SYLVIE DOUGLIS, BYLINE: NPR.
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DARIAN WOODS, HOST:
Mary Daly remembers her parents struggling with inflation decades ago.
MARY DALY: You know, I still feel the feelings. I could still get them at the top of my mind, the feelings I had growing up. They were about watching my parents. And they would put the card table up in the living room, and they would sit around it. And they would work through the bills, and the stacks of bills were high. Inflation was making it more costly, so they would start sorting out - how could we pay? What would we do? How can we manage this? And the stress I saw in their faces when they did that just kept increasing. And, you know, that's my first understanding of inflation on people.
WOODS: And inflation is still front of mind for Mary Daly. She's now the president of the Federal Reserve Bank of San Francisco.
This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods. Today on the show, a special conversation with Mary Daly - why inflation got out of hand and what kind of hard decisions she and her colleagues at the Fed will face this year as high interest rates start to bite.
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WOODS: When you think about the backgrounds of senior leaders at the Fed, you probably think prep schools, math tutors, MIT maybe, Stanford or Harvard. But Mary Daly is different. As a 15-year-old in the suburbs of St. Louis, Mary dropped out of high school.
DALY: My family needed to have an extra earner and - 'cause we experienced, like so many American families do, health and economic shocks that leave us with less than we need.
WOODS: After working at Target and donut shops, a mentor steered Mary Daly towards getting her GED. And that GED led to the University of Missouri. That's where she discovered a love of economics. Years later, she would eventually get an economics Ph.D. Now, as president of one of the 12 regional Federal Reserve Banks, Mary is a key national decision-maker. She's part of what's known as the Federal Open Market Committee, or the FOMC. This is the group at the Fed that deliberates over raising or lowering interest rates to drive the economy. Mary says that, when the FOMC meets, it's like passing through a portal.
DALY: Once you walk across that doorway, all political views, all - any of the discussions that are part of the parlance of our everyday lives, they are put aside. And everybody walks in with the idea that our goals - our mandated goals are to ensure price stability, low and stable prices, and full employment - you know, everyone who wants a job can get one.
WOODS: The regional Fed presidents take turns each year to be able to vote on the committee. And in 2021, Mary Daly was a voting FOMC member. And so remember that 2021 was the year when inflation was starting to rise up. It was this very critical time. People were debating whether inflation would stay high or whether it was transitory. And the Fed seemed to be on the side that thought inflation would be transitory. It was keeping interest rates very, very low. They were close to zero. And a lot of economists and commentators have since argued that this decision of keeping interest rates low fueled inflation.
DALY: As the data come in, you have to say, wow, inflation has surprised us in its persistence.
WOODS: So I just want to go back in time to early 2021. Inflation was starting to creep up higher. It was getting to around 4- or 5%, much higher than what the Fed wants, which is 2%. And in that early moment when inflation is starting to rise, what were you thinking at the time?
DALY: So go back to that time. Here's a couple of things that I think have been forgotten, basically, or maybe lost. But one of them was that if you did a decomposition of inflation, that means just simply you took all the inflation data, and you said - what kinds of goods and services are moving prices up? And what you found is it was in airline fares and used cars and some things that were very narrow and directly related to supply chain disruptions caused by ongoing COVID. And then the thinking is, well, we still have - at that early period of '21, unemployment was still in the - you know, just around 6%. And the inflation we were seeing seemed directly related to COVID related supply disruptions. And I think if I went back and said, what did I miss? What I missed was that we wouldn't get COVID behind us. I thought, with the vaccinations rolling out here in the United States and other countries, that we would have COVID put down earlier than it was. But that didn't happen. And as a consequence, supply chains didn't recover.
WOODS: Mary says that policy-supported demand also contributed to inflation - you know, that $5 trillion in government spending during the pandemic.
DALY: The policymakers on the fiscal and monetary side were trying to build a bridge for people so that nobody fell through or as few people fell through because of the pandemic as possible. And yet, policy-supported demand collides with COVID-constrained supply, and the result is inflation.
WOODS: Would you have done things differently. If you knew everything you knew now, would you have argued for an interest rate rise earlier?
DALY: Well, you know, policy is in a really good place now, and we've seen monetary policy work quite effectively. So when I do the, you know, postmortem, go back and look at the data, here's what I learned from the entire sequence of events. I learned, one, that, you know, pandemics are harder to get rid of than you think, and that's a key lesson. I learned that the balance sheet or asset purchases, we always say we want them to work together with the funds rate.
WOODS: All right. So a bit of an explainer here. Asset purchases is sometimes known as quantitative easing, and that's when the Fed was buying up government debt and other assets to stimulate the economy during the pandemic. And at the same time, in mid-2021, the Fed was looking at whether or not to raise interest rates, and that's also known as the funds rate.
DALY: Because one is a slow-moving tanker ship - that's asset purchases - and the other is a speedboat - that's the funds rate - we need to get people prepared for the fact that we might turn our speedboat before the tanker ship can turn. So down the road, I would suspect that we won't be in that situation where we feel somewhat constrained. And so I think that's the humbling experience of this episode, is that, wow, we need to be thoughtful about the long-term effects of events that are so hard on an economy and on all the individuals in it.
WOODS: And now the Fed is raising interest rates. It's done that at a very, very fast pace. The idea is to slow the economy down and bring inflation back down to hopefully around 2%. And so a lot of people are nervous about a possible recession around the corner. The FOMC projection is that unemployment will rise. And this is kind of the implicit message or explicit message is that unemployment needs to rise to contain inflation. Do we really need to raise unemployment to bring inflation down?
DALY: So maybe I can unpack that a little bit because I think speaking in unemployment and inflation can sometimes lose the important things that are going on underneath. So the job market is out of balance. Demand is outstripping supply. All that means is there are more posted vacancies or help wanted signs than we have people interested in filling those jobs. And so that - wages are a form of prices. And when demand is outstripping supply, prices rise. So we bridle the economy. We bring supply and demand of workers back in balance. And the consequence of that is lower inflation and also, most likely, a rise in the unemployment rate.
So I think about it as we need to bring supply and demand back in balance to deliver low and stable prices, and that will result in unemployment rising a bit. But we are not trying to orchestrate an increase in unemployment to get low inflation. If inflation comes back down and unemployment just goes up a little bit, there will be no one happier than me because I understand deeply - I mean, my parents went from high inflation to lost jobs. And I really recognize that people need both things. And the job of the Fed is to - as carefully and consciously as we can - navigate through this so that there's the least pain in the economy as possible while we restore price stability. So we're going to be conscious that we need to slow the pace of increases, look around, watch the data, see how things are coming out, and then make decisions meeting by meeting by meeting.
WOODS: Mary Daly, president of the Federal Reserve Bank of San Francisco, it's been a real pleasure talking to you. Thanks so much for joining THE INDICATOR.
DALY: Oh, it was my complete pleasure. Thank you.
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WOODS: This episode was produced by senior producer Viet Le, with engineering by Katherine Silva. It was fact-checked by Dylan Sloan. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.
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