Hoover Institution (Stanford, CA) — The US economy faces challenges that receive far less attention than curbing inflation or the rise of generative AI, Mary C. Daly, president and CEO of the Federal Reserve Bank of San Francisco, told an audience at Hoover on December 6.
Daly, in a conversation with Hoover senior fellow John Cochrane, said that even with a healthy labor market this year, with about as many as open jobs as there are candidates eager to fill them, the United States still has a much lower labor participation rate than peer countries.
“A lot of my research was on labor markets, and what I found was our labor force participation rate is lower than in our industrialized competitors,” Daly, a labor economist by training, told attendees.
Daly said the Fed doesn’t have specific tools to respond to this phenomenon and can only set favorable conditions such as low interest rates, which can lower inflation and draw people who had exited the labor market due to injury, de-industrialization of their home area or addiction, back into the fold.
“When we have a durable [economic] expansion, many people who are typed as not able to work, they begin to re-enter the labor force.”
Daly, who this year sits as one the twelve members of the Federal Open Market Committee, which votes to set the federal funds rate, was asked by Cochrane about how the funds rate is set, how she and her colleagues responded to COVID-era inflation, and the rise of generative AI.
“What do you see in the intersection of labor markets [and] emerging tech, AI . . . go,” Cochrane asked to kick off the discussion.
On AI in the workplace, Daly said that “between the enthusiasts and the doomsayers, I am in the middle. I am optimistic about (AI’s) use, but I also do recognize technology is a tool, it’s not doing (things) to us.”
“Technologies of any type, across the whole history of technologies, have never reduced net employment.”
In response to a 2023 study completed by OpenAI and the University of Pennsylvania last year—in which scholars found that up to 20 percent of American workers could have half of their daily work tasks completed by generative AI applications instead—Daly said she is seeing firms adopt generative AI features to make their existing employees more productive.
Technical manufacturer Honeywell, she explained by example, hasn’t laid off a single employee after introducing generative AI applications to its workforce. “AI just makes existing employees better,” Daly said, also adding that lately many firms “still want more workers than they can find.”
On the topic of COVID-era inflation, Daly explained that an entrenched mindset among some Fed governors caused them to fall behind the curve in responding to the spike in price levels.
“We’d been fighting inflation from below our [2 percent] target for so long,” Daly said, referring to the pre-COVID period, “there was always a concern it would go below our target.”
“Now,” post-COVID, “there was a concern that we are trying to keep inflation from exceeding our target.”
She said that the members of the Federal Open Market Committee thought for too long that inflation was primarily caused by supply-chain bottlenecks and not by broader macroeconomic factors such as increases in the money supply or excessive government spending and borrowing.
“We were slow as an institution to recognize that the supply shock that we thought was temporary was actually more persistent.”
And as the committee members were waiting for correction in supply chains and output to return to pre-COVID levels in several goods-producing industries, demand rose instead.
“The global supply network was something we all thought was quite durable and resilient and would rebound,” she said. “Demand came back with a vengeance. I am sure you all remember that you were probably part of it. We all went out and started doing things and buying things.”
Making economic conditions even more inflationary was the fiscal stimulus still flowing to consumers in many advanced economies, even during the reopening period, which pushed aggregate demand even higher than it would have been without stimulus.
But even with a pandemic in the rear-view mirror, Daly said, central bankers will still be forecasting possible causes of future supply shocks.
“Should we expect geopolitical events to just drag out, and disrupt?” Daly asked of current global instability.
“There's also weather-related events that disrupt [supply], but those tend to be short in time frame. There's just all these things that are putting pressure on the global supply chain.”
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