--:-- [INTRO MUSIC FADES OUT]
--:-- Kate Leinbaugh: Hi, guys. Welcome to my closet. Okay, I'm almost ready.
--:-- Kate Leinbaugh: A couple days ago, I called up Mary Daly. She was at her office in San Francisco. So, President Mary Daly, welcome.
--:-- Mary Daly: Oh, thank you.
--:-- Kate Leinbaugh: Mary is the president of the San Francisco Federal Reserve. And later this month, Mary and other top officials from the Fed will make a decision that will influence the fate of the U.S. economy. That decision is whether it's finally time to cut interest rates, and by how much.
--:-- Mary Daly: Mary says their ultimate goal is to have a healthy economy. What we know from all past history is a durable expansion, one that lasts a long time, is the single best thing for Americans. And that's really what we were after.
--:-- Kate Leinbaugh: Durable sounds like just good economy. Good economy for a long time. For a long time. You want a good economy for a long time.
--:-- Mary Daly: To achieve that, Mary and 11 other Fed officials have to figure out how quickly to cut interest rates without stoking inflation again. The idea is to strike just the right balance.
--:-- Kate Leinbaugh: As a central banker, the commitment you have to make to do the job well is to not run to a definitive answer with urgency, when urgency is the very thing that would cause a mistake.
--:-- Kate Leinbaugh: Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Thursday, September 5th.
--:-- Kate Leinbaugh: Coming up on the show, a Fed insider on the looming rate cut. CRM was supposed to improve customer relationships. Instead, it's shorthand for can't resolve much, Which means you may have sunk a fortune into software that just bounces customer issues around but never actually solves them.
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--:-- Kate Leinbaugh: Bad CRM was then. This is ServiceNow.
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--:-- Mary Daly: For the last few years, inflation has been a major problem in the U.S. economy, inflicting pain at the pump, at the grocery store, you name it.
--:-- Kate Leinbaugh: Mary Daly says she knows that pain, too. Long before she was the San Francisco Fed president, she was a high school dropout working three jobs to help her family pay the bills.
--:-- Mary Daly: In the 1970s, I was one of those people, really, where, you know, you're trying to decide how much gas you can put in your car to get to work and how many stops you can make on the way because you can't afford all of those things because no matter how much you were earning, inflation was eroding it.
--:-- Kate Leinbaugh: Mary eventually got her GED and then went to college and got her Ph.D. in economics. What do you say to Americans who feel like people in your position don't know what they are going through?
--:-- Mary Daly: Well, I don't say. I listen. That's the important point. I mean, individuals want to be heard and they want to be able to tell their stories. And my responsibility is to hear them and listen to them and bring their stories, their information and their sense of where they are in the world to policymaking, to our deliberations.
--:-- Kate Leinbaugh: I spend a lot of time out in the community, and one of the things I like to do is go to retail outlets and just talk to people who are shopping there especially now and in the last two years when it been so challenging.
--:-- Mary Daly: And I met a young man and his wife and they had a small child and I met them and he told me he had more jobs than he ever had in his life He was earning more than he had ever had. And he was so sad, almost choked up because he told me that every week he could have put fewer and fewer items in his basket. And that was because it was more and more expensive. And that's the toll of inflation.
--:-- Kate Leinbaugh: To fight inflation, the Fed has raised interest rates 11 times since March of 2022. Now, interest rates are at a 23-year high, making it more expensive to buy a car or a house.
--:-- Mary Daly: And as prices went up, the Fed tried to get inflation under control by raising interest rates. That's correct. decisions that are made in periodic meetings of Fed officials like you.
--:-- Kate Leinbaugh: Can you tell us what it's like to be in that room when you were raising rates?
--:-- Mary Daly: Absolutely. One of the things that I think is not known is just how vigorous the discussions are, how evidence-based they are. And in those rooms, when we recognize the suffering out in the economy, the importance, of course, was to move aggressively, to really get after the problem so that we can maintain inflation expectations, make sure they don't drift up, but also start to bring inflation down by bringing demand and supply back into balance.
--:-- Kate Leinbaugh: And that's what we did every time. But in making those decisions to raise rates with the goal of taming inflation, those rate hikes inflict pain in their own form, higher mortgages or car loans.
--:-- Mary Daly: And so for like the gentleman you met at the retail outlet, it brings more pain into his life. How do you think about those tradeoffs?
--:-- Kate Leinbaugh: Sure. It's an important question. And you do have to make tradeoffs. So raising the interest rate temporarily to bring inflation down sustainably sets this foundation for a strong and healthy economy going forward.
--:-- Mary Daly: It is always challenging to raise interest rates when people are already challenged, but it is the important thing to do because what we're really doing is setting conditions for long-term stability, which ultimately allow for long-term growth.
--:-- Kate Leinbaugh: The Fed's policies appear to have worked so far. Inflation is around 2.5%, which is pretty close to its target of 2%, and close enough for the Fed to start thinking about lowering interest rates again.
--:-- Mary Daly: Which brings us to the next meeting of the central bank. It's called the Federal Open Market Committee, or FOMC. These meetings happen eight times a year, and the next one starts on September 17th.
--:-- Kate Leinbaugh: So now, all eyes are on the Fed meeting later this month. How would you characterize the weight of this decision in particular?
--:-- Mary Daly: You know, every time you show up at the FOMC table and you deliberate, what should we do with policy? You always have one of three choices. Raise the rate, lower the rate, keep the rate the same. Keeping the rate the same is a decision. It is a policy decision. It's deciding that policy is in the right place and you're going to keep it there.
--:-- Kate Leinbaugh: So all of those decisions, whether they're to raise the rate, keep it the same, or lower the rate, they're all weighty because they all have millions of Americans on the other end of the decision.
--:-- Mary Daly: But the question that's on our minds going forward, like at this point, with inflation coming down gradually toward our 2% target and the labor market now in balance, we don't want to see additional slowing in the labor market. That would not be welcomed.
--:-- Kate Leinbaugh: And I believe that we are gaining more and more confidence that inflation is on a path to 2%, then the time to start to adjust rates is upon us.
--:-- Mary Daly: Now, how quickly we will adjust rates, how much we will adjust rates, those are deliberations we will take at the upcoming meetings.
--:-- Kate Leinbaugh: We do have to ensure that we adjust policy as we go so that we don't end up over tightening and weakening the labor market. We're not in that situation and we want to avoid that situation.
--:-- Mary Daly: Overtightening meaning keeping rates high for longer. Keeping rates too high when the economy is slowing.
--:-- Kate Leinbaugh: If fighting inflation was Mary's only goal, things would be a little easier. But the Fed has two mandates. There's keeping inflation low, and there's also keeping unemployment low.
--:-- Mary Daly: The problem is these two goals can be at odds with each other. To fight inflation, the Fed raises interest rates, which can crimp spending, prompt companies to lay off workers, and result in higher unemployment.
--:-- Kate Leinbaugh: And just last month, there was a bit of a scare in the unemployment numbers. We begin with our top story. Markets around the world have dropped amid fears that the U economy is heading for a slowdown Weak job data from the U A disappointing jobs report
--:-- Kate Leinbaugh: Is it a weak jobs report A disappointing July jobs report raised concerns the Fed was too late with rate cuts Maybe the Fed dropped the ball. Maybe they waited too long.
--:-- Mary Daly: So does Mary think that the Fed missed the mark? That's next.
--:-- Kate Leinbaugh: This episode is brought to you by Walmart. Did you know that Walmart is one of Fortune 100's best companies to work for in 2025? It's no surprise. Walmart is investing $1 billion in training and development to help associates build lasting careers, with or without a degree.
--:-- Mary Daly: In fact, 75% of Walmart management started in hourly roles. With benefits like health care, paid parental leave, and tuition support, Walmart isn't just a place to work. It's a place to grow. Learn more at walmart.com slash spark.
--:-- Kate Leinbaugh: This episode is brought to you by AARP. They have reskilling courses and career tools to help your income live as long as you do. The younger you are, the more you need AARP. Learn more at aarp.org slash skills.
--:-- Kate Leinbaugh: Right now, you've got inflation going in the right direction, But there's maybe an inkling that jobs are weakening. Unemployment jumped to 4.3 percent in the most recent jobs report, highest level in almost three years.
--:-- Mary Daly: When you saw that data, what went through your head?
--:-- Kate Leinbaugh: When you see data coming in, the headline numbers can be misleading. You have to dig beneath the macro headlines.
--:-- Mary Daly: So the very first thing that went through my mind when I saw the employment report is where are the details? And you immediately get the details and you unpack the details.
--:-- Kate Leinbaugh: And what you find when you do that is that labor force participation, the number of people working and looking for work, grows.
--:-- Mary Daly: So when more people reenter the labor market after an absence, then that's actually good news for the economy. Individuals typically won't enter a labor market if they think it's weakening. They enter it when they think jobs are plentiful.
--:-- Kate Leinbaugh: So when I looked at that, I said, oh, OK, We have to watch for the next labor market report because what it looks like right now is we have a healthy labor market that's now entered a sustainable phase.
--:-- Mary Daly: And I want to keep it there. This labor market report we just came through was not a sign of weakening. It doesn't make you worry that you've waited too long to start cutting rates. Not that report.
--:-- Kate Leinbaugh: So what I am hearing is you are not overly concerned about the labor market right now.
--:-- Mary Daly: Well, I'm going to try to put a really fine point on it. I am watching it extremely carefully because any additional slowing would be unwelcomed.
--:-- Kate Leinbaugh: And we don't want to wait till we see it because then it's too late.
--:-- Mary Daly: For economists, investors and people watching the markets, the question isn't whether the Fed will cut rates. Most Fed watchers are expecting a cut. Instead, the question is, how much will the Fed cut rates?
--:-- Kate Leinbaugh: I think the key question is, is it 25 basis points, 50 basis points? You know, that sort of 25, 50 basis point question.
--:-- Mary Daly: In September, the only question is whether it'll be by 25 basis points or 50.
--:-- Kate Leinbaugh: Since rate cuts are seen to stimulate the economy and therefore employment, a modest 25-point cut would indicate that the Fed isn't too worried about the labor market.
--:-- Mary Daly: On the other hand, a 50-point rate cut would signal that it is more concerned.
--:-- Kate Leinbaugh: People advocating for the bigger cut say it's the way to avoid a recession.
--:-- Kate Leinbaugh: Okay, so let me give you a scenario. Okay. I love scenarios. We're in an economy where inflation is close to your 2% target, and the labor market is not fragile, but, you know, showing some signs, would that call for a smaller rate cut or a bigger one?
--:-- Mary Daly: If I may, I'm going to say I think it's what I really like to think of, because your scenario is a reasonable one to think about, but it's only one of like 100 possibilities.
--:-- Kate Leinbaugh: So right now, what I think of as the most likely outcome, we have a situation where inflation is gradually coming down. The labor market's imbalanced and we don't want to see additional weakening in the labor market.
--:-- Mary Daly: So acting as early as the next meeting is an appropriate thing to do. If we get a situation where the labor market would start to falter, like, oh, it is slowing more than we would welcome, well, then we would have to make more aggressive adjustments to ensure that that didn't happen.
--:-- Kate Leinbaugh: Or if inflation was stickier and the labor market wasn't giving any signs of weakening, well, then we would have to hold on longer, that we would adjust the policy rate more slowly
--:-- Mary Daly: So the tactics of exactly how we do that those get made as you get closer to the meeting because so much information comes in between each meeting
--:-- Kate Leinbaugh: Where are you leaning today?
--:-- Mary Daly: My expectation is inflation will continue to slow and the labor market will continue to look healthy, not fragile. If for any reason those two data points don't come out like I expect, well, then, of course, I'm prepared to go and debate and discuss with my colleagues at the September meeting and make the adjustments that we collectively see as the best ones to make.
--:-- Kate Leinbaugh: So we will take our time. We will wait till our meeting, do the work, do the deliberations, and then state the outcomes.
--:-- Mary Daly: And predetermining what those are and saying them with force and definitiveness can often just be misleading and at its worst can be a mistake.
--:-- Kate Leinbaugh: Is it fair to say that we are looking at cutting rates by 25 basis points or 50 basis points?
--:-- Mary Daly: You're very good at wanting to do what everybody wants to do. I feel like every single time I talk to anyone in the media—can I just paint this point? Because I think it's important, a podcast or whatever, is that when I go out in the community and I talk to individuals, they don't ask me about 25 or 50.
--:-- Kate Leinbaugh: You know what they ask? Tell me. They ask me, are we going to be okay? Are we going to get, and I say, what does okay mean? Will inflation go back down and will I still have my job?
--:-- Mary Daly: And that's why I push away from knowing if it's 25 or 50 because, I mean, seriously, I've got a labor market report coming out on Friday. I have an inflation report coming out next week and I have all this information I'm collecting, what I can say, and I have said, and I'm happy to say again here, is the time to adjust policy to some degree is upon us.
--:-- Kate Leinbaugh: So is it fair to say that the era of rate hikes is over?
--:-- Mary Daly: I don't like to talk in eras, but I will talk about tightening cycles because eras can be a lot of time, you know. Not a Taylor Swift fan? Okay, so here's, I'm sorry to say, this is sad, I'm going to tell you a sad fact.
--:-- Kate Leinbaugh: So you know how I know Taylor Swift as well as I do? Tell us.
--:-- Mary Daly: I'm a Kansas City Chiefs fan, and I really like Travis Kelsey. That, and I'm very pleased about how much she's contributed to the economy. Okay, so no errors. No errors.
--:-- Kate Leinbaugh: But let me talk about tightening cycles. So a tightening cycle is the period of time from which you start raising the rate to when you hit the peak of its hike, and then you start to lower it. You hold it, and then you lower it.
--:-- Mary Daly: And it looks like, from all the information coming in, this tightening cycle has come to an end and is soon to start its downward descent.
--:-- Kate Leinbaugh: Now, how speedily we will be able to descend is unknown. That will depend on the incoming information and the data.
--:-- Mary Daly: But it does appear that inflation is sufficiently on path toward 2% to have eliminated the need to raise rates again.
--:-- Kate Leinbaugh: So today you are the San Francisco Fed president, but in the 1970s, you were struggling. You told us with inflation personally. What does Mary today say to Mary in the 70s?
--:-- Mary Daly: That's a good question. No one's ever asked me that question, but it's a very good question.
--:-- Kate Leinbaugh: You know, I say to her that we are dedicated, completely determined to do our job because you, young Mary, and all the countless Americans who are struggling with inflation today and have been for the last two years, this is not a struggle you deserve to have.
--:-- Mary Daly: And I think there was a sense when I was growing up that I remember myself thinking, I'm never going to get ahead, because every time I earned something, got a little raise, inflation eroded it, and I was further behind.
--:-- Kate Leinbaugh: And I think what's really important for monetary policymakers, and myself in particular, to say to the American people is we see that and we're on it.
--:-- Mary Daly: What does that 15-year-old Mary say to you today?
--:-- Kate Leinbaugh: Go faster. All right. We'll see what you do.
--:-- Mary Daly: Thank you so much for your time. We'll do our best. Appreciate it. Thank you.
--:-- Kate Leinbaugh: Before you go, tomorrow we're kicking off our new series, Red, White, and Who, a weekly look at the 2024 presidential election. Your host, Ryan Knutson, and senior political correspondent, Molly Ball, will take you through the biggest developments in the race for the White House.
--:-- Kate Leinbaugh: Look for the first episode in your feed tomorrow morning, early. That's all for today, Thursday, September 5th. The Journal is a co-production of Spotify and The Wall Street Journal.
--:-- Kate Leinbaugh: Special thanks to Nick Timuros for his help with this episode. Thanks for listening. See you tomorrow.
