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Mary Daly And Alex Mehran Sr
Mary Daly and Alex Mehran Sr discuss economics and monetary policy.

San Ramon, CA, January 15, 2020

Bishop Ranch Interview of Mary Daly, 13th President and Chief Executive Officer of the Federal Reserve Bank of San Francisco.

Interviewer: Alex Mehran, Sr, Chairman of the Board for Sunset Development and former Chair of the Federal Reserve Bank of San Francisco.

The Federal Reserve Bank of San Francisco is one of 12 districts and the largest in the United States by GDP, geography and population size. The Bank covers the 9 western states and is designated by the 12th letter in the alphabet, the letter “L,” on currency. The San Francisco Federal Reserve Bank has been incredibly influential on U.S. monetary policy as of late. Daly’s predecessor, John Williams, is the Chief Executive Officer of the Federal Reserve Bank of New York and Vice Chairman of the Federal Open Market Committee. His predecessor was Janet Yellen, who was Chair of the Federal Reserve from 2014 – 2018.

The Federal Reserve has three major responsibilities:

  1. Regulate the banks.
  2. Set interest rates and monetary policy.
  3. Manage the “plumbing” for the $1.7 trillion in cash in our monetary system.

Mary Daly came up through the research department of the Federal Reserve. She was born in Baldwin, MO to a family that, “lived close to the edge (of poverty) and we fell through. I dropped out of (high) school to help the family.” Daly credited a boss and mentor that encouraged her to get her GED and not give up on education. She went on earn a PhD at the University of Syracuse where her research focused on workforce dynamics.

Daly also credited Janet Yellen as a mentor and cited her “undying optimism meshed with practicality and hard work.”

Mehran: Why has the Fed been so off on inflation?

Daly: Wage growth has been very flat and only now growing. We see wage growth of 3-3.5% and hitting a target inflation rate of 2% in 2021 with the current monetary policy in place.

Mehran: We are growing jobs beyond (the labor market’s) capacity to fill them…where does the labor force come from?

Daly: People are coming back into the labor force off of the sidelines. Women in the age group 35-45 are the fastest growing segment of people that have been out of work for a long time and are now returning to work. They are willing to come back to work and employers are willing to take a chance.

The labor force participation rate is roughly 65% (Daly acknowledged that she was not sure what the exact rate was from memory). Note: The actual rate published by the Bureau of Labor Statistics in December, 2019 was 63.2%. There has been improvement, but we are down from historical highs. The boomers are retiring so being flat is good. (U.S. participation rate) is still lower than other industrialized countries. So, why are we behind? Men with lower skills just do not have the same opportunities anymore. Other countries have better educational attainment rates. Also, the women’s labor participation rate is much lower than say Canada where they have better policies for childcare, parental leave and alternative work schedules.

I often get asked if we (The Federal Reserve) are missing job creation due to the gig economy? The gig economy is a very small fraction of our economy and we still capture that impact in our numbers.

We also get asked if we are missing productivity being created by companies like Facebook? Facebook is mostly used for consumption and does not generate productivity gains. We are not missing the data. There is also no evidence that we are missing inflation that is really there.

Mehran asked about the repo market and the recent liquidity crisis addressed by the Federal Reserve Bank of New York…

Daly: Before the financial crisis, we ran a “scarce” model and that worked for decades. We grew the balance sheet as were coming out of the crisis and shifted to an “ample reserves” regime. When you choose the ample methodology, you have to estimate where to maintain your balance sheet to keep the minimum level of reserves needed. In September (2019) we went past the estimate in the reserves. The repo funds rate spiked out of range. The NY Fed immediately put liquidity into the market and the FOMC is taking reserves back up to a pre-September range.

Mehran: The Fed has put $80B into the market in the last few months… why isn’t this QE4?

Daly: This (cash infusion) was about plumbing and not monetary easing. We are not going past our ample regime numbers.

Mehran: Was the recent inverted yield curve a warning sign?

Daly: Prior to almost every recession you get an inversion. There is a correlation, but it is not causal. There is a much stronger correlation in the U.S. than the rest of the world. It is very dangerous to say that this time is different. Why could it be different this time? Historically, the inversions have happened because the Fed is slow to act and then moves rapidly to catch up. That is not the case this time. Long-term yields are lower because the expectation of long-term returns are low which is flattening the long-term curve. R-star (what economists call the natural rate of interest) is 0.5% and it might be even lower long-term. Temporary inversions could be a more regular event due to the flattened back-end of the curve. Also, these inversions have not been dramatic. They have been very small.

You have to keep in mind that policies always have positives and negatives. When you change the equation there is a redistribution. For example, with the parental leave policy in Canada it becomes more flexible to be a working parent by removing some rigidity. However, some employers might decide not to hire as many parents or potential parents.

Mehran: The economy is showing signs of strength, yet income and wealth inequality continue to exist. Can monetary policy play a role?

Daly: (Federal Reserve) Chairman Powell has acknowledged the problem of inequality and you can see our discussion at our last Federal Reserve meeting in our minutes. Who benefits from a hot economy? Low wage workers tend to benefit the most. We have let the economy go past full employment. We have heard that it has been helpful to formerly marginalized workers.

Note: Daly also commented that “Education is a great hurdle for growth.”

Disclaimer: Based on notes taken during the event. I have made my best effort to capture the exact quotes from the event, but any errors or omissions are certainly mine. Ms. Daly emphasized at the outset of the interview that all opinions shared were her own and not those of the Federal Reserve.
Marty McMahon, Managing Director at FlemingMartin, LLC