WEBVTT - Goldman Sachs Vice Chairman Rob Kaplan Talks Fed, Powell & Trump 

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News.

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<v Speaker 2>Delighted to have with us Robert Kaplan. He's former president

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<v Speaker 2>and CEO of the Federal Reserve Bank of Dallas, vice

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<v Speaker 2>chairman currently of Goldman Sachs, and he joins us from

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<v Speaker 2>the news the Bloomberg News Bureau in Dallas. Robert is

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<v Speaker 2>great to have you here with us.

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<v Speaker 3>How are you great to see you? Great to see

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<v Speaker 3>it doing well?

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<v Speaker 2>All right, So I want to follow off of what

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<v Speaker 2>we heard from Professor Judge. She made some really good points.

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<v Speaker 2>I mean, first of all, what do you make of

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<v Speaker 2>the back and forth between the President and Fed jer J.

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<v Speaker 3>Powell?

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<v Speaker 2>Not really between the two, but really coming from mostly

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<v Speaker 2>the White House.

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<v Speaker 4>So I'm going to talk to you about it as

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<v Speaker 4>if I were in my former seat at the FED,

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<v Speaker 4>and I would tell you I would be aware of it,

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<v Speaker 4>but I would be striving to make sure it does

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<v Speaker 4>not enter into my thinking at all. And I think

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<v Speaker 4>for most of the folks at the FED and around

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<v Speaker 4>the FMC table, they're very focused as I would be,

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<v Speaker 4>on trying to make the right decision in July and

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<v Speaker 4>then in September, and I would basically expect them to

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<v Speaker 4>extend humanly possible screen out some of the activities going

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<v Speaker 4>on externally.

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<v Speaker 1>How do you do that? I mean, this is a

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<v Speaker 1>psychological question as much as it is a question about

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<v Speaker 1>data and the FEDS dual mandate. But how do you

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<v Speaker 1>drown out the noise when it seems to be coming

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<v Speaker 1>at least in our world almost twenty four to seven.

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<v Speaker 4>So the way you drown out the noise, I would say,

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<v Speaker 4>is the task of figuring out right now with some

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<v Speaker 4>of these cross currents, we have the task of figuring

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<v Speaker 4>out what's the right way to administer monetary policy.

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<v Speaker 3>That's consuming enough.

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<v Speaker 4>And I think there's a real ethic and culture at

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<v Speaker 4>the FED and around the table to divorce your decisions

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<v Speaker 4>from political pressure or political considerations. That's really firmly ingrained.

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<v Speaker 4>And I think it's also between colleagues. It's self reinforcing.

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<v Speaker 4>You reinforce it with each other. I think the current

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<v Speaker 4>situation which I can get into is complicated enough that

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<v Speaker 4>would be consuming all of my attention, and I would

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<v Speaker 4>be having my team very focused on how to how

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<v Speaker 4>to weigh these trade offs well.

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<v Speaker 2>And the President continues to say Rob that you know,

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<v Speaker 2>Vet jo Jpal is going to do the right thing.

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<v Speaker 2>You look at the economy. You do so for you

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<v Speaker 2>know your team over at Goldman Sachs and some of

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<v Speaker 2>the clients. How do you see the economy? What is

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<v Speaker 2>the right thing in terms of monetary policy right now

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<v Speaker 2>in your view?

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<v Speaker 4>So here's what I'm seeing in the economy, and I

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<v Speaker 4>spend bulk of my time with clients across our divisions. Globally,

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<v Speaker 4>US economy is solid, but I would say growth is sluggish.

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<v Speaker 4>And what do I mean by sluggish? We expect GDP

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<v Speaker 4>growth this year, if you know, one in a fraction,

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<v Speaker 4>not a recession, but sluggish. The labor force is tight,

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<v Speaker 4>but the reason it's so tight, it's that businesses are

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<v Speaker 4>not hiring very aggressively, but they're also not firing. And

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<v Speaker 4>we've got a lack of immigration. We've got a real

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<v Speaker 4>uncertainty with ten million plus undocumented immigrants that are in

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<v Speaker 4>the workforce, so the unemployment rates likely to stay sticky.

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<v Speaker 4>In addition, the macro elements are set. You've got enormous

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<v Speaker 4>global overcapacity in goods, driven heavily by China over capacity.

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<v Speaker 4>We've got an AI artificial intelligence boom, which should be disinflationary,

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<v Speaker 4>and the counter to this is we've got this tariff

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<v Speaker 4>situation going on, which still isn't yet resolved.

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<v Speaker 3>But I would say the following.

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<v Speaker 4>The range of outcomes for tariffs in April were very

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<v Speaker 4>wide narrow down. They may be as low as low

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<v Speaker 4>to mid teens, they may be as high as high

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<v Speaker 4>teens the low twenties. That's allowed businesses to get a

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<v Speaker 4>pretty good grip on what their strategies will be, how

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<v Speaker 4>much they want to take from suppliers in negotiations, how

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<v Speaker 4>much has to come out of margin, how much will

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<v Speaker 4>go in price, and so the thing I'd be struggling

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<v Speaker 4>with at the FED is, in this disinflationary context, how

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<v Speaker 4>much will these tariffs lead to more persistent price pressures

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<v Speaker 4>or are they more likely to be a one time

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<v Speaker 4>price issue cost issue which then over the horizon will

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<v Speaker 4>get absorbed and we will return back to a more

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<v Speaker 4>disinflationary environment, which I would argue is where we are

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<v Speaker 4>predominantly globally outside the United States. And I'm not ready

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<v Speaker 4>to conclude that it's time to act in July, but

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<v Speaker 4>I'd be getting my team ready to be prepared potentially

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<v Speaker 4>to take action in the September meeting.

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<v Speaker 1>In the United States. Okay, potentially take action in the

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<v Speaker 1>September meeting. So it's a ways away, but not really

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<v Speaker 1>a ways away, just after Jackson Hole in August.

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<v Speaker 3>Right.

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<v Speaker 1>So, if we think about this from the perspective of

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<v Speaker 1>the United States economy and what you said about immigration

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<v Speaker 1>and the uncertainty around the ten million plus undocumented workers

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<v Speaker 1>or eight million, however, whatever number we're using to measure

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<v Speaker 1>this difficult to measure workforce here in the US, is

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<v Speaker 1>the net effect of President Trump's immigration policy inflationary or disinflationary.

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<v Speaker 4>The net effect on the workforces you much have. You

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<v Speaker 4>have a very tight workforce, and this is why businesses

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<v Speaker 4>are reluctant to fire. That means that wages and this

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<v Speaker 4>I think is a good thing, are probably firmer you

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<v Speaker 4>do not have. Though on the fiscal side, some of

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<v Speaker 4>these big government directed programs like the American Rescue Act,

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<v Speaker 4>Inflation Reduction Act, infrastructure, and Chipsack. You know that that

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<v Speaker 4>spigot of government directed spending has been stood down. It's

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<v Speaker 4>probably been replaced though by more stimulus, tax on overtimes,

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<v Speaker 4>tax on tips, UH, accelerated depreciation, and others. And I

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<v Speaker 4>think the net effect of what's going on over the horizon.

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<v Speaker 4>That may, in fact, when we're looking back a year

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<v Speaker 4>from now, may say that the overall trend has been disinflationary.

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<v Speaker 4>The tariffs have basically interrupted that, but only for a

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<v Speaker 4>period of time, and we're returning to a disinflationary chen.

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<v Speaker 4>But but I'm not sure yet. And that's what I'd

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<v Speaker 4>be trying to figure out, and I think that's what

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<v Speaker 4>the FED participants are trying to figure.

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<v Speaker 3>Out right now.

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<v Speaker 2>What is the biggest risk of the US economy right now?

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<v Speaker 2>Is it the tariffs and the and the deals that

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<v Speaker 2>are being worked out.

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<v Speaker 4>Uh, I would say the following, Uh, We're we're gonna

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<v Speaker 4>We're gonna go into twenty twenty six with some additional

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<v Speaker 4>stimulus coming from the bill that was just passed. We've

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<v Speaker 4>got a very tight labor force. I think a risk

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<v Speaker 4>is most businesses I talk to are struggling to find workers,

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<v Speaker 4>particularly in the service sector. I think there may have

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<v Speaker 4>to be a look at increasing legal immigration and or

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<v Speaker 4>clarifying the status of these millions of undocumented immigrants because

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<v Speaker 4>businesses are telling me they're struggling to find workers. And

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<v Speaker 4>then yes, on the tariffs. If we're in the load

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<v Speaker 4>to mid teens, I think the risk of being able

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<v Speaker 4>to manage this is lower. I think if they're mid

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<v Speaker 4>to high teens or twenty percent, I think it will

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<v Speaker 4>take longer. And I'm still, though overall optimistic about next year.

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<v Speaker 4>The biggest concern I have for the US economy is

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<v Speaker 4>the deficit. We're now net debt to GDP over one

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<v Speaker 4>hundred percent. We're going to run this year as high

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<v Speaker 4>as a seven percent and a GDP deficit, although we'll

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<v Speaker 4>have to see, and I still think our ability to

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<v Speaker 4>sell long duration treasuries is still our biggest challenge, and

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<v Speaker 4>that's the biggest thing I'm concerned about.

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<v Speaker 2>We are, of course talking with Rob Kaplan and vice

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<v Speaker 2>chairman of our Goldmnzak's former president and CEO of the

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<v Speaker 2>Federal Reserve Bank of Dallas, joining us from the Bloomberg

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<v Speaker 2>News bureau in Dallas. Hey, Rob, one thing I wanted

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<v Speaker 2>to ask you. Former Treasury in White House National Economic

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<v Speaker 2>Council Chief Larry Summers said on Bloomberg Television's Wall Street

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<v Speaker 2>Week with David Weston that he backed Treasury Secretary Scott

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<v Speaker 2>Besson's questioning of the fed's non monetary policy activities and

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<v Speaker 2>saying that there were some areas that are distinct from

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<v Speaker 2>the broader issue of central bank independence. I think it's

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<v Speaker 2>safe to say that even some that really fiercely defend

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<v Speaker 2>FED independence say it is a good idea to review.

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<v Speaker 2>Do you think the FED is overreached in some areas.

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<v Speaker 4>I think there's two or three areas that are healthy

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<v Speaker 4>to look at. One, the FED has very aggressively used

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<v Speaker 4>its balance sheet, increased its balance sheet QI in the last.

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<v Speaker 3>Number of years.

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<v Speaker 4>I think there's an argument, and it's worth a debate.

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<v Speaker 4>Maybe the bar should be higher to roll out the

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<v Speaker 4>balance sheet in the midst of a downturn, emergency powers gs.

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<v Speaker 4>Maybe a higher bar for using that balance sheet because

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<v Speaker 4>it has a distorting effect on the treasury market and

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<v Speaker 4>financial markets. I think some of the changes they're being

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<v Speaker 4>made now to do a revamp of bank regulation, I

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<v Speaker 4>think are constructive and I think those are good moves.

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<v Speaker 4>And then to the points that have been made, I

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<v Speaker 4>think it's always a good idea to take a look

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<v Speaker 4>at the FED. How can we operate better? There's twelve

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<v Speaker 4>reserve banks, there's a big board of governors. Are there

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<v Speaker 4>operations that could be integrated? Could there be more efficiencies

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<v Speaker 4>created to make it more economical. Sure, there are opportunities

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<v Speaker 4>there and kind of review, though, is healthy and constructive

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<v Speaker 4>and I think should be expected, and I think it

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<v Speaker 4>is a positive thing for the FED.

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<v Speaker 2>Rob forgive me for going back to kind of where

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<v Speaker 2>we started, and I think about man, I would be

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<v Speaker 2>super rich and living probably on Anguilla if I had

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<v Speaker 2>a buff for every time I said we were living

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<v Speaker 2>in unusual and times. But watching yesterday, Tim's been doing

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<v Speaker 2>this a long time. I've been doing this a long time.

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<v Speaker 2>To see a president with a FED share touring the

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<v Speaker 2>Federal Reserve, I think it's fair to say that was

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<v Speaker 2>super unusual.

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<v Speaker 1>That has happened in two decades.

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<v Speaker 2>So tell me someone who understands the FED the importance

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<v Speaker 2>of FED independence. You know, your conversations are the things

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<v Speaker 2>you were being asked around that, and what you think

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<v Speaker 2>is the productive takeaway from seeing that? Or were you

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<v Speaker 2>as shocked as kind of we all were.

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<v Speaker 4>Yeah, well, I thought I thought Jpalll handled it very

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<v Speaker 4>well and I really think that as a leader of

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<v Speaker 4>the FED, and I would guess what they're saying inside

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<v Speaker 4>the FED. Please screen this out. Let's focus on the

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<v Speaker 4>job at hand. We've got a big job to do.

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<v Speaker 4>The job is not finished. Let's make sure we're focused

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<v Speaker 4>on the July meeting, the September meeting, our role in

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<v Speaker 4>bank supervision, and all the other.

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<v Speaker 3>Community activities we do.

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<v Speaker 4>That has got to be the overwhelming focus to me,

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<v Speaker 4>watching the events of yesterday, it reminds me.

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<v Speaker 3>Back to what I said earlier.

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<v Speaker 4>We are much more highly leveraged than we were pre COVID,

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<v Speaker 4>whether we like it or not. Now it's spurred economic

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<v Speaker 4>growth in the last three or four years, but some

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<v Speaker 4>of that was due to excess fiscal spending. I do

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<v Speaker 4>think the big looming issue for the country, and I'm

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<v Speaker 4>optimistic generally, we are going to have to find ways

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<v Speaker 4>to moderate our debt growth, to be aware of the

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<v Speaker 4>fact we're running historically high deficit at a time of

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<v Speaker 4>full employment. We tend to run big deficits at when

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<v Speaker 4>we have high unemployment, not low unemployment. So this sensitivity

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<v Speaker 4>to the cost of everything, I think that part of it,

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<v Speaker 4>I think is a constructive development, and we're going to

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<v Speaker 4>have to do more to find ways to de leverage

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<v Speaker 4>and moderate idead growth for the good of our kids

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<v Speaker 4>and our grandkids and to have a healthier economy.

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<v Speaker 3>Do you think fed Shair J.

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<v Speaker 1>Powell concludes his term in May twenty twenty six as

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<v Speaker 1>Chair of the Federal Reserve and then serves until January

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<v Speaker 1>twenty twenty eight on the Board of Governors.

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<v Speaker 4>I'll leave it to Jay to talk about what he

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<v Speaker 4>does after he's done being FED Shair. I would guess

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<v Speaker 4>I believe strongly he will finish out his term as chair.

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<v Speaker 4>It wouldn't surprise me if he made the decision then

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<v Speaker 4>to step down at that time.

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<v Speaker 3>But he'll make that decision.

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<v Speaker 4>But I'd be optimistic that he will finish out his

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<v Speaker 4>term is chair.

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<v Speaker 2>Do you think wait, I got to just add because

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<v Speaker 2>Professor Judge asked this, you know when the President might

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<v Speaker 2>take any more steps to put more pressure on FED

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<v Speaker 2>Chier J.

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<v Speaker 3>Powell.

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<v Speaker 2>Do you think it's just going to be the same

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<v Speaker 2>drum beat or do you think you could take it

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<v Speaker 2>even further?

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<v Speaker 4>So listen, I will say this, The sequence of events

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<v Speaker 4>over the last several months have meant that the next

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<v Speaker 4>FED chair will have a onus on him or her

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<v Speaker 4>to demonstrate that they are divorced from political pressure and

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<v Speaker 4>political considerations. Very critical to the leadership of the FED

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<v Speaker 4>that they demonstrate that, and I think it's critical to

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<v Speaker 4>people in the economy and the financial markets, not just

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<v Speaker 4>here but around the world, that that person demonstrate that.

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<v Speaker 3>And I think this just.

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<v Speaker 4>Increases the emphasis on their need to demonstrate that, and

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<v Speaker 4>I'm hopeful they will.

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<v Speaker 2>All Right, don't tell anybody, Rob but I know we're

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<v Speaker 2>not supposed to have favorite interviews of the week, but

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<v Speaker 2>this was definitely a fave. Robert Kaplan, have a great weekend.

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<v Speaker 2>He is former president and CEO of the Federal Warzer

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<v Speaker 2>Bank of Dallas, and of course vice chairman at Goldman Sachs.

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<v Speaker 2>Joining us from Dallas