot. I’ve trained as a labor economist originally, and one of the things that was true before the pandemic, and it’s useful to remind ourselves of it, is that we have one of the lowest labor force participation rates in the industrialized world. So for whatever reasons, and there are lots of them and people think about those, we just don’t have as many people working in our working age population as other countries. The pandemic put really a spotlight on that. What’s interesting is that we’ve recovered to labor force participation rates pre-pandemic levels, but we don’t have much information or I’m not very optimistic about how that will continue to grow. So we’re going to have to think about that as a society because if you have less labor force participation, you have slower growth.

The Fed’s job is to bring demand back in line with available supply, which means that we will be continuing to manage the economy to keep inflation down with constrained supply. We don’t have tools to solve that problem, as Randy mentioned. We don’t have the tools to change the levers, but we have the levers to change the outcomes. But we can say that with less supply demand growth will need to be more constrained in order to deliver 2% inflation. So I think we’ve probably done as much as we can and as a nation in terms of getting it back up to pre-pandemic levels. But that doesn’t mean we would necessarily be satisfied when we’re lower than other countries. But that’s a societal question, one that fiscal agents or elected officials have to grapple with. It’s not something the Fed can directly affect.

Another question, one last question maybe? Oh, there we go. Scott?

Scott Hymus. Good to see you again. Mary.

Nice to see you.

I want to follow up on Howard’s question. You indicated that you thought monetary policy could fix the inflation. I want to go the reverse of that then is, I think many people would’ve given some of the blame for inflation going in the past or getting where we are today on some fiscal policy. If fiscal policy does not have an element in correcting it, does that mean that monetary policy is what got us where it is today and that you kept interest rates too low for too long and that’s why where we are today?

So the way I think about it is this, that you have policy interventions, both monetary policy interventions with low interest rates, and you have fiscal interventions to help the economy stay on its feet as we work our way through the initial shock of the pandemic and its aftermath. Then we find several things happened. So one thing that happened is that demand, and this is not just of the United States, this is globally where they had much less fiscal policy and even less monetary policy. Global demand just bounced back rapidly. Countries reopened, people went back out and they went out with abandon because even if you didn’t have fiscal support, you had saved money ’cause you couldn’t go anywhere. So they went out and they like, and now we’re spending like, “Okay, I’m going to catch up on the lost … ” Some people called it revenge spending. I just called it natural human behavior. You’re stuck in your house for a long time. You want to go out and do stuff and you spend money to do it.

So that was a tremendously rapid recovery of demand, supply lagged tremendously. You saw this if you were in the goods producing sector, you couldn’t get inputs. You saw as you went to your stores, you had no inventory. The supply just did not recover for all the reasons that we already know that supply chains weren’t as resilient as we thought they would be. Countries opened to different speeds. China opened really late. All of this mattered, and so we ended up with this huge imbalance between demand and supply. If you look globally, it’s the same everywhere. One of the reasons that global economies, central banks across the world are tightening policy is because they have inflation. They have demand outstripping available supply. So what really has to happen now is supplies coming back up, and it’s getting back to levels we’re accustomed to.

Demand is coming back down, things are getting into balance. We should see inflation come down. That’s why I say the Fed has the tools. We didn’t cause all the inflation, in my opinion, but we definitely have the tools to help rebalance the economy by continuing to restrain demand to bring inflation back in line with 2%. When I think about it’s history telling us what we’ll look into this, we’ll do deep dives on this, I think we’re going to find that it was a pandemic. This is how I think about it. It was a pandemic. We scrambled to do the best we could nationally and globally to fight the pandemic. What we found in the aftermath is people are very resilient and want to come back out and spend, but supply is not resilient, and it didn’t come back to meet it. So now we’re left with high inflation and a hard job to do, but we’re working on it and we have the tools to resolve to do it.

Very good.

All right. Thanks everyone for attending today. This has been great to hear Mary and Randy. One of the things that gives me great confidence in the Fed system is the grassroots nature of it the way Mary and Fed presidents get out to the states and listen to our local branches like here in Salt Lake City today. Let’s give both of them a great round of applause.

Thank you.

Thank you.