The Journal. - A Fed Insider on the Looming Rate Cut

Episode Date: September 5, 2024

This month, for the first time in over two years, the U.S. Federal Reserve is widely expected to cut interest rates. Mary Daly, the president of the Federal Reserve Bank of San Francisco, is one of 12 people who will decide how aggressive that cut should be. She talks to Kate about inflation, unemployment, the economy and Taylor Swift.  Further Listening: - What the Stock Market Panic Says About the Economy  - Why the Fed Is Steering Away From Rate Cuts  Further Reading: - The Make-or-Break Moment That Will Determine the Economy’s Fate  Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi guys. Kate, you look like you're in a closet. Yeah, welcome to my closet. Um, okay. I'm almost ready. A couple days ago, I called up Mary Daly. She was at her office in San Francisco. So President Mary Daly, welcome. Oh, thank you. Mary is the president of the San Francisco Federal Reserve and later this month, Mary and other top officials from the Fed will make a decision that will influence the fate of the U.S. economy. That decision is whether it's finally time to cut

interest rates and buy how much. Mary says their ultimate goal is to have a healthy economy. What we know from all past history is a durable expansion, one that lasts a long time, is the single best thing for Americans, and that's really what we were after. Durable sounds like just good economy. Good economy for a long time. For a long time. You want a good economy for a long time.

To achieve that, Mary and 11 other Fed officials have to figure out how quickly to cut interest rates without stoking inflation again. The idea is to strike just the right balance. As a central banker, the commitment you have to make to do the job well is to not run to a definitive answer with urgency when urgency is the very thing that would cause a mistake.

Welcome to The Journal, our show about money, business, and power. I'm Kate Leimbach. It's Thursday, September 5th. Coming up on the show, a Fed insider on the looming rate cut. owner, you've hustled to accomplish a lot, but the rewards don't stop there. When you earn two times more points on things that matter to you and your business, easily track those business expenses, and experience flexible Aventura rewards, you'll realize how much more rewarding your hustle can be. Get up to $1,800 in value when you apply for the CIBC Aventura Visa for Business at cibc.com slash Aventura Business.

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For the last few years, inflation has been a major problem in the U.S. economy, inflicting pain at the pump, at the grocery store, you name it. Mary Daly says she knows that pain, too. Long before she was the San Francisco Fed president, she was a high school dropout, working three jobs to help her family pay the bills. In the 1970s, I was one of those people. Really, where you're trying to decide how much gas you can put in your car to get to work and how many stops you can make on the way because you can't afford all of those things

because no matter how much you were earning, inflation was eroding it. Mary eventually got her GED and then went to college and got her PhD in economics. What do you say to Americans who feel like people in your position don't know what they are going through? Well, I don't say, I listen. That's the important point.

I mean, individuals want to be heard and they want to be able to tell their stories and my responsibility is to hear them and listen to them and bring their stories, their information and their sense of where they are in the world to policymaking, to our deliberations. I spend a lot of time out in the community and one of the things I like to do is go to retail outlets and just talk to people who are shopping there, especially now and in the last two years when it's been so challenging.

And I met a young man and his wife and they had a small child. And I met them and he told me he had more jobs than he's ever had in his life. He was earning more than he had ever had. And he was so sad, almost choked up, because he told me that every week he could have put fewer and fewer items in his basket. And that was because it was more and more expensive.

And that's the toll of inflation. To fight inflation, the Fed has raised interest rates 11 times since March of 2022. Now, interest rates are at a 23-year high, making it more expensive to buy a car or a house. And as prices went up, the Fed tried to get inflation under control by raising interest rates. That's correct. Decisions that are made in periodic meetings of Fed officials like you.

Can you tell us what it's like to be in that room when you were raising rates? Absolutely. One of the things that I think is not known is just how vigorous the discussions are, how evidence-based they are. And in those rooms, when we recognize the suffering out in the economy, the importance, of course, was to move aggressively, to really get after the problem so that we can maintain inflation expectations, make sure they don't drift up, but also start to bring inflation move aggressively, to really get after the problem so that we can maintain inflation expectations, make sure they don't drift up, but also start to bring inflation down by

bringing demand and supply back into balance. And that's what we did every time. But in making those decisions to raise rates with the goal of taming inflation, those rate hikes inflict pain in their own form. Higher mortgages or car loans and so forth, like the gentleman you met at the retail outlet, it brings more pain into his life. How do you think about those tradeoffs? Sure, it's an important question.

And you do have to make trade-offs. So raising the interest rate temporarily to bring inflation down sustainably sets the foundation for a strong and healthy economy going forward. It is always challenging to raise interest rates when people are already challenged, but it is the important thing to do because what we're really doing is setting conditions for long-term stability, which ultimately allow for long-term growth. The Fed's policies appear to have worked so far. Inflation is around 2.5%, which is

pretty close to its target of 2%, and close enough for the Fed to start thinking about lowering interest rates again. Which brings us to the next meeting of the Central Bank. It's called the Federal Open Market Committee, or FOMC. These meetings happen eight times a year, and the next one starts on September 17th. So now, all eyes are on the Fed meeting later this month. How would you characterize the weight of this decision in particular? You know, every time you show up at the FOMC table and you deliberate, what should we do with policy? You always have one of three choices.

Raise the rate, lower the rate, keep the rate the same. Keeping the rate the same is a decision. It is a policy decision. It's deciding that policy is in the right place and you're going to keep it there. So all of those decisions, whether they're to raise the rate, keep it the same, or lower the rate, they're all weighty because they all have millions of Americans on the other end of the decision. But the question that's on our minds going forward like at this point, with inflation coming down gradually toward our 2% target

and the labor market now in balance, we don't want to see additional slowing in the labor market. That would not be welcomed. And I believe that we are gaining more and more confidence that inflation is on a path to 2%, then the time to start to adjust rates is upon us. Now, how quickly we will adjust rates, how much we will adjust rates, those are deliberations we will take at the upcoming meetings. We do have to ensure that we adjust policy as we go so that we don't end up overtightening and weakening the labor market. We're not in that situation and we want to avoid that situation. Overtightening, meaning keeping rates high for longer. Keeping rates too high

when the economy is slowing. If fighting inflation was Mary's only goal, things would be a little easier. But the Fed has two mandates. There's keeping inflation low and there's also keeping unemployment low. The problem is these two goals can be at odds with each other. To fight inflation, the Fed raises interest rates, which can crimp spending, prompt companies to lay off workers, and result in higher unemployment. And just last month, there was a bit of a scare in the unemployment numbers. We begin with our top story. Markets around the world have dropped amid fears that the U.S. economy is heading for

a slowdown. Weak job data from the U.S. A disappointing jobs report. Is it a weak jobs report? A disappointing July jobs report raised concerns the Fed was too late with rate cuts. Maybe the Fed dropped the ball. Maybe they waited too long. So does Mary think Maybe the Fed dropped the ball. Maybe they waited too long. So does Mary think that the Fed missed the mark?

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Join for just $4.99 a month. Savings may vary. Eligibility and member terms apply. Right now, you've got inflation going in the right direction, but there's maybe an inkling that jobs are weakening. Unemployment jumped to 4.3% in the most recent jobs report, highest level in almost three years. When you saw that data, what went through your head?

When you see data coming in, the headline numbers can be misleading. You have to dig beneath the macro headlines. So the very first thing that went through my mind when I saw the employment report is where the details and you immediately get the details and you unpack the details and what you find when you do that is that labor force participation, the number of people working and looking for work, rose. So when more people re- enter the labor market after an absence, then that's actually good news for the economy. Individuals typically won't enter a labor market if they think it's

weakening. They enter it when they think jobs are plentiful. So when I looked at that, I said, oh, okay, we have to watch for the next labor market report because what it looks like right now is we have a healthy labor market that's now entered a sustainable phase. And I want to keep it there. This labor market report we just came through was not a sign of weakening. It doesn't make you worry that you've waited too long to start cutting rates. Not that report. So what I am hearing is you are not overly concerned about the labor market right now.

Well, I'm going to try to put a really fine point on it. I am watching it extremely carefully because any additional slowing would be unwelcomed. And we don't wanna wait till we see it because then it's too late. For economists, investors, and people watching the markets, the question isn't whether the Fed will cut rates. Most Fed watchers are expecting a cut.

Instead, the question is, how much will the Fed cut rates? I think the key question is, is it 25 basis points, 50 basis points? You know, that sort of 25, 50 basis point question. In September, the only question is whether it will be by 25 basis points or 50. Since rate cuts are seen to stimulate the economy and therefore employment, a modest 25 point cut would indicate that the Fed isn't too worried about the labor market. On the other hand, a 50-point rate cut would signal that it is more concerned. People advocating for the bigger cut say it's the way to avoid a recession. I wanted to know Mary's thinking on the next rate cut. Okay, so let me give

you a scenario. Okay. I love scenarios. We're in an economy where inflation is close to your 2% target and the labor market is not fragile, but you know, showing some signs. Would that call for a smaller rate cut or a bigger one? If I may, I'm going to say I think it's what I really like to think of, because your scenario is a reasonable one to think about, but it's only one of like 100 possibilities. So right now, what I think of is the most likely outcome. We have a situation where inflation is gradually coming down.

The labor market's in balance, and we don't want to see additional weakening in the labor market. So acting as early as the next meeting is an appropriate thing to do. If we get a situation where the labor market would start to falter, like, oh, it is slowing more than we would welcome, well, then we would have to make more aggressive adjustments to ensure that that didn't happen. Or if inflation was stickier and the labor market wasn't giving any signs of weakening, well then we would have to hold on longer, that we would adjust the policy rate more

slowly. So the tactics of exactly how we'll do that, those get made as you get closer to the meeting because so much information comes in between each meeting. Where are you leaning today? My expectation is inflation will continue to slow and the labor market will continue to look healthy, not fragile. If for any reason those two data points don't come out like I expect, well then of course I'm prepared to go and debate and discuss with my colleagues at the September meeting and make the adjustments that we collectively see as the best ones to make.

So we will take our time, we will wait till our meeting, do the work, do the deliberations, and then state the outcomes. And predetermining what those are and saying them with force and definitiveness can often just be misleading and, at worst can be a mistake. Is it fair to say that we are looking at cutting rates by 25 basis points or 50 basis points? You're very good at wanting to do what everybody wants to do. I feel like every single time I talk to anyone in the media, and can I just paint this point? Because I think it's important, podcast or whatever is that when I go out in the community and I

Talk to individuals They don't ask me about 25 or 50 You know what they asked tell me they asked me are we gonna be okay? Are we gonna get and I say what is okay mean will inflation go back down and will I still have my job? And that's why I push away from knowing if it's 25 or 50 because, I mean, seriously, I've got a labor market report coming out on Friday. I have an inflation report coming out next week and I have all this information I'm collecting. What I can say, and I have said and I'm happy to say again here, is the time to adjust policy

to some degree is upon us. So is it fair to say that the era of rate hikes is over? I don't like to talk in eras, but I will talk about tightening cycles because eras can be a lot of time, you know. Not a Taylor Swift fan? Okay, so here's, I'm sorry to say this is sad. I'm going to tell you a sad fact. So you know how I know Taylor Swift as well as I do?

Tell us. I'm a Kansas City Chiefs fan and I really like Travis Kelsey. That and I'm very pleased about how much she's contributed to the economy. Okay, so no errors. No errors. But let me talk about tightening cycles. So a tightening cycle is the period of time from which you start raising the rate to when you hit the peak of its hike and then you start to lower it, you hold it and then you

lower it. And it looks like from all the information coming in, this tightening cycle has come to an end and is soon to start its downward descent. Now how speedily we will be able to descend is unknown. That will depend on the incoming information and the data, but it does appear that inflation is sufficiently on path toward 2% to have eliminated the need to raise rates again. So today, you are the San Francisco Fed president, but in the 1970s, you were struggling, you told us, with inflation personally.

What does Mary today say to Mary in the 70s? That's a good question. No one's ever asked me that question, but it's a very good question. You know, I say to her that we are dedicated, completely determined to do our job, because you, young Mary, and all the countless Americans who are struggling with inflation today and have been for the last two years, this is not a struggle you deserve to have. And I think there was a sense when I was growing up that I remember myself thinking, I'm never going to get ahead because every time I earned something, got a little raise, inflation eroded it and I was further behind. And I think what's really important for monetary policymakers and myself in particular to say

to the American people is we see that and we're on it. What does that 15 year old Mary say to you today? Go faster. All right. We'll see what you do. Thank you so much for your time. We'll do our best. Appreciate it. Thank you. Before you go tomorrow, we're kicking off our new series, Red, White and Who, a weekly look at the 2024 presidential election. Your host, Ryan Knutson, and senior political correspondent Molly Ball will take you through

the biggest developments in the race for the White House. Look for the first episode in your feed tomorrow morning, early. That's all for today, Thursday, September 5th. The Journal is a co-production of Spotify and The Wall Street Journal. Special thanks to Nick Timouros for his help with this episode. Thanks for listening. See you tomorrow.