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Indiana University Announcer
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Mary Daly
Bloomberg audio Studios Podcasts Radio News the debate is
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Interviewer
rich around AI's economic disruption. Is it growing more intense? Some see the that could unlock enormous gains, productivity and growth. But others that they want of disruption of unintended consequences. And we want to try and understand the sort of messy middle of all of this with Mary Daly, President of Federal Reserve bank of San Francisco. Mary Daly Extraordinary. The data that you now have to lean upon, trying to understand what's factual fiction, what's utopia, what's what sensationalism. Who do you go to for your data on whether productivity is working?
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Mary Daly
I go to the businesses who are using the technology because you can always encounter enthusiast enthusiasts or doomsakers years. But it's really the people in the middle, as you said, who are using that technology thinking about it. And I've seen tremendous interest in IT last year and now I am seeing tremendous investment in it thinking about how do they train their workforces to be AI ready, how do they think about what I can do not just in the back office but in the front of house of operations. And we're seeing this in small businesses, medium and large, in global companies and more regional ones, and importantly in everything from agriculture to machining and building things to services. And I think that's really the place. We haven't seen widespread productivity gains yet. The ROI is still to be developed, but I'm definitely seeing the enthusiasm and it's picked up tremendously in the last year.
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Interviewer
We haven't seen the productivity gains yet. You know, you're being very clear on that. As you remember, I asked you over and over again for an hour, please show me the productivity gains. But in the economic data, whichever set of data you want to look at, do you see an impact from AI negative or positive?
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Mary Daly
It's really hard to take. We have had productivity growth that's been outside of the historical norm and I think that's a positive for the US Economy. Everyone wants to say that's I what I think of it is as sure it's possible that businesses are looking for cost savings and they hire fewer workers and they do just as much because they're using, you know, an LLM assistant to help. But we just haven't heard from businesses that they're seeing transformative, ongoing productivity gains yet and they want to Always underscore yet. And, and I said, well, what's the time frame? And they said next year, year after. Because what we know is it isn't just about getting a model and using it for things or an agent. It's about transforming your business processes so that you really take advantage of things. We don't even think about today what can be done differently that will transform the economy. So you can definitely find a single business or sectors who are using it and seeing the gains. But we haven't seen that across the economy going forward. But I'm pretty bullish. I see the possibilities and I' hearing more and more that people are seeing early rewards and really recognizing that next year is the litmus test.
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Interviewer
Bullish is an interesting turn of phrase today, putting aside the slight dip in the market, the exuberance that we have seen in financial markets to want to back these companies. And we're about to get more public companies coming, more liquidity, more, more money. Is that in and of itself a financial stability issue? Are you worried about the markets rioting so high?
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Mary Daly
You remember, you know who's, who's doing most of this investment, the Mag 7 who's who's really there. This is actually something they can do and fund and their enthusiasm is real, they see what's possible. But I don't think that we should think, oh, there's financial stability concerns just because the market's gone up. It could go up or down as it has in the past, but a financial stability issue would mean it's spread to the banks, it's spread to consumers or businesses right now. I'm not saying seeing evidence of that. We keep our eye on it for absolute sure. But what I am seeing is that companies other than the technology enthusiasts, companies outside of technology, are using AI to think about how to do their business better in real ways. I mean I was just meeting with some machine make machines for a living. That's what they do. And they're thinking about how do I scan in 50 years of plans of these machines I built for companies and then use those plans and a model to generate innovative new ideas of things I can sell that will be faster, better, cheaper than things I've sold before. We toured a robotics company that builds things that help manufacturers do better in terms of shipping and distribution. These are real things that do have a capacity to change the economy. So I'm not. That's why, that's the underlying part of my bullish. It has less to do about the investments that tech companies are making and More about the investments that everyday regular companies that make things and provide services, the things they're doing.
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Interviewer
President Daley Inflation is still the biggest risk. And you know, that's. Those are not my words. We heard it, you know, all week long, the Bloomberg Credit forum, for example. One of the things that you and I have discussed in the past is, is the massive capex commitment build out of Datacenter in conjunction with a bottleneck in some core areas like memory, inflationary or is it disinflationary? You know, that's the thesis that like a utility of PG would argue disinflation rate because the big guys are buying in aggregate. I still don't understand where we are with that.
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Mary Daly
It's a timing issue in my judgment that, you know, in the beginning, of course, when companies want to invest in big construction projects, a lot of electricity demand, then the companies that are providing those things or areas that are providing those things are going to see competition for the limited amount of services they have. But what they're building creates the infrastructure. The data centers create the infrastructure. Or if the big guys come in, as you just said, and help with electrical plants that help with electricity generation, that eventually can help with the prices of those things. Not here and now, but you just have to think about the timing. And one of the things is really important in policymaking is that we not assume, we know. We actually look for the evidence of what are we seeing in prices today, what are we seeing in what is the forecast of prices tomorrow and then how do we think about policy? So right now I'm focused on, you know, other energy prices, oil prices and food prices are driving up inflation. What we do know that down the road these things could maybe compete for services and costs and raise costs. But we haven't seen real evidence that that's the limiting factor. The limiting factor seems to hard to get generators. It's hard to get the infrastructure equipment you need. And so you see the big tech companies thinking about solutions they can provide for themselves.
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Interviewer
The inflationary data must be fascinating here in San Francisco. When I think about all these companies potentially going public, what that means to the employee base, what that means for your house price and the ability to be able to buy yet more real estate here, what it means for the cost of labor as well. Is there an inflationary pressure that you're seeing here? In some I've lived through.
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Mary Daly
So I moved to San Francisco in 1996 and then we had the dot com and I know what it feels like to not be able to Rent a place that's affordable because the people who are making many more orders of magnitude. And I was, you know, in a position where that's manageable, but it's, that's what's happening is people feel like they're getting crowded out because other things are happening. But that's more about the supply of housing than it is about the demand for housing. We want people to come and invest in this community. We want the city to thrive, we want regional activity to thrive and employment to grow. But as you said, you know, the more interest people have in living in a place, if you have limited supply of housing, then you're going to have a run up. So I, those are the things that, not the Fed, but other policymakers, other federal policymakers and local policymakers like the mayor are working on. But it looks very, you know, you can see the elements of 1996 already here where there's productivity growth, there's enthusiasm, etc. But is it a bubble?
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Interviewer
Is there a risk that we're in that same, you know, the dot com
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Mary Daly
was very different than the AIG boom. And so I just want to, you know, there's a lot there that's already being put into businesses and it's very pervasive. It's not just the dot com. So I, I don't jump to the conclusion that if it has similarities to the 90s. It's going to be the night, if
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Interviewer
I may present that a. You, you went out and did some of the most important, important work in that era of how the advent of the Internet would change the economy look. So you've kind of established where we sit right now. Inflation continues to rise. How likely or unlikely would that make a rate cut in 2026? How do you tie the two together from this juncture onward?
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Mary Daly
You know, I think one of the questions I get asked regularly is what are the, what's the path for the rates going forward?
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Interviewer
Yeah.
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Mary Daly
And the answer I give, because this is how I really think we have to think about it, is we don't know how the economy is going to play out. We have, as we've been talking about this tremendous possibility with AI but we have the same time, the war in Iran, that is with an uncertain end, which has pushed oil prices up, and fertilizer prices, which have filtered into food prices. And right now those are fairly contained. And if you look at the futures market for oil, it's $80 a barrel by the end of the year. But, you know, we have to think about that. And so Right now, policy is in a good place. We are prepared to respond either way, whatever the economy brings. But I think giving more forward guidance about what's possible could be misguiding in the end because we just have to wait for the economy to evolve. Everybody wants to resolve the uncertainty today, but I think that's a mistake because it will close off our mind about what we really have to look at. The inflation risk possibility, but also the possibility the war ends, oil prices come back down, and we're back to the underlying dynamics with some of the positives of AI we've been talking about.
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Interviewer
Can I ask you about the labor market as well? Because you've tried to bring this transparency of how you're thinking about things with your blog, for example. And one of the really interesting ones that I was reading and captured my attention was the idea that we've got zero labor growth now. Immigration's changed the way in which demographics change. Are you feeling like we've seen some improvement, some, some resilience in the labour market and will that hold?
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Has it firmed?
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Mary Daly
Yeah, you know, I think it's too early to say firmed. I think we're, you know, there's always statistical error, so you can bounce around from month to month. But if you, you know, I was one of the people who, policymakers who were a little worried about the labor market at the end of last year, was very supportive of the cuts that we took to stabilize conditions there. So relative to that point, I think this is, we've really stabilized. And I'm starting to see businesses feel a little more cautiously optimistic, which will feed through to hiring. But they're not being, you know, they're not just running out to hire people. They are being right, I can get an agent. They're interrogating how much I can do for them before they hire. And, you know, regularly we talk to our businesses and they say we don't want to hire a bunch of people, find out I can do certain things. And we did a different set of skills. So we want to wait, we want to be patient on our hiring and make sure we're not over hiring. Because, you know, if you're, if you ever go through a period of time where a business has to lay workers off, it's a painful experience for workers and for them. And so they just don't want to get overly confident only to find out they have to make adjustments so that caution will be with us for a bit.
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Interviewer
We are live on Bloomberg Television and Bloomberg Radio. We're in San Francisco. Francisco. And we're at the Bloomberg Tech event and we're speaking with San Francisco Fed President Mary Daly. Reset a little bit. But if I may, it's the first opportunity we've had to ask you, have you spoken to Chairman Walsh about how he sees the Fed evolving, about changes to the institution and if you may fold in the context of your district, San Francisco Fed? Yes, much more than that. And your role going forward?
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Mary Daly
Sure, absolutely. So, you know, I think what we really want when any new chair comes in and what we want from all of our leaders of Federal Reserve banks and all of our governors, is that you're thinking constantly about how can the Fed be better? How can it better serve the American people? How can we do our work more efficiently, more effectively and more resiliently? You know, ultimately everything we talk about is, is put between two bookends. We are fiduciary stewards of, of public trust, which means we better have services that people can depend on and we better work hard to achieve our goals. And we're fiduciary stewards of public funds, which is we are very careful about how we spend taxpayer dollars. So with those two things in mind, you know, I mentioned I joined the Fed back in the 90s. So I joined the Fed in the 90s and we had check processing. Remember checks? We had check processing. I start to write loads everywhere. Everywhere in the everywhere we had a location, we had people process checks. But then check demand started to fall and so we consolidated those activities into a few locations. And that level of modernizing, constantly thinking about how can you do better is what I see now.
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Interviewer
So what is the chair's equivalent of that?
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Mary Daly
Well, he just joined, so I'm going to give him the right time. He has to announce that he's talked about making sure he's holding on to that tradition. And he comes to in with a lot of ideas. But you know what I've heard him say again and again, which I really appreciate because all he's the fifth chair I've worked with. All of the chairs I've worked with have the same basic compass. It is to do our best work for the American people and work with all the individuals who are earnestly doing their work in the Fed to do it well. And I see that in Chair Wash,
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Interviewer
that earnest work within the Fed. How much of that is being modernized to use adopt AI. How hard or easy is it at this moment when you're such a regulated institution in and of yourself?
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Mary Daly
Well, we're careful, like all regulated institutions and Importantly, like all businesses, businesses, you know, when I talk to businesses, the last thing they want to do is take huge risks that destroy their shareholders, the value of their company. The same is true for us. Good fiduciary stewards of public trust and good fiduciary stewards of public funds, which means we're always driving to adopt new technology to do our work more efficiently. But we recognize we have to do that safely. You know, people want to know they can get their money when they need it. They want to know that the banks are well supervised. They want to know that monetary policy is not made by machines. It's made by people making judgments not only about models and rules, but also about the lived experiences of people across our country.
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Interviewer
Very quickly, before the show ends, what are you seeing in credit? That's a big story for us in how data centers are financed. For some, it's very worrying.
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Mary Daly
Well, you know, we're, we're watching that carefully. I watched that carefully. What we do see is that there's a lot of, there's those companies investing a lot of their own resources in those. So it's something to keep our eye on. But at this point, you know, again, if you stack rank the things that are worrying today, I'd say getting inflation back to target, getting Americans the relief they deserve that we've been working on for quite a while, that's my number one priority.
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Indiana University Announcer
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The Hartford Announcer
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