MNI INTERVIEW2: Daly: Covid Forces Rise of New Labor Market

Finding ways to pull employees sidelined by the pandemic back into the workforce presents both the biggest challenge and biggest opportunity of the post-Covid-19 world, Federal Reserve Bank of San Francisco President Mary Daly told MNI in an interview Tuesday.

Meanwhile, climate change and more extreme weather patterns are creating risks for the economy that the Fed is only beginning to study, she said as wildfires ravaged a record-setting millions of acres in her district this year.

Longstanding economic disparities made more acute by Covid-19 will result in "talent being left on the table" unless policymakers find ways to "reach back and get all those individuals who were displaced by Covid back in the economy," the Fed leader said. That conclusion is built upon the biggest lesson of the last expansion, that "full employment is not a truth with a capital 'T,' and we instead find it experientially."

Creating economic opportunity for underprivileged communities across regions and demographics is an issue that goes "beyond fairness," Daly said. "It's super costly to our economy. Every time we leave talent on the table and sideline people, we're limiting our growth. Full employment can be a larger number tomorrow if we're focused on delivering opportunity."

The Fed's revised strategy of creating monetary policy to achieve 2% inflation on average and mitigate shortfalls from full employment is aligned with that goal, which will be judged by a range of variables including unemployment rates, labor force participation rates and the speed of wage gains, she said.

And if the Fed achieved its inflation goal without having closed the black-white employment gap? "I think it would be a nice problem to have, to be at 2% inflation," Daly said, "but we're not there yet. We have a lot of room to run and a lot of opportunity to bring individuals back."

At the same time, policymakers must face the reality that Covid has accelerated the evolution of business models in the digital era, Daly said, citing the example of a retailer in her district that was forced to massively accelerate a 10-year plan to shift distribution from retail locations to warehouses. "We will have to ensure we don't just focus on returning people back to what they had, but what's available."

To fully engage all available workers, the economy needs to "allow for that dynamism to occur" and provide skills and training to the jobs that are now available, she said.

CLIMATE CHANGE

The financial system similarly needs to grapple with the risks posed by climate change and weather-related disasters that have "huge impacts and a long tail," Daly said. California's wildfires have not only destroyed property but devastated entire communities in ways that cannot be quantified.

Existing shoreline policies and building and fire codes "are really for a different time," Daly said. Understanding potential vulnerabilities is the first step, and the San Francisco Fed's bank supervision and payments teams are thinking about how severe weather events affect the financial system and the economy.

A contact in the Oregon banking sector has told her that wildfires have affected 2% of their loans but is occupying 100% of his attention, she said. "This is increasingly important and will be more important five to 10 years from now."