Tracy: Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.

Joe: and I'm Joe Weisenthal. Joe, I don't know about you, but when I think about Alaska, I think about snow, glaciers, gold, oil, pipelines, northern exposure, small plains, and the 12th district of the Federal Reserve system of banks.

Tracy: That's literally the exact list that I think includes.

Joe: Incredible.

Tracy: I can't believe it. All right. Well, we are in fact here in Alaska in Anchorage to be specific and it's a really interesting time to be taking a field trip to the very very northern state because Alaska actually has a lot of relevance to our current period.

Joe: See, you know, we used to talk about how like Arizona was a very odd loy state.

Tracy: Oh yeah. And I still think but this is a very odd outlaw state because there are so many specific things that we hear about here whether it's a demographic shift oil obviously logistics is huge it's you just feel the presence of the various train and plane hubs and ship hubs here in Alaska so it is and housing which has a very difficult housing environment here too. So it is a very meaty area for us to do uh coverage.

Joe: Absolutely. And we do in fact have the perfect guests to talk all about it. We are going to be speaking with Mary Daly. She is of course the San Francisco Fed president and therefore the president of the 12th district and Alaska is in that district and she's here on a trip and she's going to talk to us for quite a while. So Mary, welcome to the show.

Mary: Thank you so much. I'm delighted to be here and I'm so delighted that we're in Alaska together.

Tracy: I was going to ask, how often do you actually come here?

Mary: I come regularly, but it's not just me. members of my team, economist, our engagement officer. It's our public engagement officers. They come too. Ultimately, we're trying to source information from all of our states. So, we go to all the states in our district. There's nine of them. And we ask questions of all of them about how they're living in the economy, what are the things that concern them, what are the opportunities, what are the challenges.

Joe: So, big picture, how's the Alaska economy right now? Or what do what constitutes the Alaska economy actually?

Mary: Well, let me tell you something. I learned the first time I came to Alaska. It isn't an economy. It's a series of economies. Right? If you go to the more remote areas that you can only say access by airplane, you can't there are no roads. They live on a in a cashless economy. The subsistence that looks very different than Anchorage where you're using your digital wallet to pay for things locally that more familiar to the lower 48. And so really when you think of Alaska, you have to think of economies, communities, and you have to imagine that the leaders here and the population here has to come together to ensure that all the decisions they make serve the variety of needs they have. I think that's what makes it so rich. It really is at the forefront of so many things that can affect the national economy that it's a really great place to learn.

Tracy: Is Alaska of particular relevance at this particular moment in time when you know uncertainty is the word of the day? We do have tariffs going on. Uh inflation is still a lingering concern and Alaska of course does already have a high cost of living.

Mary: So you know think about Alaska as right now a leading indicator. They're sitting in the perfect storm if you will of all the things going on in our economy. They have a higher price level and we they've suffered even more from rising inflation. They are thinking hard about how do they import and how do they do this given the tariffs. They are a recipient of a tremendous amount of federal spending related to strategic defense and the military capacity and even things like satellites. So they are right there. And so coming here and seeing how they're dealing with it, one, it tells me how resilient our economy is more generally to these different changes. And two, it provides me a leading indication of how businesses in communities that are right there on the forefront are going to respond to this. And I can use that information to look on the lower 48, especially my states, and ask, "What are we seeing there?" So, it gives me early insight into the changes and how they're likely to affect the economy.

Joe: Mary just did the intro better than I did. I think.

Tracy: resilient and scrappy feels like one of those things where like every town in the world or every city likes to describe their residents as such, but this is like the first place I've been where like 100% believe it. And when hearing the stories of people who have been here multiple generations, it's like, okay, you actually I actually fully buy that.

Joe: But it's interesting. So, one of the there's a lot to go down, but we've heard about declining population levels, particularly in Anchorage. And it's interesting to me because you're a San Francisco Fed president. So you have part of your district is wrestling with population decline and then also San Francisco itself this massively housing constrained destination for labor, right? People want to go to make their fortunes in a different kind of gold rush. But talk to us about like you know your perception of the economic challenges in a place where there's a lot of out migration where it's difficult to say keep young people around.

Mary: It's very difficult. Alaska is not unique there. You can look outside of my district at North Dakota and other places and go to these rural communities and they'll say, "We want to keep our people and it's hard to do it, right? But what is particularly true in Alaska is there's several things going on all at once. And ultimately when people decide to stay at a place or come to a place, they want an ecosystem of things that are important to their ability to thrive. They want to have work and not just work they start when they're 22, but work that they can grow into and maybe change into as they age. They want to have housing opportunities so that if they want to raise a family or if they just want to own a home, they have that. At this point, there's even trouble getting property even if you're just leasing it. So, there's those types of pressure. So, that's taking that risk. And then if you're trying to build a family, there's the schooling issues of population outflows mean that fewer schools are available. So then the equation starts to break down.

And what you know really has to happen is they have to believe that they can stay because something more prosperous will occur or that they really like the outdoors and being part of this beauty. And I think that that equation is not penciling it out like it was because ultimately if people don't have jobs or place to live or see a bright future for their career and their family then they will feel forced to go elsewhere. And I think that's where the state leadership and this the anchorage leadership and all the business leaders I meet with that's their fundamental concern. One person put it this way. How do we attract people? That's important. But how do we maintain them? How do we retain the interest in us when our economy is not doing as well as some competing economies in the lower 48?

Tracy: Well, on that note, can you talk a little bit maybe about the cost of living in Alaska? Because this is another thing that is, you know, somewhat unique. There are higher prices for just simple things like groceries, housing might be constrained in a way that you wouldn't like necessarily think about for a place as big as Alaska. But this comes up quite a lot and I'm very curious how you're thinking about inflationary pressures on Alaska specifically given that over the past few years. Inflation was a concern for all of the states, but I imagine it was an extra concern here in this particular one.

Mary: Absolutely. You start with this just the recognition that almost everything costs more in Alaska. Why? Well, you have to import a lot of the things that we take for granted, you know, whether it's health care products or things that you can use for your buildings or simple groceries and shoes and other things. Now, we import a lot of that stuff to the broader US, but the shipping cost to come all the way up to Alaska and then the distribution across the greater Alaskan region is very challenging. There's transportation costs that if you only take that alone really drive up the prices. That's already a higher price level. and then you add to it a higher inflation rate. Well, then the pain that anyone might feel in the lower 48, that's just magnified in Alaska.

You put with that the fact that in the, you know, 20 years ago, wages in Alaska used to be higher than wages in the lower 48, but that gap has shrunk over the last 20 years. And so now the wage levels are roughly the same and the prices are a lot higher and inflation is driving those up more. and things aren't getting cheaper to import into Alaska. And I think that's why people say, you know, it's just when I try to build a a property, I'm a builder and now I have to pay higher costs to ship things in. And if I get tariffs on top of that on the basic inputs, that just doesn't pencil out anymore. And that's the equation they're dealing with. It's just more expensive. It's harder. It's cold here. It's remote in many places. And all of those put challenges that ultimately raise costs.

Joe: probably like the biggest question right now in the sort of for the whole US is the degree to which tariffs will be inflationary, the degree to which they'll be passed on to consumers or absorbed by whoever. What specifically are you hearing from businesses about what they can do and the actual impact of tariffs on their operations?

Mary: Sure. I'll start with Alaska since we're here and I've been meeting with businesses since I came, but I'll go broaden it if you don't mind. So on the Alaska, we're hearing very similar things to what we hear in the lower 48. We're hearing that they want to pass it along to consumers because it's challenging to deal with, but that consumers are exhausted. You know, that's a phrase I hear a lot. Consumers are exhausted. I just don't know how much they can do. They're already trading down. If they used to go to one retailer, they're moving to the next level down, showing up in the dollar stores to try to find ways to make ends meet. Or they're just foregoing things that they might do in the past.

Those things put pressure on firms to say, "Well, if I raise my prices, I'm going to lose my sales and I have to pencil that equation out." So, I see more of them eating it in into their profits and then just hoping that they can either collectively go to Washington and get an exception for whatever they're trying to import or or use, or they can weather a one-off tariff increase and then move to a more normal set of things. You know, in construction, you're hearing things like, "Well, we we moved from steel framing to lumber framing, wood framing, because steel was tariffed, and now we're looking for alternatives that we can make here or have lower import costs."

Joe: It seems like a serious trade-off, going from steel to lumber framing.

Mary: Well, you know, what's remarkable, and this is remarkable, and I think Alaska does this in ways that are even more innovative than other places I've seen, is construction and engineers. They know how to build things and they know how to make them durable. So, you give them a set of materials. It's almost like when you do those cooking shows and they give you a box of things and they say to the people, "Make something delicious." That's what construction people and engineers are good for about. They say, "Here's my box of things. I'm going to make a house that's durable, can last the cold climate, can be built on the perafrost. I'm going to figure it out." And I don't count them out because they're very good at this. And it ultimately leads to the innovation that's needed to deal with the higher cost. The problem is it's happening all at once and it makes it really hard to innovate fast enough to offset the cost.

So I'm hearing pass through but I'm not hear seeing a lot of it. You saw this in the published data spreading it out past Alaska. Published data is coming out. Goods price inflation is going up. It's not spilling over into services inflation either in housing or in services. You know what I think of as super core services exhousing. That's good news. And the best sense from history and from what's happening right now is that there won't be much of an impetus. so far to spill over. That would get into a persistent inflation problem. You can't count it out, of course, but I don't think there's a lot of evidence that it's occurring.

Tracy: I have a bunch more tariff questions, but since you mentioned history just then, one thing I'm really curious about, is there anything we can learn about how inflation expectations work from the Alaskan experience? So, this is a state where the higher cost of living has been top of mind. When you start to see those idiosyncratic developments in terms of prices when people are talking about something like tariffs, do you see expectations for future rates of inflation ramp up faster here than perhaps elsewhere in the US?

Mary: So there's not a lot of good data on statewide inflation expectations. So we have to rely on talking with people. And when I talk with people, they worry more, but they don't there's a difference. Inflation expectations, the way you can measure it is, am I asking for a higher wage? Am I going in and saying, "I can't keep up. I need a higher wage." And we don't really see a difference here in Alaska than we do in the lower 48. We just see that when inflation gets to rising fast and the labor market's tight, then individuals say, "I'm going to go ask my firm." And the firms are more willing to give it. But now that the labor market has softened, people aren't that interested in going in and saying, "I want more money." It also is consistent with them thinking that the tariffs are a one-off.

The best way I know to think about inflation expectations and kind of gather that type of information is look at short-term inflation expectations versus medium and longer run inflation expectations. So all I can do is ask Alaskans that question and I haven't seen anything different than the published data for the nation which is short-term or rising, medium and longer run. They still believe that we can get inflation down to 2%. That suggests to me they think it's a one-off. tariffs go up, you pay for them. And it's all about managing the increased costs rather than thinking this is just another run of of inflation.

Joe: Maybe it's a process question, but you know, obviously when it comes to the dual mandate, there's a lot of good government data. Actually, we should talk about data quality, too. And um but I'm curious like what is the additional thing that you get out of these trips other I mean, it's good to have anecdotes. It's good to make face to face as their regional Fed president, but when you think about incorporating your process or how it may even affect future votes on interest rate decisions, what do these trips add to official sources of data? Yeah, sure. Absolutely.

Mary: So, the most important thing is that I learn about how the economy actually works. It's very difficult to know how tariffs will affect an economy if you don't know how it works. It's very difficult to know how inflation will affect the economy or if the housing crisis that they talk about is really larger than the housing challenges you see in other places or it's the same. And importantly, it's not just a trip to Alaska that informs that. It's a trip to variety of places that we serve and that's why regional Fed presidents are out a lot because we're trying to collect the information. That's one big reason to learn about it.

You know, when I take a tour of, you know, a port or a manufacturing plant or a drilling facility, I'm learning how those things work together so that I can better understand how the economy will perform in when they face a shock. It's not all about the price of oil. It's about how many workers do they have? What's the drilling? Where are the bits? What are you working on? Where do you get your things? So, that's piece one. Piece two is data are almost entirely backward-looking. They tell you about what happened last week, last month, last year, but you can't make policy on backward-looking data. So, it tells you where we are in level terms, but it doesn't tell you where you're going. And so, getting to talk with people and actually ask them questions like this. I ask this question all the time now. So, you feel really uncertain. I'm sure that's worrisome. Are you changing your behavior because of it? And the first question is always yes, we're very uncertain. And the second one has been we're not changing our behavior entirely. So, I'm continuing to invest, but I'm not necessarily taking on riskier projects. I want a good ROI if I'm going to keep going. So, I think that's another reason to come.

And then the third reason to come and this is really important and and I think underappreciated is the Federal Reserve Act created 12 reserve banks and a board of governors and did so if you go back and look at the original documents to recognize that you can't make policy that serves a nation if you only are in DC. But that gives us a responsibility as reserve bank presidents to represent the people who we're serving in terms of learning about them and bringing their collected information to help us make national policy. So that's what we do and when we come people feel like we are doing the work on their behalf and trust goes up and when trust goes up as I've said many times and many of my colleagues have trust is one of our most important tools because if people believe we can achieve price stability and full employment then they behave as if we can achieve price stability and full employment and that's a virtuous cycle that actually delivers it faster.

Tracy: This was going to be my next question actually and again it's kind of a process question but if your job is to represent the 12th district and the 12th district has diverse states in it and Alaska perhaps in many ways is an outlier how do you actually judge I I guess or how do you make sure that you're representing different interests perhaps different states might be at different places in the economic cycle and you're dealing with basically an interest rate that tends to be a single oneizefits-all interest rate, a pretty blunt tool in many ways. How do you balance that?

Mary: That's a great question and I'll say it this way. Representing the economies and the voices of the people doesn't mean we're transactionally balancing the interest rates hurts you, it helps you. Because we can't make national policy for any particular region, not the 12th district, not the first district, not a state. And that's just part of the constraints of our job, right? We have a dual mandate for the nation. So you're aggregating up the data. But then it's a mistake to think that if you have the aggregate statistics, you know how the economy is fairing.

There are many places where let's take tariffs and federal spending cuts and oil and gas drilling deregulation that's happening all in Alaska. So Alaska becomes the leading indicator in many ways for how this is affecting the economy. And so if I see it here, I can then expect to see it other places. in some time periods that would not be true. Alaska would not be a leading indicator. It would lag the economic performance of the country and or any economic changes. So you know your states and your economies well enough and all my colleagues know their states and economies well enough that they know where we are in the business cycle or the sequencing of things to know which states are leading, what states are following and then what states are being most impacted or less impacted so that we can make better policy.

The other way I put it together is an interesting thing about having a very diverse district is you start to learn how similar people are. You know, everybody wants the same thing. They want inflation to be at target. They want to have economy that's sustainably thriving, that's sustainably available. They want to be rationally inattentive to inflation and whether the economy is going to be pushed into a recession. They just don't want to think about it. And that's a universal truth. It doesn't matter if I'm in Alaska, Hawaii, or Nevada. doesn't matter. Idaho feels the same way as California in that goal, in that sense. And so I can go and see to that point, are people nervous? Are they optimistic? Are they cautiously optimistic? Today I see concerns, but when you really push them, and this is true across the 12th district, people are cautiously optimistic. Some cities have more cranes than others, but everybody's got a crane.

Joe: when we last had you on the podcast when you were coming through New York City and we talked a little bit about about AI and you represent the home of the most advanced AI models in the world when you're out here talking to many of these sort of old school industries do you talk to them or hear anything about tech diffusion like the implementation of these and is there anything interesting that you've picked up on that

Mary: absolutely let me start with the most interesting thing I picked up and I'll expand it to the other things I I want to give a shout out to the small businesses so small businesses are they can be remote across Alaska. It's hard for them physically to reach marketplaces that are not in their immediate area. They often have limited workforce availability in some of these places or just small businesses in general. You're dealing with rising costs and so you want to keep your portfolio of labor small and they turn to AI to do things that augment their output because they're augmenting their skills. So it's a they can save time.

They can do. You can write a marketing plan by asking one of the AI models. Here's my inputs. Can you write a marketing plan? And already you're ahead. Can you write me a pitch deck? Can you write me, can you tell me the five best marketplaces in the United States for the products I want to sell? All of this makes it better. And it's not li it's not limited to the just that kind of marketing and growth sales. It's actually also about can I do things differently. So, we were talking to a small manufacturing firm, not in Alaska, but I'm seeing hearing the same things here that said, "We're able to use AI to do first drafts of plans based on the 30-year history of all plans we've ever made to create this one small part that someone asked me to machine." So, those are the kinds of things that I'm starting to see spread.

Then if you're a larger business here in Alaska, you want to use AI just like any other company in the nation to make sure you're not falling behind and get a competitive edge, right? These things, these tools are helpful and it's not just about reading your emails faster or writing a draft of something. It's about really thinking about your core business. What can I do with AI that helps me save time and helps me augment my existing workforce when we have often a workforce shortage?

Tracy: H how are you thinking about AI generally? And one of the reasons I asked this is because one of our frequent guests, Neil Duta, was writing a guest piece in our newsletter today and he was talking about how there's pressure on the housing market. There's pressure on consumers and then you have this third big trend in the US economy, which is this massive investment boom in AI. And in some sense it feels like the AI investment boom is very very divorced from the health of the consumer and other things going on in the economy. How are you factoring that into I I guess monetary policy and how you feel about things more generally?

Mary: Well, it's very true that the AI investment boom doesn't look like the you just look at stock market braces and valuations, right? If you look at the companies that are invested in AI development, they look different than or AI support, they look different than the companies that are doing mainline manufacturing. I mean, this is a fact. But I don't see that as a competing interest. I see that as that's a structural development that's just going to keep going. And then on the other side, you have the cyclical aspects of the economy. And people do feel stressed. They've been dealing with high inflation and it's coming down, of course, which is great news, but still the price levels higher. They're dealing now with job security issues like whether maybe even if they're not it's not true that they'll lose their job or a layoff's around the corner. They're nervous and they say they're nervous and so you know you sense that I'm not sure about the future kind of component.

I don't see those two things as competing as much as we have to manage in monetary policy the cyclical dynamics and it's very good in many ways that there's something coming down the pipe that could be useful. The question I have right now is are companies deploying the technology and diffusing it at a more rapid rate that offsets some of the concerns they had about tight labor market and I am seeing a little bit of that. But mostly what I'm seeing is how are we going to go forward faster, better, cheaper? How are we going to up our game and not raise our cost? In fact, how are we going to get cost down? And AI becomes something they can try.

And you know a year ago when we talked or whenever that maybe it was only six months ago when we talked we were doing these CEO roundts as part of our emerging tech economic research network. So we do a lot of these across all business types and they were saying we're not doing it in front office operations. We're not doing in our main product lines. We're only going to do back office. Now it's moving to the front. Oh that tells you something's changing. One of the things that I asked somebody why and they said it's just a lot easier to do it than you think. And we can discipline the models ourselves. We can prevent hallucination by checking. So now they feel more comfortable.

Joe: I feel like the change in model quality in the last 6 months is really remarkable.

Mary: It isarkable and just and like many of the concerns about hallucinations, they still exist, but they seem much less of a problem today than even 6 months ago when you were playing with the most advanced models.

That being said, you said you talked about here's this potential productivity enhancer and you said I don't coming down the pike or I forget exactly the term companies are trying it. As of today, it doesn't feel like okay, we've seen some great product general economywide productivity gains. However, what we do see is um very high electricity prices, maybe data centers playing some role. There's still per the ISM continual shortages of electronic components or these very intense transformers very intense capital demands at a time when AI hasn't delivered economywide productivity gains. Could there be an element where there's like a crowding out element right now or like disproivity from all that investment that hasn't paid off yet?

Mary: You know, there's always going to be this discontinuity, put in a time economist term, but there's always going to be this discontinuity where you're waiting for the proceeds of a technology you're investing in. Those take time and the needs of that technology, especially something as power intensive as AI at a time when we're also trying to modernize the power grid because some of it just hasn't been maintained across the United States. So, we have a number of power company CEOs on our boards and councils and they're always telling us it takes so long to get a transformer because there's bottlenecks. Now, they're worrying about tariffs on transformers and are the components of transformers. Then they're competing with data center needs and companies and saying, "I'll just build my own power to support this." And so, that's just a marketplace that was developed for a much smaller footprint in power and now has to ramp up. That's going to take time.

and the proceeds from AI technology are just nent. We're just not seeing them come through in productivity. Some of the easy wins that a company might have done probably are behind us or you know you think okay do I need two copy editors or one well if I have one copy editor in AI I'm okay but those are easy wins right the real transformational type of productivity things are for things we haven't even really thought of yet you know I always use this example of thinking about the original iPhone or smartphone against the Blackberry so when it came out I'm like this is just a fancier Blackberry and then ultimately of course I was totally wrong. This was a much more trans just transformational technology because we developed things on that technology.

Tracy: I still miss the Blackberry.

Joe: Me too. Openly.

Tracy: Yeah, I used to file stories just on the Blackberry.

Joe: I could type entire epic novels on a Blackberry and I've got the thumb problem of the thumbs meet in the middle. I'm on a mini. It's not working.

Tracy: Okay. So, just going back to the vibes more generally, one thing that's already come up multiple times in this conversation is the idea that if you ask people what they think about the economy, they say like, "Oh, it's not great." If you ask them what they think about their own personal economic situations, they say they're fine. And to the point about the tariffs earlier, businesses will say, "We're very worried." But on the other hand, they don't seem to be changing their actual activity just yet. What's your thesis or your theory for why we keep getting that disconnect?

Mary: So, this is not an uncommon disconnect by the way. People have been historically and not all the time of course, but when they have concerns about the national economic progress, they will tell you in poor sentiment. And when there's a lot of transition, right, just think of the transformations we're going through. We're trying to bring down inflation, which has been tiring, trying to think about bringing manufacturing and other things back to the United States. Thinking about deploying a workforce that's domestically driven. Those are big transformations at a time when people are looking at some of their neighbors and saying, "I see Joe buying less things. He didn't get a new car this year. He always gets a new car." That's a lot of pressure.

And so, but their own personal situation, they're still be able to go to the grocery. They can buy something for their kids. they can invest in repairing their home or going on a vacation and so they feel okay and they also feel personally secure in their job but they're worried about the broader labor market and I think that's natural and my theory is that when there's so much change people get worried it doesn't matter if they think the change is even good they just get worried and they're worried that we're standing on one person put it this way I'm worried we're standing on a precipitous cliff I love the view because I'm looking out I'm fine but you know anything can happen and so I think that anything can happen piece makes them nervous which is one of the reasons another reason to come out and talk to people is when I talk to people I say here's what we're doing it and here's how we would handle something if we did look a bit tippy in the economy and that helps.

Joe: So, you just gave a speech here in Alaska right before we're recording this episode and you said something interesting in your speech. I now I'm forgetting Dr. But something about things are different but they're not that different or that in the past this is not the first time people have felt periods of change or

Tracy: or it's not the first time that central banks have had to deal with oh that's right that's what it was that basically yes things are very uncertain but this is the story of central banking

Mary: it is indeed the story of central banking if you were going to write a novel or do a whole another podcast on central banking

Joe: like there's never been a time where it's like oh we know what's going on we've got this we know what the future looks like

Mary: exactly I mean just let's think of my time at the Fed so far. So we had 9/11 that was pretty uncomfortably uncertain and traumatic at the same time. Then we had the global financial crisis that is a tremendous period of uncertainty that lasted a number of years. Then there was the pandemic that was not a very certain or clear time in our our history and so now we have uncertainty but it is not something that we are unpracticed at. So I think that's why the important point to reassure people on is we don't wait for clarity before we act because if we did wait for clarity before we act we would be constantly behind.

Tracy: One thing that does seem to be new, at least in my lifetime, possibly not if you were alive in the 1970s, but political pressure on the Fed, and we've certainly seen some instances of that coming from President Trump who has not been shy about saying what he would like to see in terms of interest rates. How are you dealing with that?

Mary: You know, we do have many periods in our history where there's been pressure to move the interest rate because of course that would be part of the way the president or the administration or Congress would like to see the Fed go. But that's why the Fed is independent because ultimately Congress gave us the monetary policy responsibilities so that we could make decisions that go past any particular administration that are independent of political activities or political plans. So those are good things about the Fed.

and ultimately if you take a job at the Federal Reserve and especially if you're in leadership of the Federal Reserve, Federal Reserve bank president or governor, you have to almost like tap a stone when you take the job. It's part of the part of your oath basically that you're going to make monetary policy that serves all Americans and in a way that is not influenced by political leanings one way or another. So, I make the same decisions using the same information, using the same models and sources. Of course, the models and sources change depending on the kind of condition we're in in the economy, but the process, we talked about process a moment ago, the process remains the same. Be curious, figure out as much as you possibly can. Always learn. Then take a decision that you think is right, that we collectively think is right for the nation and the outlook. and then it have enough humility that you can ask the question did we make the right decision and what more do we need to learn to make a better one and I think that always works and that's that's immune to political pressure because ultimately I get up every day knowing that my work serves Americans that's who I work for and that's what we do.

Joe: you made this point about how like if you know if you wait for the clear evidence it may be too late especially with the respect to the labor market once it slips history says it tends to fall. Last week it was the Fed meeting where there was no rate move and then Friday we got a jobs report that was not only disappointing, significant revisions and revisions are a common thing but um and Tracy's been writing a lot about this and we've done some episodes response rates to public surveys have gone down. There are concerns about whether you know we need a fresh jolt of investment but these are the main instruments right that you are looking at when you're piloting the plan etc. Is this making it harder? Like, do you have concerns about that the quality of your visibility into the data is suboptimal right now?

Mary: You know, I'm going to put it slightly differently than main instruments. I think they're key instruments, but we've been broadening our portfolio of instruments for monitoring for really since the GFC, since the global financial crisis because what you learn in the global financial crisis is you're not going to get enough information just looking at these main series to really know what's going on. Then we had to do that of course in the pandemic and we got all these real time series we were using open table data traffic how many people were going out or is it is it transit traffic etc.

So what I would offer is this there's two things that I think about we are revered have been revered across the globe for our data collection and our data continuity and our data integrity. Those three things are important to any nation that's trying to follow things and not just the Federal Reserve, but to policy makers across the board, including states and localities, to businesses who need to know what does the economy look like so they can put it into their sales projections. And so making sure that we're investing enough in those that information, making sure we know how important it is, I think is an essential goal.

On the other side, I'm not simply relying on those pieces of information. And importantly, since we're in a turning point right now, kind of a by a transition point, it feels like a turning point where the economy is slowing, inflation's coming down because of restrictive interest rates, and we're we're trying to achieve that soft landing that the data are always volatile. They're volatile on any turning point, whether we're turning from a downturn into an expansion, you miss the job growth. when you come down, you tend to miss the job loss or the net losses. So, that's something I'm always I'm familiar with at this point. I've been doing this for a while. I know that's going to happen. The magnitude of the changes is pretty severe on Friday from the week before. Is that survey response? Is that seasonal adjustments because things are different or is that something else going on? I trust the BLS will unpack that and give us some answer about that.

But you know ultimately on the response rates you know I say that when I ask people would you respond to a public survey they've lost a little confidence in public institutions maybe a lot of confidence in public institutions and so the real call to action here for me is it is part you know the Federal Reserve is not all public institutions but we should do our part to demonstrate to people and to talk to people go to the critics and say what is it that you're not trusting and then tell our story. Maybe they have things that they're going to bring that we should listen to and basically lean into this idea that we do this work for them and that we want them to trust that we're doing it for them.

Tracy: Can you talk a little bit more about the alternative data sources that are available to you? Because I hear this a lot, this idea that okay, well, payroll seems to have a revision problem at the moment. Maybe there are other indicators we could look at. Or if a larger chunk of CPI prices are being imputed or estimated than they were previously, maybe there's something else we can look at. What exactly are these data sources? Like what is most valuable to you right now?

Mary: So there's privately collected data. We talked about foot traffic and things, but there's the ADP employment data. You can think about that. There's the prices project. You can look at those data. Importantly though, I think it's not just getting other sources of data. It's learning. So say that a lot of the CPI prices are imputed. Then we need to bring our best statistical minds to think about if I take the ones that aren't imputed and I look at how correlated they are with underlying inflation over time, what do I learn? Are they a good signal?

Tracy: Is there a messaging challenge here though? If I think people are very used to at this point the idea of the Fed sees the non-farm payrolls number, the Fed sees CFPI obviously isn't your preferred inflation measure, but PCE or whatever. If you're looking at other things or maybe if you're at turning points in the economy and so other indicators become more important at that particular amount of time, how do you communicate how you're factoring in that data into your monetary policy decisions? Because not everyone is going to be looking at the same things as you.

Mary: We talk about what we do and part of talking about what we do is to say we have history and models that tell us a little bit about how the economy works. We have the incoming information and we have all the periods of time when the information has been volatile and we can understand the underlying trends and then we have the people we talk to and what was interesting about the jobs report on Friday is it better matched in the direction of change not in the magnitude it better match what I've been hearing and so a disciplining device for data that you don't know if they're really accurate is what you hear from people because people do not tell you I feel really really comfortable getting a job only to find out that the job market report is bad. What they will tell you is, boy, it looks really worrisome out there and then you get a jobs report that doesn't look like the rapid job growth.

That was the thing that was out of whack. The rapid job growth from the month before is what I said, well really that's not what I'm hearing. What's the gap? And we spent a lot of time digging in and unpacking that. But then when the jobs market report got revised, I was like, okay, that makes more sense. Even if the direction I mean even if the magnitude is vastly different than anything I I probably think we'll go forward I think the direction of change is accurate.

Joe: Okay. So there's this slowing and as you indicated some number who knows rate cuts are probably coming in the future. Obviously there businesses when you read them in the ISM surveys I was like we need rate relief. There are uh people who want to buy a house we want rate relief. President Trump obviously maybe in part due to interest payments on the debt wants to see lower rates. That being said, even as the markets priced in some cuts in the near-term future, there's been the s significant steepening of the yield curve. Long-end rates haven't come down that much. So, it's not obvious to me that even if you delivered cuts that all these homeowners or businesses or the president would get the type of rate relief that they actually want. I'm curious like what would it take to in your view to get meaningful change at the long end of the curve which is where a lot of where there's a lot of sensitivity.

Mary: I love that question because I think it's hard to remind people on a regular basis that we are not the only game in town at the Federal Reserve. We don't control we're not yield curve targeters. So we're not controlling all the things that would move the yield curve. What moves the long end of the yield curve is of course Fed policy inflation expectations. those have been well anchored. So I don't think that's driving them. Geopolitical risks, how our how we're viewed as a trading country or a reserve currency, what our debt looks like going forward in projections and how we think we're going to manage all of that together. Right?

So right now it looks like the markets are just reacting to all of the risk. We have rising debt. We have geopolitical risk. We're not sure how our trading partners like us right now. And then all of this could be burdensome and mostly could push up the real rate of interest over time, right? The natural rate of interest or the neutral rate of interest. And so you're seeing that and ultimately the Fed can adjust policy in the short end in a way that's meant to balance the goals, but we can't control all the aspects of the yield curve.

Joe: I know because I I've heard Chairman Powell and others say a million times, we don't comment on fiscal policy. That's not our business. Nonetheless, I'm gonna

Mary: You're right. Yeah, I know. I know.

Joe: But when you look when you describe those various factors that push the long end up or keep it elevated, could it be that it will be hard to get those back down to more desirable levels without some more substantial fiscal consolidation?

Mary: Well, let me say this. we were having these conversations about the rising neutral rate of interest before the election, before the administration changed. And so I think we should look to what are the fundamental factors in our economy that are changing the neutral rate of interest not just in the US but in the globe right the interest rates are not set nationally I mean we've set interest rates nationally but glo interest rates are global if you remember prior to the pandemic interest rates and after the GFC interest rates the real rate of interest was just falling inflation was below most count's targets and it was this sluggish growth inflation expectations are falling. How are we going to manage this stagnation that's going to come from this secular stagnation?

Then we of course inflation rises in almost every country. And we're talking about the real interest rate going up, not down. And so we're looking at a place where it settles now at the neutral rate in nominal terms setting settling around three or higher, not at 2.5. So that's a pretty big increase in the in the rate of interest, the neutral rate of interest. And frankly, the direction seems to be pushing it up, not pulling it down. And I think that's where I try to explain to people the most is that interest rate cuts, if you think we're going back to preandemic levels of interest rates that were considered neutral. I don't think that's likely to happen. And that's commercial real estate. Folks are really attuned to this. And they knew that a year and a half ago. Markets are knew that a year ago. But I think we're still working on businesses and consumers to recognize those were not those are not days we're likely to return to at least in in the near term.

Tracy: Since Joe asked you a wealth effect from stocks question, I'm going to ask a very similar question in relation to crypto because this is actually something that has changed quite a bit since we last spoke to you. I mean crypto prices are still going up. The industry seems to be expanding. The administration is clearly very very crypto friendly. Are we at the point where crypto perhaps matters from monetary policy either from a sentiment perspective that wealth effect perspective or from a financial stability perspective which of course you know as San Francisco Fed president that's under your mandate as well.

Mary: So the way I think about crypto and the conversations about stable coins and other things. So let's separate crypto from stable coins for an we put in a big umbrella and people think it's the same but it's actually very different. And so a stable coin is another way to fund yourself. So you can do you can trade, right? It's I can do a crossber transaction. I don't have to wait. I don't have to do currency changes. And so those things are just about a technology or an innovation that smooths out the exchange particularly across borders. The crypto is an asset. This is just it's a digital asset. So you can invest in it and it can grow but it can also decline. And I think there's appetite for other kinds of assets to invest in. you don't have to invest in a mainline blue chip company. You can invest in this and you can get some gains. So the question for me is always how do we incorporate that maybe it's enthusiasm and also that risk into our assessment of how loose or tight are financial conditions and how vulnerable is the economy to financial stability concerns. So you're right to ask, you know, is it big enough now that we would look at it? I think it is big enough we would look at it. It's not that it's big today. So, it's material. It's that it's big and growing. It's getting bigger every time. So,

Tracy: the direction of travel

Mary: the direction of travel. I feel a little bit like back in the '9s, you could see people doing some well maybe really the 2000s after the dotcoms you saw people doing internet purchases and we would collect retail statistics on how many things were bought on the internet and people would regularly say that's not big enough. Don't worry about it. But you know you you have to look ahead right it might not be big enough today but you don't have time to practice and develop metrics and practice your evaluations and learn from that if you wait till it's giant so I think absolutely we have to think about it right now and assess it as part of what we do and the good news is we are assessing it and I don't see special particular risks to this and I think Congress is doing what Congress is supposed to do looking over the parameters and saying what's a a stable coin process that can work how do we ring fence these types of things. That's what you want. But that doesn't have those powers. We're implementing our um policy that in the economy we have and our elected officials are deciding the parameters of those exchanges.

Joe: I think I actually just have one more question and it's very sort of straight down the middle macro, but you know there's this obvious you know slowing in some areas etc. You've described the state of the interest rate setting as still in restrictive territory, at least modestly restrictive. Yet inflation is still durably above target, not massively the way it was a couple of years ago. Why is that?

Mary: Takes time. Once inflation gets up, it takes time to bring it down. And you know, the reason you would adjust policy before you totally get there, let's put tariffs aside for a minute and let's just think about the regular dynamics of the economy. If you wait to see the whites of the eyes of 2% inflation, you will be too late. Because policy tightness today is not just a reflection of where interest rates are today. It's a reflection of where interest rates have been over the last 12 to 18 months. And they've been modestly restrictive. So, they're gradually slowing the economy and gradually bringing inflation down.

And the thing we had been waiting for, at least I'd been waiting for for a long time, was for this to start showing through to the housing sector. And it has been in the last several months. And so that's a really big and important sector that has to have inflation come down for us to achieve our 2% goal. So if you started extrapolating services inflation excluding housing is coming down, housing's coming down, the goods sector without the tariffs was coming down and so you get all of those things and that's pushing you to 2%. We have to adjust policy before we get there because remember anything we do if we left it exactly where it is has another effect for another 12 to 18 months. Who knows what exactly the lags of monetary policy are? The only thing people can agree with is it has a lag.

Tracy: Just in terms of the importance of speed here, if you got confirmation of significant weakening in the labor market, could a 50 basis point cut be on the table?

Mary: You know, in in central banking, and this is true at the Fed, but I think other central banks as well, you never want to rule out a tool simply because we haven't used it before. And we did use our tools in an an aggressive way. But one shouldn't take that to mean I think that's the likely outcome. But I do think we should think of all of our tools and all of our meetings as being available to us at all times because the job isn't pick a tool that's exactly the one that everybody expects you to use. The job is restore price stability and do it without tripping up the labor market and leaving people with lower inflation but no jobs.

Joe: I actually have one one last question. This happens a lot. Well, but uh the dollar, you know, you look at a lot of charts since April 2nd and there's been a it they bottom, but then they jump back up. We haven't seen that with the dollar. And I'm curious, you know, people are concerned about political continuity and stability and institutional stability in the United States. And the attacks on the Fed are real even if the fact that it doesn't change how you do your dayto-day job and dollar weakness could itself be inflationary because we do have an import bill, etc. I'm just sort of curious like how you think about the sort of I guess maybe medium-term when you're thinking about okay you have to hit your mandate these things that are really outside of your control

Mary: completely outside of our control

Joe: completely your control but like how do you think about them in terms of hitting your mandate at a time when yeah there are these sort of like factors that affect macro that seem outside your control.

Mary: Well, you know, if you take the just take the idea that we import things. If the cost of those imports goes up either because the dollar is weaker. We don't make dollar policy. Just want to say that we take the dollar is outside of our world. It's just another input to our equation. But if you have a weaker dollar and you're paying then more to import things or you have tariffs, so you're paying more to import things, well then that's just going to raise the rate of inflation. It's put upward pressure on inflation. So then the Fed has to think, okay, what are the things creating upward pressure on inflation and what are the things creating downward pressure on inflation and how do we navigate that to get to 2% inflation. That's the job regardless of whether you always have things that are pushing inflation up and pulling inflation down. Our job is to net those things and say what's left and whatever's left we use the interest rate to achieve.

Tracy: I'm sorry I have one I have one last question.

Mary: I knew this was going to happen. I I at some point chairman Paul is going to be replaced. I don't know if the president will try to fire him, but it his term will expire and a new nominee will come up. From the perspective of a regional Fed president, what is an important quality of the chairman in terms of like being successful and working with the rest of the FOMC?

Mary: You know, I think you could be a regional Fed president. You could be anyone who works at the Federal Reserve in the Federal Reserve system. You could simply be a citizen of the United States. So, someone who cares deeply about how the country goes. And the the requirements are always the same. You put other people first above your own self. You think about decisions that serve the American people. And you do that without flinching. If the criticism comes, as long as you're doing and you're using your committee and you're getting to a judgment that you think is best for the American people, that's an important quality.

And the other important quality is to listen. The diversity of the inputs we get from all types of people, businesses, communities, markets, that's important. The disagreements or differences of lens that people put on things and say, "Well, I don't see the world like that." Any leader, no matter what they're leading, has to be able to listen to be successful. That's my personal belief. You have to listen. You have to know what you know, you put your best ideas out there. You have to be willing to listen to criticisms or support. And then you have to turn around and ask people, let's use this disagreement to our advantage as opposed to using it as a way to to divide. And I think that's historically what have made the most successful Fed chairs. But honestly, it makes a successful committee member. We all have to go in with the idea that this is not about us. This is about the people we serve. We know who those are, the American people.

Joe: Joe, we should run for Fed chairs. All we do is listen.

Tracy: That's basically it.

Mary: But then you But then you do have to decide.

Tracy: All right, we're we're not that good at that. All right, Mary Dailyaly, thank you so much for coming back on Odd Offs.

Mary: My complete pleasure and I'm so glad we did it in Alaska.