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AARP Interview: Mary C. Daly, Federal Reserve Bank of San Francisco

Regional Fed President on jobs, inflation and fixing the economy

Exterior of the San Francisco Federal Reserve Bank in the Financial District neighborhood of San Francisco, California.

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En español

When prices were rising last year, economists said inflation would go away on its own. But that turned out to be wrong. What changed?

mary daly the s v p for the federal reserve bank

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Mary C. Daly, president of the Federal Reserve Bank of San Francisco has worked for the Federal Reserve System, the nation’s central bank, since 1996.

Last year, COVID was affecting the inflation numbers and doing something we don’t often see. Because of COVID, people had incomes that they hadn’t spent traveling or doing other things, and they were using them to buy goods to make it easy to live at home. But that same COVID completely disrupted supply chains across the globe. So it made all of these goods harder to get. And when things are hard to get, because the supply is limited and demand is strong, then you get inflation.

So the question is, why has inflation lasted so long? And the answer is, because of COVID. All of us hoped and thought that it would subside quickly after we got the vaccine. But the vaccination take-up hasn’t been as high as we need it to be, and the disease and the variants spread much more quickly. The miss was really that we mis-forecast how quickly people would get the vaccinations and beat COVID back.

Russia invaded Ukraine on Feb. 24, and today, as we speak, it’s March 1. What has the invasion changed?

Russia is an exporter of energy. People are worried that this will be another boost to energy prices, which are already high and continuing to rise. That hits consumer pocketbooks directly.

What else do you see that’s concerning?

One of the biggest effects on inflation right now is the global supply chain. Parts of Asia, in particular, don’t have the vaccination rates and the vaccine effectiveness that our vaccinations have. As a consequence, they have to either shut a factory or send people home to quarantine. Once you shut a factory or port, that has a domino effect, because these are all goods going to make other goods, and you end up with too little supply and too much demand.

This is really important: that COVID subsides globally. If I don’t see those numbers come down globally, then I will be much more worried about how we have to work on inflation here in the United States.

I’m also watching the Ukrainian-Russian situation, to see if we can get a resolution to that. You watch on TV the conflict and tragic loss of lives — it creates a lot of uncertainty in people; it creates consumer sentiment declines, business sentiment declines. We don’t want that. We want peace back.

And then I’m also looking at how well our interest rate increases can bridle back some of this demand and help us get the labor market, and the demand and supply, back into balance. And the final thing I’m looking for is, do workers come back? We lost 4 million workers who worked before the pandemic and haven’t come back yet. And we need those workers.

How does inflation affect older people differently?

Older Americans are more likely to be on a fixed income, where they have a set amount of resources that they intend to spend down over the rest of their lives. Inflation can eat away at the fixed income you have.

Now one of the offsets that we’ve always had in the United States is that Social Security gets a cost-of-living adjustment that tries to help older Americans who rely on Social Security as their main source of income, so that they don’t fall behind when inflation hits. But even with those adjustments, people are paying more this month than they paid last month, and that’s hard.


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The Fed is raising short-term interest rates. What is going to be the immediate effect of that?

This should directly affect deposit rates for savings accounts in banks. Now, by how much and exactly when, it’s not always clear. The other thing you’ll start to see happening is that the economy will slow down a bit, and six months, eight months from now, we’ll start to see the effects on the inflation rate. And if we don’t see the effects on inflation starting to percolate through, then we would make more adjustments to the interest rate to ensure that it does happen.

What will be the day-to-day signs that this strategy is working — that the economy is slowing down and inflation is easing up?

Older Americans see that their children can’t live in the neighborhood that they they grew up in because they’re priced out. So when we see the economy slow down, we’ll see the housing market get more in balance with the economy. And if that happens, people have more ability to choose a place to live that they want.

And another place where you’re likely to see this is when the labor market recovers. Because you should also find that when you go to dinner, you’re not waiting in a long line, and the prices aren’t rising because they tell you that they have COVID-related staffing disruptions. It won’t be some big thing where you say, “OK, there I see it.” It’ll be a lot of little adjustments throughout the economy.

About those 4 million Americans who left the labor force: Many of them are older workers who decided to retire. Do you expect them to come back?

Older Americans in a bad job market leave the labor market. But when the economy starts to grow again and they really get opportunities, they return. Because older Americans want to contribute.

There are two key issues that are going to determine how quickly people come back. One is COVID. And the other is employer flexibility. If U.S. employers say, “We only take people who work 40 hours a week for 52 weeks a year,” older Americans are going to say, “I’m sorry, I can’t do that. I’ve got other obligations. I’ve got other things I want to do.”

Do you think employers will be that flexible?

You know what’s a big incentive for businesses? Having no one to work for them.

They’re much more flexible when they run out of workers. I’ve seen time and time again, the things that employers said they would never be able to do because it would injure their productivity or whatever — they find a way to do it.

Older Americans remember the painful double-digit inflation of the 1970s. What advice can you give people about how to defend against inflation this time around?

What all of us are doing is, we’re making substitutions. We’re purchasing different things. You’ve seen a lot of temperatures in homes drop. We’re finding ways to economize that don’t disrupt our lives so completely that we feel miserable.

But I think this is the most important thing I can say: This is not the 1970s. This is a hard period when you’ve got a limited income and you’re trying to figure out how to manage inflation, but it’s not going to persist forever. The Federal Reserve is on it. I don’t actually expect inflation to get all the way back down to 2 percent by the end of this year, but it will start to moderate. And if it doesn’t start to moderate as we want come summertime, we will continue to raise the interest rate until we get it under control.

For our readers who have retirement investments, is there any reason for them to rethink what their portfolio should look like?

I’ve learned a very important lesson in life: Don’t give investment advice. But it’s never a good idea to make abrupt changes on your investment strategies for a periodic run-up in inflation or something else. I tell this to my family members, my friends, myself: The best thing to do in periods of turbulence is stay steady in the boat. What is your long-run goal for your investments? And how can you meet that, given the current environment we find ourselves in?

George Mannes is a senior editor for AARP The Magazine and AARP Bulletin. He previously worked at Money magazine and TheStreet.com.