San Francisco Fed President Mary Daly Talks Interest Rates, Inflation, Tariff Impact
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Bloomberg Audio Studios. Podcasts, radio, news. San Francisco Fed President Mary Daly. President Daly, welcome back to the program. It's good to catch up with you. I want to start with this data and maybe we can spend some time on the palace intrigue later on. Jobless claims, initial claims lower than expected. Continuing claims higher.

higher than expected and creeping higher over the past few months. From your vantage point, President Daley, how much weight would you put on one versus the other? And what's the labour market picture look like in your point of view, your opinion?

Well, the labor market is shaping up to be solid, and the data today confirmed that. Now, continuing claims are going up because it takes a little longer to find a job. That's consistent with the hiring numbers just being slower as the economy comes to a more sustainable pace. But when I look at the labor market, there are really no warning signs that it's weakening.

We'll continue to watch that, but right now it's progressing solidly, although more slowly than before. President Daley, a lot of people have said that it is a data-dependent Federal Reserve, and yet we haven't seen enough data to really understand whether inflation is the primary objective or whether it really is. Some of the weakening that we've seen in the labor market, albeit from a strong place, when will you have enough data to really make that determination?

Well, one of the challenges of central banking that you just have to accept is that we never have perfect data. So you're always making judgments and you want sufficient data to make a judgment that is really going to be best for the American people. So right now we have incoming information on the labor market, which does not signal real weakness. It just signals slowing. So we'll continue to watch that.

and then on inflation the data have been good so far coming in if we were only backward looking we would say though it's time to adjust the interest rate we have to be forward-looking and then you have to make judgments about how you think inflation will shape up going forward in the eyes really see three scenarios and i'm leaning towards one that i love i'll tell you more more but

The one scenario, of course, is that it's just delayed. The tariffs are going to have some impact on inflation. It is, after all, at an increasing cost, and that will be a more persistent effect. The second opportunity or possibility is that it's delayed, but it will be a one-off. And then the third, of course, which I think is increasingly...

possible, it's not my modal, but it's increasingly possible, is that this just doesn't amount to as much as the models in history would tell us because businesses find ways to absorb the costs and they split it down the production chain and ultimately consumers pay less of that.

So I think those last two scenarios, it's delayed but it's a one-off or it doesn't materialize to the extent that the models would suggest. Those are where I'm putting increasing probabilities and we'll just have to collect some more information to make a decision. But ultimately, we can't wait for perfect information or we'll be behind.

and we can't do that to the American people. It sounds like President Daley, you're leaning toward a sooner rate cut if it is confirmed that this tariff impulse isn't as inflationary as people expected. Is that correct?

Well, sooner than what? I mean, my modal outlook has been for some time that we would begin to be able to adjust the rates in the fall. And I haven't really changed that view. It does seem like that. Of course, if the tariffs are a one-off, you can look through them. And if they're just not going to materialize, then you have to watch both sides of the mandate. And I think that's really important. It's not one or the other.

it's both sides of our mandate that have really come into frame since we brought inflation down from the really high levels to something that's closer to our target. Ultimately, we have to watch both sides, and that's what I'm doing. And then the fall looks promising for a rate cut. I don't know for sure. I mean, we have to be open about what we don't know. Humble is, I think, the word that comes out of the inflation run-up. But we will, you know, there's a lot of

the differences of views on the committee. I see that as a real positive right now because people bring their perspectives and the data will guide us to what is the one that ultimately looks like reality. - President Daley, John was talking about the palace intrigue. And I do wonder about how the increasingly political overlay to the Fed has complicated your messaging given that there is this debate about the dual mandate, et cetera. How much has it affected the way that you communicate?

You know, not really. One of the things that I recognize on a regular basis is if I go out and talk to the people who live in the 12th Federal Reserve District, so that's nine states, very diverse states in the West, they don't actually bring this up at all. What they bring up is...

what do you think's going to happen to inflation will you be able to restore inflation to two percent we will restore price stability do you think the labor market is going to be preserved during it because ultimately i really want both jobs and lower inflation i want to get ahead and so far

The people in my district are cautiously optimistic overall, thinking that the economy is weathering some of the worst concerns and the uncertainties, but continuing to move along. So cautiously optimistic is where they are, and I think that reflects what's on top of their mind, less about what's happening in Washington and more about what's happening in their lived experience in their communities.

communities. So President Daley, would you dismiss some of the discussions around shadow fed and all of that as simply palace intrigue and not necessarily affecting what would happen on the Fed? Are you concerned about that?

You know, ultimately what I'm concerned about is the two mandates Congress gave us, full employment, price stability. There's work to do there. That's where all of my focus is. And the Federal Reserve is an institution. It weathers a variety of different points in time, ultimately because we only think of one thing, how our work can further the American people

uh... in their lives and livelihoods and how we do that through our congressional mandated call so that's what we think about we've had a durable history since nineteen thirteen and i would can i consider that to be continuing to do our job well president any one argument we've had to reducing to strike sooner than maybe site before as you indicated is that basically the labor market right now is no longer a source for inflation and with that in mind the risk based reduce interest rates because the fed believes that the policy right still restrictive

Does that not convince you enough right now? Not completely, because remember, inflation's been above our target for some time, well above our target during periods of time. And there's a sense where people really want us to get that down. Inflation is a tax on people. And every time we let people continue paying that tax, it erodes their well-being. So I'm very focused on getting inflation down to 2%.

us being sure that we're on that sustainable path as long as the labor market doesn't show signs of weakening is really important. So you have to make a view, you have to have a view about what you think tariffs will do to inflation. Now my own view is that they will

potentially raise inflation, that's my modal outlook, but they should dissipate over the period. It's not going to be something that builds into inflation expectations and thus we really have to lean against it. But we can't just be assuming we know just because that's our modal outlook. We have to really collect the information and understand. Remember, data dependence isn't a backward-looking activity. It's a forward-looking activity. Right now we're looking forward by talking to our contacts

and they still feel uncertain about what they will do. They're going to try to pass some along, but they, as a number of people you've had on your show have mentioned, firms don't have all those abilities, whether they're managing their brand or just they have exhausted consumers who can't take anymore. That's what we're waiting to find out. But I don't think we're behind in our waiting. We've got policy in a good place, the economy's in a good place, and that's what we'll continue to monitor.

President Daley, how much of a lesson was it last year when the Fed cut by 100 basis points only to see long-term yields rise significantly in the face of growth and inflation expectations? Is that something that you worry about could happen now?

You know, really, financial markets are an input to my decisions, not an output that I'm worrying about. And ultimately, you know, we want to see financial conditions align with what we're trying to do for the economy, and we'll adjust as needed. But, you know, we make policy. There's many things that affect yields. We make policy that we believe will...

be with the lags in monetary policy, supportive of both of our goals. And so I don't spend a lot of time wondering what the bond market will do, especially given there's so many things going on in the bond market right now. It's been quite volatile. So really it's about what do financial conditions overall do and what does that do to growth and activity and inflation? Does it restrain it or support it? And that's where my focus is. Final question. Just quickly, President Daley, just want to squeeze this in.

What would life be like with a permanent role in Washington, D.C., compared to, say, San Francisco? How would that feel? Hotter.

But seriously, you know, one of the things that I've, my experience with the Federal Reserve is you have to contribute from wherever you sit. And that's what we all do when we get around that table. There's 19 of us and we don't think about who is in what role. It's really how do we debate, discuss, bring our best thinking and our best disagreement to bear so we can make the right decision at the right moment for the people we serve. President Deli, appreciate your time. Very diplomatic.

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