San Francisco Fed Pres. Mary Daly: Without tariffs, Fed would be considering rate normalization

Key Concepts:

• Inflation vs. Employment Mandate
• Tariffs and their impact on inflation
• Normalization of interest rates
• Impact of immigration policy on labor
• AI and its effect on employment
• Monetary policy and economic outlook

Inflation vs. Employment Mandate:

• Mary Daly believes that currently, inflation is coming down and the labor market remains solid, indicating a good balance.
• She emphasizes the importance of monitoring both inflation and employment data to ensure the economy remains in a good place.
• Daly notes that concerns about tariffs pushing up inflation have lessened as firms find ways to mitigate the impact on consumers.

Tariffs and their Impact on Inflation:

• Daly acknowledges concerns that tariffs could increase inflation but notes that the announced tariff rates are coming down.
• Firms are finding ways to mitigate the impact of tariffs on consumers.
• She emphasizes the need to watch for the impact of tariffs on inflation but believes the concerns are not as significant as initially anticipated.

May Inflation Data Analysis:

• The May inflation data confirmed a pattern of inflation continuing to come down in the services and housing sectors.
• This is considered good news for both the inflation mandate and American families.
• Daly notes that the fundamentals of the economy are good, absent the potential impact of tariffs.
• She suggests that without the tariffs, the Fed might consider normalizing interest rates with a slowing labor market and gradually decreasing inflation.

Potential Scenarios and Future Outlook:

• Daly outlines three possible scenarios: a delayed effect causing a meaningful increase in inflation, a one-time inflation event, or a less impactful effect on inflation than models predict.
• She emphasizes the need to collect more information to determine which scenario is unfolding.
• Daly mentions that Reserve Bank presidents are constantly engaging with CEOs to gather insights.
• She notes cautious optimism from CEOs regarding the tariffs they will eventually pay and what they can avoid passing on to consumers.

Timing of Potential Rate Cut:

• Daly suggests that a July rate cut is not likely, as more information is needed.
• She indicates that the fall would be a more appropriate time to consider a rate cut, as more information will be available by then.
• Unless there is a meaningful and persistent faltering in the labor market, Daly believes the fall is a more suitable timeframe.

Impact of Immigration Policy on Labor:

• Daly reports that there hasn't been a significant impact on wages due to immigration policy.
• Wage growth is aligning with long-run values of inflation and productivity growth.
• There are isolated reports of disruptions in labor availability, particularly in sectors like hotels and entertainment venues.
• Job growth is slowing, which mitigates potential mismatches in the labor market.
• Firms are finding it easier to find workers compared to the previous year.

AI and its Effect on Employment:

• Daly mentions that the Fed is studying the impact of AI through regular roundtables with CEOs.
• CEOs report that AI is being used to augment their payrolls rather than reduce them.
• AI is being implemented to handle less productive activities, allowing workers to focus on more productive tasks.
• Daly notes that there haven't been reports of job losses due to AI.
• She reminds that historically, technology has not reduced net employment overall.

Tariffs as Taxes and Monetary Policy:

• Daly emphasizes the importance of considering theory, history, and real-world experiences when evaluating the impact of tariffs.
• She acknowledges the possibility that tariffs could be a one-time event with firms finding workarounds, leading to no persistent inflation growth.
• However, she believes it's premature to make that assumption and prefers to balance the goals of bringing inflation down to 2% and maintaining a strong labor market.

Assessment of Current Policy Stance:

• Daly affirms that policy is currently in a good place, even with labor market considerations.
• She notes that the labor market is at a point where additional softening could easily turn into weakening.
• Daly emphasizes the importance of not allowing the labor market to weaken while waiting for inflation to rise.
• She cautions against central banks fighting the last war (missing on inflation by deeming it transitory).

Synthesis/Conclusion:

Mary Daly's perspective is cautiously optimistic, emphasizing the need for data-driven decisions. While acknowledging potential risks from tariffs and other policies, she highlights the current balance between inflation and employment. She advocates for patience in adjusting interest rates, preferring to wait for more information in the fall. Daly also underscores the importance of understanding the real-world impact of policies by engaging with businesses and monitoring economic indicators closely. Her analysis suggests a measured approach to monetary policy, balancing the dual mandate of price stability and full employment.