San Francisco Fed President: ‘The labor market’s in a state of flux’

San Francisco Federal Reserve Bank President Mary Daly joins Yahoo Finance’s Brian Cheung to discuss labor market recovery, outlook on inflation, and financial stability risks.

Video Transcript


BRIAN CHEUNG: Welcome back to "Yahoo Finance Live." I'm Brian Cheung. The Federal Reserve made the announcement about two weeks ago that it was going to be patient with its monetary policy, keeping interest rates near zero, and also $120 billion a month pace of asset purchases. And here to discuss that a little bit more in detail is the Federal Reserve Bank of San Francisco President Mary Daly in an exclusive here on Yahoo Finance.


And President Daly, I wanted to kick off this conversation with just that jobs report covering the month of April that everyone was watching. It feels like it really missed expectations across the board. From your perspective, what were your expectations for April? And what do you think led to that surprise last Friday?

MARY DALY: So first, Brian, welcome-- thanks for having me on. So the-- the jobs report was disappointing for those who expect to just be able to extrapolate the momentum that we've seen percolating up into what's going to happen in the future. But this kind of volatility is very normal in turning points. We've seen it in every other recession and expansion that I've been through.

The difference now is that the size of the volatility, of course, is much larger, much bigger, because we went through such a massive shock with COVID. So for me, I wasn't as disappointed as many. What I see is things that we know. Let's start with what we know.

More than 8 million people who had jobs prior to the pandemic don't have jobs today. So that's a deep hole we have to dig out. And of course, we're adding new graduates right about now to the labor market, so we also have to absorb those individuals, make sure they have opportunities.

I also see a labor market that has disproportionately affected women over many others, as they're at home schooling and trying to do caretaking and manage job opportunities. So we're in a transition state. I see some momentum building. I'm very encouraged. I remain bullish about the future. But we're not there yet, and we're going to have fits and starts, and we have to stay steady in the boat.

BRIAN CHEUNG: So President Daly, you mentioned you weren't as disappointed as maybe others were, but could you explain maybe what did you glean from that jobs report that tells us a little bit more about the unique dynamics of this labor shortage? There's been some rigorous debate about the impact of unemployment insurance, whether or not that's holding people back from wanting to rejoin the workforce. Do you think that's an element from what we saw on Friday?

MARY DALY: Well, I think we shouldn't call it a shortage. We have more than 8 million people who remain on the sidelines. What we have is bottlenecks, just the normal disruptions. Remember, we were completely out of the economy, and now we're re-entering. And we're seeing these kinds of difficulties, these bottlenecks everywhere.

We're seeing them in-- I was at a restaurant the other night and they ran out of lettuce. I asked, what happened? Why did you run out of lettuce? Lettuce is an important part of your production. And they said that they didn't know how many people were going to show up. And then the suppliers don't know how many people are going to show up. So it's just starting out.

That same logic can be applied to shipping, can be applied to lumber, can, of course, be applied to people. The labor market is in a state of flux, and there are many constraints that are also there, including we not fully back to school, people aren't fully vaccinated, there's still health risks. And most employers can't guarantee you work that won't be interrupted for any period of time because we're not through COVID. So this is just a transition point. I would hesitate to call things shortages, and instead think of them as bottlenecks.

BRIAN CHEUNG: So you mentioned a shortage on lettuce. I hadn't heard that one. I've heard about chicken wings and other issues, but I haven't heard about lettuce. I wanted to ask about how that impacts maybe the inflationary dynamics? We heard about other supply chain issues at hand that might be incentivizing producers to raise their prices.

So how do you figure out what's transitory, as the Federal Reserve has described some pressures, there's some measuring differences, for example, as you measure year-over-year, but how do you parse out what's transitory from what might be more secular demand-pull types of inflation that could be more of a concern from the Fed's perspective?

MARY DALY: Sure, absolutely. And that's a fantastic question. So there is no special science to this, but here's some starting points. The first thing you noted already is you take out the base effects. We had a low price-- low prices at the depth of COVID. When prices return to normal levels, we're going to get a pickup in inflation. So that's going to contribute.

Then, of course, are these bottlenecks we just talked about. And bottlenecks cause spot prices to rise. So spot prices for shipping are a really good example. If you have a long-term contract for shipping, you're great. If you have to pay the spot price for shipping, you're going to pay a little bit more. But those will relax as the supply constraints relax and things get back into balance.

So that will cause inflation to pop in the next several months, probably through the end of the year, even achieving levels above 2%. But that's going to be transitory, in our judgment, in my judgment. And it'll come back down to the underlying rate of inflation, which I think of is about 1.8 going forward. And we're going to continue to dig through the slack that we have, continue to get people back to work. And then and only then will we be able to achieve our 2% on average inflation target.

BRIAN CHEUNG: So all of those things together, when does the Fed start to think about thinking about tapering its asset purchases? Right now it's pacing at about $120 billion a month in US treasuries and agency mortgage-backed securities. When is the time, from your perspective, to start having those conversations? Is it now?

MARY DALY: Not yet. When you get a jobs report like you did and you see the volatility that we've had, you say, OK, we're on a good path, but we're a long way from home. And when you're a long way from home, it's not yet time to start thinking about thinking about talking about relaxing the accommodation that we've given. We need a bridge that gets us through the pandemic.

We still have COVID with this. We're not done yet. We have to get through the pandemic and then be well-positioned to grow the economy, bringing those 8 million-plus workers back into the labor market, back into their communities with productive jobs and mobility and delivering on the promise of the dual mandate-- full employment, price stability.

BRIAN CHEUNG: Now in the meantime, there's been some concern from Fed critics about the impact of all of this accommodation and whether or not things that we're seeing when those headlines about Dogecoin or Archegos are being fueled by easy money policy. So from the Fed's perspective, where are you seeing financial stability? There was a report that the Fed released last week saying that hedge funds could be a blind spot when it comes to leverage in the system. Where do you think we are with-- about a year in to this aggressive monetary policy?

MARY DALY: Let me tell you how I see it. So I see it as we're always watching every aspect of the financial system. After the financial crisis, we start-- we study everything, quantitative and qualitatively, talking to contacts. And what I see is valuations in the stock market that are pretty high, hedge funds and prime money market funds that have embedded risks into them that we have to think about.

But that's not just a reflection of policy. The policy is necessary to ensure that we get the economy back up to speed. But we have to-- do have to rethink what our financial system looks like going forward so that we can be resilient against shocks of all types, including the type-- and also in a low interest rate environment be resilient to needing to have interest rates low to bring millions of Americans back to work without concerning ourselves that this is causing financial instability.

So these are the problems ahead for multiple agencies, not just the Federal Reserve. And right now our commitment, my commitment is to ensuring that we get those individuals who lost their jobs, through no fault of their own, back to work, we get inflation up to our 2% on average target, and we fulfill our responsibilities that Congress gave us.

BRIAN CHEUNG: Now with regards to the financial system, it seems like markets have been kind of confused about some of the warnings regarding maybe higher interest rates. And we did hear from Treasury Secretary Janet Yellen last week where she said-- I want to be careful about the wording here, but she said higher interest rates may have to rise somewhat to make sure that our economy doesn't overheat. What was your interpretation of those remarks?

MARY DALY: Well, I can't speak for the treasury secretary, so I will not. But here's what you know if you're trained as an economist, that as the economy builds up and we get to full employment and price stability, then we have to raise the interest rate, at some point, normalize so that we can get back to the steady state economy that's in a good place. My reading of what Treasury Secretary Yellen said was just that.

And what that-- what it doesn't give you are prescription for what to do now with policy. Right now we still have COVID. We haven't been fully vaccinated. We need to make sure that the momentum in the economy is-- is continuing. The bridge that the fiscal agents put forth is-- is there, and I feel really reassured by that.

We will find out at some point when the economy is fully ready to go on off of life support, if you will, and on to fully on its own. But then that will be some time before it achieves full employment. So I think we're a long way from normalization. And I think of us all just knowing what the models look like, eventually we will normalize, and that will be a good day.

BRIAN CHEUNG: Now I want to go back to the idea of maximum employment, because regular people that were watching us may not have understood that last question, but they'll probably understand this question, which is you've described the Federal Reserve's approach to maximum employment now as experience-- experientially trying to find it. So that implies that it's more than just the headline unemployment rate. We know that the Federal Reserve is paying attention to inequality by race, by gender, by a number of other factors. So what are you looking for in terms of this job market's recovery to make sure we are getting close to maximum employment?

MARY DALY: So what I look for is sort of a preponderance of evidence across the labor market. I have a labor market dashboard, if you will, and it grows in its complexity every-- every cycle, because we have more information, we-- we know more. But things that would be on that, the unemployment rate, the wage-- the level of-- rate of wage growth, the rate of hiring, the quit rate, workers quit jobs when they feel secure they can find another one. So if the quit rate is low, you know that the labor market isn't quite as strong as you think.

I look at it by industry. Right now if you looked at the tech sector, you'd say we were in a booming economy. But if you look at the hospitality sector, you know that that's not true. So you have to look at these sectoral decompositions. You can't be satisfied with any one number.

What a broad based and inclusive goal means is that we're really here to achieve what we say for every American, everyone who wants a job can get one. We've created the conditions for that to happen. That's what the interest rate policy is about, all the while ensuring that we have price stability. And so no one measure will do the trick.

You need all of them. And in the end, you know, we need to keep studying. We're a data-dependent Fed. So being experientially waiting to find it doesn't mean we're waiting to find one number. It means we'll-- we'll be very aware, as will all your listeners, when we get there, when we see that everyone we meet has a job if they want one and everybody has an opportunity in our economy to fully participate.

BRIAN CHEUNG: And then I wanted to ask about climate change. The San Francisco Fed's been doing a lot of research. It hosted a conference. And we've heard from other parts of the Fed system, as well, that there's interest in maybe even incorporating some sort of paying mind to climate change in the regulatory framework.

But there's been some criticism from Capitol Hill, the likes of Senator Pat Toomey, who have criticized this as maybe mission creep on the part of the Fed. What do you have to say to those critics? And why is the Fed kind of moving forward on a lot of this type of research?

MARY DALY: Let me start by saying that we welcome this kind of debate. I mean, this is what really is part of a good system of our democracy is that people raise their hand and say, well, I don't quite see that or I disagree with that, and then we come out and have discussions. So I welcome the discussions. I think this is healthy.

The-- the important part for your listeners to know is we are not climate scientists. We do not study climate change. What we look at is the risk that severe weather events create for the economy, the payment system, which is in our core missions, and the financial system.

And we think about, how are those things going to affect the world today, but also the world 5 and 10 years from now? Because ultimately, we have to be a forward-looking Federal Reserve. We have to do our work so that we understand the risks around us so that we can fully achieve the mandates we've been given by Congress. And that's why we work on these topics.

BRIAN CHEUNG: All right, well, Federal Reserve Bank President of-- sorry-- Federal Reserve Bank of San Francisco President Mary Daly, thank you so much for joining us here on Yahoo Finance today. And the Fed speak will continue. I want to remind our viewers that we will have Cleveland Fed President Loretta Mester in an exclusive interview here on Yahoo Finance. It's not going to be long from now, tomorrow at 10:00 AM.