Monetary Policy and Economic Trends

Lynelle Marble:

I am Lynelle Marble. I am the executive director of the Hawai’i Executive Collaborative, and I just want to thank you for being here today and taking the time to come out. In addition to all of you here in the room, I just want to note that we are also being livestream through OLELO as well as through all of the SF Fed’s channels, their Facebook, their website, and so on. So this talk story, including your questions and their answers will be on that live stream as well. So it is my pleasure today to introduce this talk story with our special guest, Mary Daly, president and CEO of the Federal Reserve Bank of San Francisco. As many of you know, the Hawai’i Executive Collaborative is a nonprofit organization that serves as a neutral convener and a backbone to top decision makers and leaders from across all sectors and islands.
These leaders recognize that in order to create systemic change and address some of our greatest challenges, that we needed to work together and model an approach where collectively we would find common ground, incubate ideas, fill gaps, and help amplify existing efforts to create a stronger Hawai’i. Our commitment to fostering more collaboration is why we’re delighted to partnership to work in partnership with the Federal Reserve Bank of San Francisco. To co-host today’s program, the SF Fed serves the 12 Federal Reserve District, which includes our home state of Hawai’i as well as Alaska, Arizona, California, Idaho, Nevada, Oregon, Utah, Washington American, Samoa, Guam, and the commonwealth of the Northern Mariana Islands. In other words, it’s big. In fact, it’s the largest district by geography in the whole federal system or the whole Federal Reserve system, the SF Fed’s mission in serving this large and diverse areas to build a stronger economy for all Americans, including the people of Hawai’i.
One of the primary ways the bank fulfills this mission is by using monetary policy to fight inflation and support a stronger labor market. And today we’re very fortunate to hear directly from President Daly about her perspective on monetary policy and the Federal Reserve’s efforts to promote price stability and full employment. At HEC, we believe to be that we should be locally rooted and have a global perspective. So we look forward to learning the broader economic insight that President Daly will be providing to us today. The other thing I’m excited to hear about is the SF Fed’s efforts to engage in the many communities that it serves. As you know, the core of HEC is to preserve and perpetuate Hawai’i S SOUL by ensuring that what we love about this place, our culture, our people, our ina our communities are all thriving now and for future generations.
And we know that this can only be accomplished when all of us takes on a shared kuleana or responsibility to work collectively to build a more resilient Hawai’i. And that’s why President Daly is here and we’re pleased to co-collaborate with her because she also believes in the power of collaboration and community engagement. And she has a long list of incredible accomplishments and depth of experience and expertise that speaks to this. To share a few highlights, president Daley joined the SF FED in 1996 as a scholar and public policy advisor. She has published widely on labor force dynamics, the economics of social security and disability, an evidence-based public policy. After a distinguished two decade career at the SF FED as labor economist and policy advisor, President Daly assumed leadership of the SF FED in 2018. In her current role, she serves as a member of the Federal Open Market Committee or the FOMC, which is the monetary policymaking body of the Federal Reserve System.
This year, President Daly is a voting member of the FOMC As president and CEO, she has committed the SF Fed to being a community engaged bank. This means that President Daly, along with the bank’s leadership, engage with communities across the district listening to and learning from the people that they serve. They want real-time information about local economic conditions. And while here in Hawai’i, she and her team will be meeting with several community leaders and groups across the state, including lahaina. President Daly likes to say that every voice matters, and by listening to those voices and by understanding the concerns of the communities they serve, President Daly and her team can make better decisions and better policy. And that’s why we’re here today to have a robust discussion and conversation about the economy in Hawai’i and across the country. I would like to thank President Daly and her incredible team from the SF Fed, along with our many partners here in Hawai’i who have worked to make today possible. Now, please join me in welcoming Ryan Kalei Tsuji, our moderator who is reporter and anchor and hosts of Spotlight now on Hawai’i News now among many other things in Hawai’i, along with our honorable and our wonderful guest, President Daly, thank you so much for joining us.

Ryan Kalei Tsuji:

Thank you. Lynelle. Is this on? Can you hear me? Okay. Well, we want to thank all of you for coming here and being a part of this conversation here this morning. Thank you to Lynelle and HEC. We also want to recognize Mayor Kami from Kauai also in attendance. Thanks for joining us mayor, and also to those of you who are watching on air and online, taking a little break from maybe your Olympic coverage. For those of you tuning into this instead, for those of you who might be USA volleyball fans here, USA beat, Brazil three one just now advancing to the medal round. So a lot of local boys on that team. I know a lot of people very excited about that. But thank you all for being here. Thank you President Daly for being here. We want to get into a lot of things that we want to discuss here and we want to present an opportunity for those of you here in the audience as well to ask some questions.

So we’re going to have a q and a little bit later, so just be prepared for that. We’re going to try to engage some of your questions here as well. I want to begin our conversation before we really get into your background and sort of your story. We want to start at the top with some hot topics and what’s really happening right now. Over the last month, we’ve seen a pretty volatile market here in the U.S. and globally as well. Some of that directly attributed to the recent job report that came out. What can we interpret from this? What are you seeing from this? And if you can just give us your overall thoughts of the state of where we’re at right now.

Mary C. Daly:

Absolutely, I’ll do that. I did want to say thank you for having me. It’s really an honor to be here. It’s one of the things that we appreciate. We’re always welcomed wherever we go, but when we come to Hawai’i, we’re open, the arms are open and people welcome us. And really the discussions have been fantastic so far. So back to the news of the day. So definitely the labor market report that came out on Friday caught the attention of many individuals who markets who are worried that something negative is really happening. So first thing I want to do is step back and talk about that labor market report and what’s happening in the economy. So the economy, it has been slowing and we see that when we talk to contacts, when we look at the data, it’s been slowing for the last several months. That’s how monetary policy works.

We raise the interest rate, inflation comes down, the economy slows, the labor market slows, things come back into better balance and we achieve price stability. So we had known that we were getting into that more balanced frame where our price stability goal and our labor market goal, the risks to those goals were more I balance and it’s why we changed the FOMC statement at the last meeting and why you saw chair poll in his press conference. Talk about the fact that our minds are quite open to adjusting the policy rate incoming meetings. And then the labor market report came and it was the numbers were worse than most forecasters had put forth. So what does it mean? Well, the first thing to remember is that we have a reasonably solid labor market. We had a very frothy labor market, then it came to be a strong labor market, then it became a solid labor market.

And this labor market report says that we’re at this place where we have wage growth at 3.6 in the report. That’s inflation plus productivity growth and productivity growth of 1.5. On average inflation is two. That’s right in balance, the unemployment rate is still low by historical standards. The job growth is about at the rate that new entrants are entering the labor force. So what’s the concern? Well, the concern is that we won’t just land at this relatively good and balanced place, but that we’ll continue to deteriorate and softening will turn into weakness. And we don’t see that right now. And so one of the things I want to convey is we look around our labor market reports that come out, they come out monthly and they’re backward looking. And this particular labor market report had in their hurricane barrel, it had in there a lot of temporary layoffs.

Temporary layoffs are by definition temporary. We hope they reverse by even the next labor market report. We also had a pretty large increase in the number of people in the labor force. And when you dig into that a little more, it looks like a lot of those individuals are foreign born individuals and so they’re reentering or they’re coming in for the first time to the labor force. It takes ’em a little longer to find jobs when they first start out. And so the unemployment rate rises. Those are pieces of information I’ll be watching very carefully to see if the next labor market report continues to suggest that kind of same number or same dynamic, but that could also reverse. And so underneath the hood of the labor market report, there’s a little more room for confidence. Confidence that we’re slowing but not falling off a cliff.

This is what we would expect slowing but not falling off a cliff. But I do want to say this as a fed official, as a voting member of the FOMC, and I can just look at what we’ve done over the last couple of years and you’ll see that by and large, we’re all committed to this. We will do what it takes to ensure that we achieve both of our goals, price stability, and full employment. We will make policy adjustments as the economy delivers the data so that we know what is required. If we reacted on one data point, we would almost always be wrong because that’s why we say we’re not data point dependent. We’re data dependent. What that really means is we look at the totality of the information before we act. That is a study in the boat approach that works well in policy both historically and today.

Ryan Kalei Tsuji:

So you mentioned a little bit about the dynamics of this labor report and as you look forward and looking to this next report, is there any indication in your mind of beyond the specifics that you mentioned that you’re going to be looking out for when this next report comes out? Any interpretation of how that may move, if we will continue to see decline or do you anticipate things to get better?

Mary C. Daly:

So that’s the open question, but I will say that we’re not waiting. We don’t wait until the next report comes out. One of the reasons we do community engagement is to make sure that we understand the lived experience of the people we serve. The other reason, and I just had a CEO roundtable this morning with community leaders and business leaders to understand what they’re seeing in their own businesses so that we can get an early projection on this because policy is made based on the projections for the economy, not looking backwards. If you only look backwards, you’re too late. So data dependence does not mean look backwards and then count up what happened and make a judgment that would be reactive. Policy needs to be proactive, which means it has to be working on projections. So one of the things I’m doing here is asking everybody from bankers to small businesses, medium businesses, even large businesses, what are you seeing?

And what we’re hearing is that the economy is downshifting, that the economy which was growing rapidly is growing more slowly. Inflation people are getting the inflation relief that we have seen in the aggregate data, but we’re not there yet. Inflation is still printing above our 2% target. So there’s still more work to do and people are struggling with not only a higher price level, but a faster rate of inflation than we are really working towards, which is 2%. We are also seeing, one of the things I did immediately up I’ve been doing for months, but immediately on Friday, is I called around to CEOs in the district and I said, I just want to confirm, are you slowing hiring or are you laying workers off? Firms are not laying workers off. Firms are simply slowing their pace of hiring. The way that you have a real deterioration in the labor market that leads to something that really is problematic is when you move from just slowing the hiring to balance payrolls against growth and you move to layoffs. We’re just not seeing that. We’re not seeing that yet. There’s isolated layoff numbers and certainly there’s temporary layoffs that came out in this report, but we’re not seeing widespread permanent layoffs. And that is an early warning sign. We would like to see, and you first see this in initial claims, but before you see it in initial claims, you hear it from businesses in the district and elsewhere. And that’s one of the reasons when we all the reserve bank presidents, all of them, there’s 12 Reserve Banks, all of them spent a lot of time in the field talking to businesses so that we’re bringing that information and we’re completing the picture, if you will, so we can really get that projection right.

Ryan Kalei Tsuji:

Beyond just the jobs report, there is a lot of eyes obviously on where we’re at with interest rates and as a voting member of the federal open market committee, the body that is in charge of setting these interest rates, what can you tell us about where things stand? I think a lot of people in this room and a lot of people who are watching are eagerly anticipating when that might come. What can you tell us about that?

Mary C. Daly:

Sure. So let me start with saying that, just remember that three or four months back, really for most of this year, there was a lot of concern being talked about that policy wasn’t working at all, that monetary policy wasn’t tight enough and we really had their ratchet, the tightness in there, and we weren’t getting the results we were hoping for. Well, I think that ship went back into its harbor. I’m in the shipping thing now today, ship sailed, et cetera since I’m near water. But seriously, that debate is now over. I think it’s very clear that policy is working and it’s working in the way that is intended. Now we’ve moved to a place about whether we have to start reducing the interest rate in order, we want to get inflation down, but we also don’t want to tip the labor market over. And you give people lower inflation, but then you take their jobs.

That’s not the dual mandate. The dual mandate is balancing both of those. So I see the upcoming policy adjustments as things that will be required that the interest rate will need to be adjusted in order to preserve the balance in those two objectives. The question that everybody wants to know is when and how much? But of course that’s where collecting the information is so valuable. If we would jump to we know exactly what we’re doing and so let’s do it already, we can end up making a mistake. We do have two goals, price stability, full employment. We have inflation coming gradually back down to 2%, but we need to bring it fully down to 2%. We have the labor market slowing and we got that one labor market report that looks like it has some additional weakness in there. But again, unpacking the information, it’s too early to tell whether that’s a slowing to a sustainable pace, which allows the economy to continue to grow and firms find workers and workers find jobs, or if it’s getting to a point where there’s real weakness there, it’s really too early to know. So I can’t tell you whether we will do a certain degree of cuts. People always ask how much? Is it 25? Is it 50? Is it three months in, three meetings in a row? Is it every other meeting? My message to you is as we have been doing the federal reserve, the FOMC is prepared to do what the economy needs when we are clear what that is, and there’s many more pieces of information that come out between now and when we next meet, and we’ll use all of that information, both the published data and our contact information to make the right determination, the best determination collectively for the economy.

Ryan Kalei Tsuji:

I’m wondering, and just curious, how worried are you or do you ever worry about waiting too long before to make that cut before we see some sort of downturn or it becomes a reactionary measure? How do you find that balance?

Mary C. Daly:

Sure, no, that’s a great question and it’s interesting. People ask me if I worry and I am more of a focuser. So if something gets in my mind, then I focus on what can we do so that we can, I’m active oriented, right? I have a bias for action when there’s things out there that are risky. And I think what we did in our FOMC statement, I supported that FOMC statement and as you know, there was a unanimous vote to hold the rate study, but that holding the rate study came with that statement adjustment, the FOMC statement. And if you don’t read the FOMC statements, right when they come off the press, I can summarize here. We rebalance the language so that there’s a recognition that both of our goals are in the frame, right? So for a long time over two years we talked about inflation because inflation was starting at 7% and it was far off its goal and the labor market was very strong.

So we were achieving almost overachieving on the labor market goal and completely underachieving on the inflation goal. It was far above 2%. So our focus has been on bringing inflation down. But earlier this year, really in the second quarter, you started to see the labor market slow to a point where it has to come into the frame, it has to come into the frame that you’re looking at. And we’ve been talking about that. I’ve been talking about that particularly I’m a labor economist by training. I unpack all that information. I’ve been saying as many of my colleagues have that these are now relatively equal balanced in my mind, equally balanced risks. We don’t want to go too far on the labor market and we don’t want to leave inflation too high. So I think those things are in balance. So why am I going through this whole thing? Because there’s two ways to adjust policy. There’s really three ways, but let me talk about the two. So the third way, which is the least used way, is the balance sheet. But that’s when you’re at a zero lower bound and you need to do extra things for the economy. The two ways that you can adjust policy is by actually doing something. And the second one is what we call forward guidance saying what you’re going to do now, I don’t know if you paid attention on Friday, but the mortgage interest rate dropped considerably after Friday’s employment report. Why does that happen? Because market participants rate setters, they’re very aware of the fed’s reaction function and they know that when we have two goals and we’ve already communicated we’re going to work on both and both are in the frame of our line of sight. And so the interest rates start to adjust. Now markets can move in one direction or another too much. But I think the important thing is that the reaction function, how we will balance the two goals we have is very clear and interest rates are already adjusting when those interest rates adjust, whether they’re for mortgage or car loans, et cetera, you already see policy working even if before we cut the rate.

Ryan Kalei Tsuji:

So taking all this into consideration of what you’re seeing from the jobs report with the interest rate, I’m wondering if you can just provide maybe a broad and current outlook of the economy and where you see monetary policy heading in the next few months.

Mary C. Daly:

So I do see policy adjustments, and this is, let me say that these are my views, not they do not reflect the views of the committee. So I’m talking about how I see it. But with the data we have coming in and the risk to our goals balanced and the clear idea that we want to give people both things, right? That the commitment we’ve made to the American people is price stability and full employment not or, and that policy adjustments will be necessary in the coming quarters. How much that needs to be done and when it needs to take place. I think that’s going to depend a lot on the incoming information. But from my mind, we’ve now confirmed that the labor market is slowing and it’s extremely important that we not let it slow so much that it tips itself into a downturn. We just don’t want to see that.

We don’t see it yet. We don’t see firms laying off workers. We don’t see demand slowing, consumer demand slowing. Incomes are still strong. Order books are still good, they’re just not as busy as they were. So I see an economy that has momentum and we want to make sure we keep that because the perfect economy is the one where you have price stability and you have sustainable growth. And then people can worry about other things or think about other things like their families, their communities growing, their businesses, achieving their career goals and their income goals for themselves, building wealth. And that’s the economy we’re heading for.

Ryan Kalei Tsuji:

As Lynelle mentioned, she described your District, it’s your District covers the western U.S. states, the largest geographic area, which includes Hawai’i. I’m wondering if you can share with your role as the Reserve Bank President, what you see in these various communities that you serve and how Hawai’i may be different or similar to the other areas in which you oversee.

Mary C. Daly:

So there there’s no doubt that communities that I travel to in the district are different from one another. You can feel that the Intermountain states are different than the coastal states are different than Alaska and Hawai’i and the territories. They’re all a little different, a lot different sometimes in terms of the community and other things that the fabric of them. But the interesting thing is they’re very similar. So what is the number one concern everywhere I go right now? Well, it was inflation and still that’s a very strong competitor, but now it’s housing. And no matter I know Hawai’i is struggling with a housing shortage. That’s true. Anywhere you travel in the United States, there’s too few homes for the demand for homes and people are worrying about that. Businesses are worrying that their workforces can’t be housed. First time home buyers are worried they won’t be able to get into the market.

People who want to rent and they want to inform families, they’re constrained. So I think that’s something that I see and it just reminds me that the communities in our country are more similar than different. Sometimes the second thing people are worried about is the sustainability of our growth. Can we really get to a place where we have the proverbial soft landing where we have sustained expansion but with a lower rate of inflation? And I haven’t seen anybody doing more than worrying about that. Most of it. We do a regular survey, it’s called the beige book, and we send out a survey. Some in this room might’ve participated in it, but we send out a survey to businesses in our district and we hear back how they’re thinking about the economy. And what I’m hearing is that inflation’s coming down, the labor market is getting a little easier to find workers, worker groups are saying it’s still reasonably easy to find a job, but it’s just different than it was a year ago. And most people are pleased about that. It was a challenging environment a year ago. And then they’re not pessimistic. They call themselves cautiously optimistic. And I think that cautious optimism is consistent with the economy. I see. We came in yesterday, I think our plane landed in later on lunchtime. And so we went out and walked around and it’s teaming with people. People are here, they’re busy, they’re excited. And if you bump into people and say, where’d you come from? I’m coming from Ohio and Michigan and Germany, and there’s just a lot of diversity in that group of people and they’re very much interested in partaking in the economy. So that doesn’t tell me that it’s an economy in trouble, but definitely consumers are trading down. We heard that this morning in the round table. They’re trading down, they’re value oriented. They’re probably buying a lot of small gifts as opposed to bigger gifts when they go return home. But they are still here and they’re still participating. And that’s how the economy is more broadly.

Ryan Kalei Tsuji:

More specifically to Hawai’i. We had a conversation in, I’m sure you can share that story with the audience about just your interpretations of speaking with people that provide service for tourists. And it seems, as you said, to be busy here in Hawai’i, tourism of course is a very strong industry here to our local economy. And you also have recently spoken to a group in Las Vegas earlier this year about tourism as well. I was able to see that and transforming beyond tourism, and that is something that is a conversation that’s happening within our own community. How can Hawai’i take advantage of other opportunities outside of tourism when we rely so much on that and we continue to see that consistent flow? What does that look like for a community like ours?

Mary C. Daly:

So one thing that I started at the Fed in 1996 and Oregon and Washington we’re trying to transform themselves from resource-based economies to something more diverse. And it was really interesting back then that I met someone in one of those states and I think it was Oregon, and he said, well, the only way we’re going to get this done if it’s not a replacement, it’s a augmentation. It’s not you give up tourism. So in Las Vegas they were very clear, it’s not tourism goes down and everything else has to go up. It’s that we can grow bigger, faster, more resiliently if we say tourism’s always going to be a critical component of what we do, and we could do more. We could do different things. I think that it’s a yes and yes tourism and other things as opposed to let’s get rid of tourism or let’s put this down.

And I think that’s a mindset you have to have. It changes how you converse about it. So then what am I seeing in Las Vegas that they’re doing? And I think this is how I’ve seen most successes in Oregon and in Washington as well, that it’s not the private sectors decides to do this. It’s not the government’s sectors decides to do this. It’s that the entire ecosystem says it would be better if we were more diverse because more diverse would be more resilient and more independent from the challenges in Las Vegas, their challenges, they call themselves like a canary in the coal mine. That’s not a great reference, but their tourism goes down before the economy starts to falter. And so that’s the incident. But you don’t want to be completely dependent on the cyclicality of the U.S. economy and whether consumers are going to spend, you want to diversify.

So they started by diversifying what tourism meant. Now that’s easier for them than I think in Hawai’i because people come for the climate and the culture and the ocean and all the things that are mountains and all the wonderful things here in Las Vegas, they started diversifying into entertainment and they keep purchasing sports teams and they get people to come. But that’s what I mean by yes. And it’s like thinking about what else could tourism be that would attract people even if they weren’t having, they didn’t have a lot of disposable income and they said, let’s go to Hawai’i. So the second thing that they did is they brought all these groups together, public, private community and said, what else are we going to be good at? And what else is there a marketplace for where the particular aspects of our location aren’t a disadvantage to us could be even an advantage. So that’s the kind of thing that I think is important. I’ll mention one last thing before we go to something else, but we’re getting ready. Part of what we do is we travel to other places. We live in a global economy and I was reading about what Vietnam’s doing because they don’t want to just simply be a manufacturer exporter. So they’re really thinking about how they can be involved in AI because they’re a place in Asia that could do ai. Singapore does finance, they can do ai, and that could be something where they build a liaison, they know how to do this, they can work on that. So these are just ideas, but I think the foundation of all of those ideas is it’s public, private and community coming together, working together and saying, okay, what could we build out? Let’s not build up everything and then hope something works. Let’s figure out two or three things that we want to build up, and then what would be our program in order to get that done? And I think there’s possibility there myself.

Ryan Kalei Tsuji:

On that same vein and just looking at what you’re hearing, and you briefly touched upon this when it comes to housing and what you are seeing in various communities, very similar to the issues that we are dealing with here in the state of Hawai’i. Of course affordable housing is a big issue here, especially on some of the neighbor islands. We’re seeing some things that are also happening on the island of Maui with policy changes that are happening there. What do you think is causing this overall affordability challenges for many people and how can that be solved and maybe what are some of the things that you’re seeing in other regions that could help Hawai’i?

Mary C. Daly:

I think you mentioned Maui and we’re coming up on the one year anniversary, and so I just want to say on behalf of the San Francisco Fed and all my colleagues, it’s really all of us. I mean, you’re in our District and when we heard the terrible news living in California and in all the intermountain states, we know what that feels like. But we just want to recognize the devastating loss of life and community and the rebuilding is only just starting. The important thing I remember from all the fires that I’ve seen previously is you can’t let the one year anniversary be the end of the conversation. We have to continue to talk about it and think about investing and rebuilding and things for that to really be fully repaired. So I just wanted to mention that and then I’ll turn back to your question. Can you remind me, I’m sorry. It’s very emotional moment, right? The one year anniversary of something, and it’s just something that I feel really strongly I want to recognize.

Ryan Kalei Tsuji:

Well, before we go back to that, let’s stay on this Maui topic for just a little bit. If we can just, and I’ll go back to the housing. When we look at that and the impacts of natural disasters, we have seen of course what happened last year, this summer alone, there were three significant brush fires that impacted neighbor island communities, including the island of Kauai. And as we look and we navigate through just how much more of these we’re seeing, I’m wondering if you can provide some context in terms of the frequency of these natural disasters, these new threats that now impact our state. How does that impact our economy overall?

Mary C. Daly:

Sure. So with monetary policy, the Federal Reserve has no tools or role to play in mitigating weather related events or thinking through policies and other things that’s really left to the fiscal agents, and that’s true whether they’re federal or state, local. But what we do do is study how events like this are affecting the allocation of economic activity. Now on an aggregate basis, you don’t see a hit really a decrease in aggregate activity because the vents are fairly isolated. But in the local communities you see it. And what happens in the local communities is it’s not just the recovery efforts from that particular disaster, it actually is a rethinking of where to locate activity and how to deal with things should that happen again. And so in many places in the west we’re dealing with wildfires. Florida is dealing with flooding, Texas is dealing with Houston just had a hurricane and people lost their power for 10 days in Houston, not the whole city, but many, many people dislocated from a power loss in a very hot muggy climate. So these are things that are happening throughout the United States, drought, sea level rises, excess rain, lots of flooding, and it changes how people allocate activity, where you can get lending, insurance investment and just where businesses will ultimately locate and where people can build and what you can repair and redo. And I think this is happening not just in Hawai’i and not just in California, but across the United States and frankly across the globe.

Ryan Kalei Tsuji:

Speaking of one of those points that you mentioned, insurance, and we’ve noticed here locally, property insurance costs going up, it’s become a concern of the legislature here. There have been even talks of going into a special session to address some of the insurance issues and the rising costs that many condo owners are facing overall, but we saw this increased significantly after the wildfires on Maui. I’m wondering if you can just share the long-term impacts of rising insurance costs and even potential providers leaving the state and what we’re seeing on a national level as well with rising insurance costs.

Mary C. Daly:

Well, we’re seeing across the nation really property insurers recalculating what if to pay claims when claims are made and if the claim portfolio or the claim distribution changes, it’s also true that the cost of repair and rebuilding are much higher. Now, materials costs have went up a lot and we had supply chain disruptions that went up, but then inflation. So they’re trying to reprice their whole portfolio to ensure that they can pay claims. Insurance costs are rising throughout the United States. In the United States, the way we work, insurers a state regulated and run. And so each state is taking their own approach to how to do this. But Hawai’i’s, as tragic as it was, it was not the first to occur. There are tragedies across the country and I think what’s really would be useful is for the states to come to think together about what the best is.

How do you do this because this is not a problem that’s simply in Hawai’i. It’s a problem in a variety of states where insurance is harder to get sometimes and certainly more expensive, but ultimately insurance companies work by putting the money together that allows them to pay the claim. So it’s not, it has to be solved in that whole, there’s an equilibrium that you have to think about it. I’m sorry, I was just an economist for a moment. So you have to solve it holistically. We call that general equilibrium, but you don’t need to know that we have to solve it holistically, right? The insurance companies have to be able to pay the claims, people have to be able to get insurance and pay for it. And there is this sense of reallocating economic activity or repricing the allocation of economic activity in order for it to thrive and continue in a sustainable basis.

Ryan Kalei Tsuji:

I want to go back to that initial question about housing again and just get your thoughts again about affordable housing being an important issue for those of us here in the state and some of the things that you’ve seen from the other regions on how they’re tackling this and really the root cause of the affordable housing crisis that we find ourselves in, but other states do as well.

Mary C. Daly:

Sure. So I’ll share with you a very interesting study that I read that is by the Cato Institute, and you can just look on their website if you want. I also gave a speech on housing earlier this year. I can’t remember the time, March, March in March, and I cite that in there if you’re interested. But they did a survey of across the nation and they found that 85 or 87, I can’t remember now, percent of Americans are worried about housing. So it doesn’t matter where you live, what age you are, what income level you are, what party political party you are, what kind of a job you’re in education level, nothing worried about housing. So then you look and you ask, well, how can this be? What’s happening? Well, if you plot, and I did this for this talk I gave, if you plot homeowner demand versus, or housing demand versus housing supply, what you see is a very large gap has opened up.

So that gap started to form after the financial crisis with the collapse of the housing market. And it has been growing and growing and growing. So now we are in a unsustainable position at this point where the demand for housing is far outstripping the supply of housing. So what are some of the things I have seen going on? Well, it’s interesting, it’s small pockets of things, and I’ll give you some examples. In Oregon, we met with a manufacturing owner. He owns a manufacturing firm, he’s building workforce housing because he needs it for his workforce. So he’s putting some of his resources to do that in Salt Lake City. They’re thinking with that private sector, public sector, community sector. How do you make homeowners, I mean home available for first time home buyers? How do you take some of the pressure off? I shared a fact earlier today that with the round table that today about 13% of homes available for sale are affordable For the first time home buyer.

40 years ago, that was well over 50%. So there’s just been a change in the housing equation that has to be fixed and that has to be done across the country, not just in Hawai’i. But I would say I was thinking about one of the things we do is convene, and I think there are a lot of mayors in a lot of cities that are convening private public partnerships, and we have groups who can share some of the best practices. We’ve been learning. If you want to keep in touch with us, our community development work, and they do a lot of this work to think about what are the best practices that different locations are using, it’s going to take all of us really thinking innovatively to and outside of the box to fix this equation.

Ryan Kalei Tsuji:

We do want to take this time to open up to questions from those of you here in our audience. If you have a question you want to raise your hand or we have the mic over here as well that we can be brought to you. We have a question back here.

Greg Waibel:

Hello, President Daly. I’m Greg Waibel, CEO of the YMCA.

Mary C. Daly:

Oh, terrific.

Greg Waibel:

Question for you. FOMC seems to have very clear guidance on inflation 2%. All of us really understand that really well. Do you have guidance or data points that you use on the labor market to give us an idea of what do you look at and give us some more data points that we can also follow?

Mary C. Daly:

Sure, absolutely. And one of the things, the reason 2% is easy to pick for inflation, we pick it, think of it as almost like an administered rate. We say what it is because that’s when it’s not so low that we could easily slip into deflation, which is the struggle that Japan’s tried to get itself out of for decades. And we don’t want it so high that people think about it. So that’s why 2% makes a lot of sense on the labor market. The labor market is not easily measured by one number. And you’ve seen this over my career. I’ve seen this when I first started, there was almost like a one number mentality unemployment rate, and if you got the unemployment rate right, you’re fine. There’s even a law opens law that has it in there. But after the financial crisis, and even before that in the nineties when we had the jobless recovery and things, people started to recognize that you can’t evaluate the labor market with one number.

You have to use a dashboard of indicators. And so the complexity is reflected in the fact that we’re not choosing one target for it. But we also, in our long run statement that we released back in September of 2020, we made it, or August of 2020 rather, we made it clear that we’re not in the business of trying to pull the labor market back because we learned in 2018 and 2019, the labor market just surpassed everything that people expected of it. And we let it go because inflation was printing at 1.8 and it turned out that we have to learn about the labor market experientially about how much capacity this has. Now, when you’re measuring weakness in the labor market or softening, there’s a large dashboard of indicators. So let me give you some of my favorites. And they have a dynamic pattern to them.

So I look at quits a lot. Now, quits don’t help you when you’re evaluating weakness, but they do help you when you’re evaluating slowing. So people quit their jobs frequently when they think a better opportunity is in front of them. So quits rates rise rapidly at this point. Quits rates for a while now have come back down to their more normal levels and people aren’t quitting their jobs as much. If you own a business, you might be seeing this. Attrition rates have just gone down. As workers recognize I need to be a little more careful about leaving my job because the labor market’s slowing. Another thing I like to look at is the number of people who think a job is hard to find versus the number of firms that thinks workers are hard to get. These are both surveys of small businesses and they tell you what’s that sort of proposition between firms and workers?

And so far those have not fallen back down to pre pandemic levels. So far it’s still the case that firms still find it hard to get a little hard to get workers, but much easier. And workers still find it pretty easy to find jobs, although a little harder. So that’s another good one to look at as we get to a point where you worry about slowing, I look at initial claims for unemployment insurance and then I talk to people because you can’t even catch it early enough if you only look at initial claims. You have to get out and talk to firms and ask firms, are you planning on laying workers off? Is your book of business slowing sufficiently that you need to cut your payrolls? And we do that. And what we hear, and we do this with small, medium and very large businesses, another place I get a lot of good information is with consulting firms.

They sell their business to businesses. And so they know a lot about what those businesses are doing. And the first thing they tell you is firms cut back on discretionary spending. So consulting. The second thing they do is they try to keep their workforce pretty stable or if they want it to come down, they do that through attrition. They just don’t refill positions where someone’s left. And that’s what’s happening now. Firms are either keeping their workforces stable or they’re letting ’em slow through attrition. The third thing that they do, and then this is what you want to get ahead of for sure, is they say, we need to shrink the size of our payrolls, but we haven’t really been seeing that in large scale yet. And if you dig into the labor market report, you don’t even see the permanent layoffs rising. You saw temporary layoffs rising and you report temporary layoffs when you intend for them to be temporary.

And that’s largely out of natural disasters or you had a just shut down for some reason and you don’t see that. Final thing is there’s a whole other dashboard of indicators that come out of the surveys of people and it asks them, how many jobs do you have? And we see multiple job holders start to climb. Well then that’s when people are feeling like either that inflation’s so stressful that I really need more jobs, or they feel like they don’t have security in one job or they’re not making enough in one job. So I’m watching that as well. So probably you have a labor market dashboard and it has a heat map and there are maybe 50 indicators on that dashboard. And then you’re also looking for what your contacts are saying. And so right now none of the indicators are really flashing red. Some are to their pre pandemic levels, some are not yet. And I’m to the point now though, where I’m monitoring carefully, let’s put it that way. Does that help?

Ryan Kalei Tsuji:

Next question. We have one other way in the back there and then we’ll get up here after.

Charles Morrison:

Charles Morrison with the East-West Center, which is a public diplomacy institution. I heard I’m a great fan of the Fed and its independence, but you mentioned your twin goals and then you mentioned that of course you don’t have control of fiscal policy, you don’t have control of tariffs, you don’t have control of immigration. And then you mentioned also that we live in a global world, so we don’t have control of what the Japanese do and the collapse of the carry gun trade, so forth. So I’m just wondering about the quality. You study what the economy looks like internationally, nationally, but what does the quality of your dialogues with other parts of the U.S. government, with international central bankers, and what do you think might be different now than was when we could think of the United States more as having its own bubble and in control of its own economic destiny? Thank you.

Mary C. Daly:

So in my, I’ll just talk through what I’ve seen change in my own career and let me talk first about other central banks. We always had conferences among central bankers from across the globe. This has been a longstanding thing, but the number of them now and the dialogue back and forth, importantly, no one’s coordinating their policies, but we’re all grappling with similar issues, right? When the pandemic hit, all central banks are grappling with what do you do? Fiscal debt has risen across the globe. It’s not something unique to the United States. These are things that after the financial crisis, the global financial crisis, you really have to, these are like colleagues across a globe dealing with very different countries and often very different situations, but who sharing information with helps you get better. So I’d say that’s a very strong relationship. I regularly am interacting with them.

We’re about to go to our annual conference in August hosted by the Kansas City Fed, and there’ll be people from across the globe there, central bankers from across the globe, part of the talks part of the discussion, and I find that a very rich and rewarding environment to learn from others and have them learn. For us, it’s just like rolling up our sleeves together and solving problems even though we all come back and solve ’em for our own country. That’s important. Our interactions with other parts of government, we’ve always been the Fed and other parts of government, always been very cooperative and helpful to each other, but it’s very clear we all have different roles and you don’t see at the staff level even I’d say I’m a staff working with the head of something else. We’re not trying to do the other person’s job.

We’re trying to do our job better. So I would say that’s a very healthy way to think about it. If you have real clarity, then you can exchange information and learn from each other without getting confused. And I’d say that’s where we are at this point. But Fed independence is more than just something that we have and need to hold onto. It’s historically been a very important thing to the stability of the role in economies, in terms of keeping inflation and in our case, full employment in the frame. But it’s also a really important part of our integrity. The best tool the Fed has is trust and credibility. I say that and I think we’ve got recent evidence of it. When inflation was printing at 7% longer, run inflation expectations hovered around 2%, which is our target. That’s because people understood, even if they knew they didn’t like 7% inflation, they knew we would get this down to 2%.

So the five year ahead inflation expectations, five to 10 year ahead, it stayed at 2% or nearby. So I think of that as that’s what credibility does for you. It makes the challenge of solving problems easier. And it also ensures people that we are on the job that we were given, Congress gave us two jobs, price stability, full employment. We signal that we’re doing it, but that doesn’t mean we have to cut ourselves off from the world. In fact, that would be the opposite of what we should do. We need to talk to people and learn from people whether they’re in our communities or other parts of government or other central banks, but we can’t get confused about our role and the importance of sticking to our mandates and getting our job done.

Audience Member 3:

Catherine, you question Catherine now from Pacific Bank. First, I wanted to thank you, President Daly for coming out here, making this time for us.

My question is, in regard to the labor markets, whether you see any disruptors on the horizon, you had mentioned AI earlier in regard to Vietnam, maybe that’s one, but any high-level kind of disruptors that you see in the market?

Mary C. Daly:

Sure. So the labor market is in a constant state of being disrupted. I just wanted to say that, right? There’s a lot of changes. There’s an economist, David Autor, and he’s at MIT, and he has a little diagram that shows that 10 years ago, 40% of the jobs in the United States didn’t exist. I think I have that number right. But it is a very important reminder that the labor market is a dynamic place. And jobs that are here today weren’t here a decade ago or 30 years ago or 20 years ago. It’s just that’s how the economy evolves. So there will always be disruptions. The pandemic was a big disruptor and then people came back and they got their feet under them and firms got their feet under them and things. But what is always true is that the labor force needs to be agile in terms of their work.

We have to, we say lifelong learning and things of that sort, but really you need to be able to move and grow as you move through your career. Otherwise you can be left when the technologies or the business lines change and move and you’re not keeping up. So one of the things that I think needs to be disrupted, I’m going to answer your question a different way, whether it’s technology or other things coming for the labor market, something that we could disrupt and make sure people were better is to have more what I think of as di visible education where you don’t get to four years and say, okay, that’s it, I’m done. And then we don’t have many opportunities to quickly retrain. And generative AI might actually help with that because you’re seeing small courses to become prompt engineers, small courses to be able to use the tools for data analysis. Those are things that can help our workforce maintain its training so that it can grow and be ready for the jobs that are created. But I’ve done this work a long time and I’m a student of history, and what I realize is the labor market’s constantly changing. Sometimes the changes are big enough, you can see them as they happen. Computers were one of those changes. Computer revolution, more recently, generative ai. People talk about that as if that could happen. And it certainly has the possibility, but I haven’t seen it yet. But in any of these things, the best preparation for our workforces is that they continue to be able to advance their training and in small enough bites to afford to do it and to want to do it.

Ryan Kalei Tsuji:

Carl, did you have a question? Oh, I’m sorry. Did you have a question? Okay, go ahead.

Audience Member 4:

Green Infrastructure Authority, President Daly, thank you so much. Very informative. So if I’m understanding how inflation is calculated this year over year, right? And so if Google’s correct, June, 2024, it’s 3% 20, 22 over 9%. There’s not many people I know that got a 9% raise in 2022. So where is affordability in the lens of the fed’s policy making?

Mary C. Daly:

So our goals are very narrow, right? Price stability, full employment. And so that’s what we’re working on. It peaked at 7%, 7%, and it’s a little under three. Now, the numbers we use, the PCE would be 2.6. So I look at those numbers and I say that’s a lot of progress, but we’re not there yet. Now, when inflation was at its highest, real wages in the economy were falling, people were earning a lot of money, more money and a lot of money being more money than they were used to. Wage growth was rising, but it was not keeping up with inflation. And their real wages adjusted for inflation were falling. But then in the middle of last year, real wages started to rise. And that’s because wage gains were still being made, but inflation was coming down and real wages are rising right now. What happens in these inflationary periods is workers fall behind and then it takes multiple years to catch up.

And the piece that creates the ability to catch up is to have a sustainable expansion where people keep getting wage increases, they keep moving themselves back into position, and then their wages and their incomes catch up to the change in the price level. But for that to happen, we have to do two things. We have to bring inflation fully down to 2%, and we have to do it without disrupting the economy to the point that people lose their employment. So that’s why these two things together are so important. And over time, in any inflationary period we’ve had, you see people catch up over a period of time, but it doesn’t happen immediately. Now, maybe a positive I can share with you is that we do contact calls, and this was larger firms. What we’re hearing is that they’re still working on catch up for their workers. And so they recognized their workers fell behind in real wages. And so you ask before the most recent wage data came out, you might ask, why do firms in softer labor market, a slowing labor market, keep raising wages that say the average is around 3%? Why do they keep doing that? It’s because they want to give a little catch up and they want to make sure that their workers feel confident that they didn’t get completely left behind in that. And that’s how the labor market typically works. So that’s what’s happening now.

Ryan Kalei Tsuji:

I know we’re out of time. Do we have time for one more question? One more question. Thank you. Alright. Carl.

Carl Bonham:

I’m not sure you won’t mind then Carl Bonham, executive director at UHERO. And I just had, you mentioned earlier that the inflation expectations were anchored, which was impressive throughout this episode of inflation. But it makes me wonder why we haven’t cut yet. And I’m not latching on to the last labor market report or anything like that, but we clearly have a labor market that is slowing, maybe weakening, and the trends are largely all towards continued weakening. Hopefully that’s going to flatten out at some point, but there’s no real evidence of that. At the same time, we’ve got these anchored expectations. We know there’s a lag between monetary policy even as market rates move by themselves. And I would argue that we’ve already achieved the inflation goal. You mentioned the 2.6% headline, CPE. If you take out OER, you’re at 2%. And I am curious whether you think we should take out OER maybe before the next cycle and then I’ll finish with one question. I wonder what your view is of the neutral rate, because my guess is that we’re going to have restrictive monetary policy all the way through next year, unless we see some really big cuts.

Mary C. Daly:

I feel like I’ve been given a test when you teach.

Okay, I can do it though. Okay, so let’s go to the policy rate and the economy. So right now there’s a difference between the level of activity and then projections about where you think it might go. We have a lot of clarity over the level of activity, which is how strong is the demand for workers, how strong is consumer demand, how good or income, all the things that we can talk about. And when you talk to businesses, they don’t think that their business is weak, they just see it slowing. So then you get into, okay, what is the projection? But there we have considerable uncertainty. Now there’s always uncertainty about the projection, but the uncertainty that we’ve been facing is even wider because we got that poor data on inflation earlier in the year. And that was when the talk emerged that maybe policy is not tight enough.

Now, I was never a proponent of that. It always seemed completely tight enough and very restrictive to me, but there was a lot of chatter about that. So that has passed, as I said, that’s over. Now we’re to a point about is the labor market slowing a lot or slowing a little? As you see from the projections for the employment report, it did not have this. That’s why everybody’s surprised. But it also hadn’t factored in Hurricane Barrel to the extent that that disrupted activity and didn’t factor in the growth in the labor force, which was largely due to the inflow of immigration. So those are things that you don’t know. So what is important though, and I’d say this is even more important than, is it July or is it September? What’s really important? Has the economy downshifted and did we recognize it? And if you look back at the FOMC statement and Chair Powell’s press conference, you see the statement indicated, we see it.

And that Chair Powell indicated we recognize it and that we’re prepared to act as we get more information. And that is in part, I believe why you see the labor market report translating into rate reductions of mortgage interest rates and other things, right? Is because they understand our reaction function, that it’s clear inflation’s coming down closer to our target. It’s clear that the labor market is slowing and it’s to a point where we have to balance those goals. I remember I gave this talk in June, a speech at the Commonwealth Club in San Francisco, and I said, elevated inflation is not no longer the only risk we face. And that got a lot of attention in the room. And in part it was because there was a sense that yes, we’ve arrived at a place where inflation is now I’m more confident that we’re on a sustainable path to two, and that labor market has to come back into frame. And that’s why I said earlier that itself, the communication itself is a policy adjustment. And if you act when you don’t know more, because with all this uncertainty you can actually end up making a mistake. And it is just as up until now when you see that there could be potential weakness in the labor market, although I don’t see it yet, really the risks, they were just becoming balanced, right? The risk because you don’t want to leave inflation persistently above 2%. That would be, I mean, people have endured interest rate environment just to leave inflation at 2.6. That’s not a good outcome and we don’t want to tip the labor market over. So that’s the world we’re in right now. And as I said, it was a unanimous decision to leave it. And the communication that we do is, in my judgment, equally valuable.

Ryan Kalei Tsuji:

Alright, well President Daly, thank you so much for taking time out of your schedule to join us here this morning. We know you have a busy schedule here, a short time in Hawai’i. Hopefully get to do some relaxing and a little bit of vacation while you’re out here. But we appreciate you and thank you all for being a part of this conversation. And again, thank you to Hawai’i Executive Collaborative for helping to organize and have us here today. Thank you all so much and enjoy the rest of your day. Thank you, Aloha.

Mary C. Daly:

Thank you very much.