Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Delighted to have with us Robert Kaplan. He's former president
Speaker 2: and CEO of the Federal Reserve Bank of Dallas, vice
Speaker 2: chairman currently of Goldman Sachs, and he joins us from
Speaker 2: the news the Bloomberg News Bureau in Dallas. Robert is
Speaker 2: great to have you here with us.
Speaker 3: How are you great to see you? Great to see
Speaker 3: it doing well?
Speaker 2: All right, So I want to follow off of what
Speaker 2: we heard from Professor Judge. She made some really good points.
Speaker 2: I mean, first of all, what do you make of
Speaker 2: the back and forth between the President and Fed jer J.
Speaker 3: Powell?
Speaker 2: Not really between the two, but really coming from mostly
Speaker 2: the White House.
Speaker 4: So I'm going to talk to you about it as
Speaker 4: if I were in my former seat at the FED,
Speaker 4: and I would tell you I would be aware of it,
Speaker 4: but I would be striving to make sure it does
Speaker 4: not enter into my thinking at all. And I think
Speaker 4: for most of the folks at the FED and around
Speaker 4: the FMC table, they're very focused as I would be,
Speaker 4: on trying to make the right decision in July and
Speaker 4: then in September, and I would basically expect them to
Speaker 4: extend humanly possible screen out some of the activities going
Speaker 4: on externally.
Speaker 1: How do you do that? I mean, this is a
Speaker 1: psychological question as much as it is a question about
Speaker 1: data and the FEDS dual mandate. But how do you
Speaker 1: drown out the noise when it seems to be coming
Speaker 1: at least in our world almost twenty four to seven.
Speaker 4: So the way you drown out the noise, I would say,
Speaker 4: is the task of figuring out right now with some
Speaker 4: of these cross currents, we have the task of figuring
Speaker 4: out what's the right way to administer monetary policy.
Speaker 3: That's consuming enough.
Speaker 4: And I think there's a real ethic and culture at
Speaker 4: the FED and around the table to divorce your decisions
Speaker 4: from political pressure or political considerations. That's really firmly ingrained.
Speaker 4: And I think it's also between colleagues. It's self reinforcing.
Speaker 4: You reinforce it with each other. I think the current
Speaker 4: situation which I can get into is complicated enough that
Speaker 4: would be consuming all of my attention, and I would
Speaker 4: be having my team very focused on how to how
Speaker 4: to weigh these trade offs well.
Speaker 2: And the President continues to say Rob that you know,
Speaker 2: Vet jo Jpal is going to do the right thing.
Speaker 2: You look at the economy. You do so for you
Speaker 2: know your team over at Goldman Sachs and some of
Speaker 2: the clients. How do you see the economy? What is
Speaker 2: the right thing in terms of monetary policy right now
Speaker 2: in your view?
Speaker 4: So here's what I'm seeing in the economy, and I
Speaker 4: spend bulk of my time with clients across our divisions. Globally,
Speaker 4: US economy is solid, but I would say growth is sluggish.
Speaker 4: And what do I mean by sluggish? We expect GDP
Speaker 4: growth this year, if you know, one in a fraction,
Speaker 4: not a recession, but sluggish. The labor force is tight,
Speaker 4: but the reason it's so tight, it's that businesses are
Speaker 4: not hiring very aggressively, but they're also not firing. And
Speaker 4: we've got a lack of immigration. We've got a real
Speaker 4: uncertainty with ten million plus undocumented immigrants that are in
Speaker 4: the workforce, so the unemployment rates likely to stay sticky.
Speaker 4: In addition, the macro elements are set. You've got enormous
Speaker 4: global overcapacity in goods, driven heavily by China over capacity.
Speaker 4: We've got an AI artificial intelligence boom, which should be disinflationary,
Speaker 4: and the counter to this is we've got this tariff
Speaker 4: situation going on, which still isn't yet resolved.
Speaker 3: But I would say the following.
Speaker 4: The range of outcomes for tariffs in April were very
Speaker 4: wide narrow down. They may be as low as low
Speaker 4: to mid teens, they may be as high as high
Speaker 4: teens the low twenties. That's allowed businesses to get a
Speaker 4: pretty good grip on what their strategies will be, how
Speaker 4: much they want to take from suppliers in negotiations, how
Speaker 4: much has to come out of margin, how much will
Speaker 4: go in price, and so the thing I'd be struggling
Speaker 4: with at the FED is, in this disinflationary context, how
Speaker 4: much will these tariffs lead to more persistent price pressures
Speaker 4: or are they more likely to be a one time
Speaker 4: price issue cost issue which then over the horizon will
Speaker 4: get absorbed and we will return back to a more
Speaker 4: disinflationary environment, which I would argue is where we are
Speaker 4: predominantly globally outside the United States. And I'm not ready
Speaker 4: to conclude that it's time to act in July, but
Speaker 4: I'd be getting my team ready to be prepared potentially
Speaker 4: to take action in the September meeting.
Speaker 1: In the United States. Okay, potentially take action in the
Speaker 1: September meeting. So it's a ways away, but not really
Speaker 1: a ways away, just after Jackson Hole in August.
Speaker 3: Right.
Speaker 1: So, if we think about this from the perspective of
Speaker 1: the United States economy and what you said about immigration
Speaker 1: and the uncertainty around the ten million plus undocumented workers
Speaker 1: or eight million, however, whatever number we're using to measure
Speaker 1: this difficult to measure workforce here in the US, is
Speaker 1: the net effect of President Trump's immigration policy inflationary or disinflationary.
Speaker 4: The net effect on the workforces you much have. You
Speaker 4: have a very tight workforce, and this is why businesses
Speaker 4: are reluctant to fire. That means that wages and this
Speaker 4: I think is a good thing, are probably firmer you
Speaker 4: do not have. Though on the fiscal side, some of
Speaker 4: these big government directed programs like the American Rescue Act,
Speaker 4: Inflation Reduction Act, infrastructure, and Chipsack. You know that that
Speaker 4: spigot of government directed spending has been stood down. It's
Speaker 4: probably been replaced though by more stimulus, tax on overtimes,
Speaker 4: tax on tips, UH, accelerated depreciation, and others. And I
Speaker 4: think the net effect of what's going on over the horizon.
Speaker 4: That may, in fact, when we're looking back a year
Speaker 4: from now, may say that the overall trend has been disinflationary.
Speaker 4: The tariffs have basically interrupted that, but only for a
Speaker 4: period of time, and we're returning to a disinflationary chen.
Speaker 4: But but I'm not sure yet. And that's what I'd
Speaker 4: be trying to figure out, and I think that's what
Speaker 4: the FED participants are trying to figure.
Speaker 3: Out right now.
Speaker 2: What is the biggest risk of the US economy right now?
Speaker 2: Is it the tariffs and the and the deals that
Speaker 2: are being worked out.
Speaker 4: Uh, I would say the following, Uh, We're we're gonna
Speaker 4: We're gonna go into twenty twenty six with some additional
Speaker 4: stimulus coming from the bill that was just passed. We've
Speaker 4: got a very tight labor force. I think a risk
Speaker 4: is most businesses I talk to are struggling to find workers,
Speaker 4: particularly in the service sector. I think there may have
Speaker 4: to be a look at increasing legal immigration and or
Speaker 4: clarifying the status of these millions of undocumented immigrants because
Speaker 4: businesses are telling me they're struggling to find workers. And
Speaker 4: then yes, on the tariffs. If we're in the load
Speaker 4: to mid teens, I think the risk of being able
Speaker 4: to manage this is lower. I think if they're mid
Speaker 4: to high teens or twenty percent, I think it will
Speaker 4: take longer. And I'm still, though overall optimistic about next year.
Speaker 4: The biggest concern I have for the US economy is
Speaker 4: the deficit. We're now net debt to GDP over one
Speaker 4: hundred percent. We're going to run this year as high
Speaker 4: as a seven percent and a GDP deficit, although we'll
Speaker 4: have to see, and I still think our ability to
Speaker 4: sell long duration treasuries is still our biggest challenge, and
Speaker 4: that's the biggest thing I'm concerned about.
Speaker 2: We are, of course talking with Rob Kaplan and vice
Speaker 2: chairman of our Goldmnzak's former president and CEO of the
Speaker 2: Federal Reserve Bank of Dallas, joining us from the Bloomberg
Speaker 2: News bureau in Dallas. Hey, Rob, one thing I wanted
Speaker 2: to ask you. Former Treasury in White House National Economic
Speaker 2: Council Chief Larry Summers said on Bloomberg Television's Wall Street
Speaker 2: Week with David Weston that he backed Treasury Secretary Scott
Speaker 2: Besson's questioning of the fed's non monetary policy activities and
Speaker 2: saying that there were some areas that are distinct from
Speaker 2: the broader issue of central bank independence. I think it's
Speaker 2: safe to say that even some that really fiercely defend
Speaker 2: FED independence say it is a good idea to review.
Speaker 2: Do you think the FED is overreached in some areas.
Speaker 4: I think there's two or three areas that are healthy
Speaker 4: to look at. One, the FED has very aggressively used
Speaker 4: its balance sheet, increased its balance sheet QI in the last.
Speaker 3: Number of years.
Speaker 4: I think there's an argument, and it's worth a debate.
Speaker 4: Maybe the bar should be higher to roll out the
Speaker 4: balance sheet in the midst of a downturn, emergency powers gs.
Speaker 4: Maybe a higher bar for using that balance sheet because
Speaker 4: it has a distorting effect on the treasury market and
Speaker 4: financial markets. I think some of the changes they're being
Speaker 4: made now to do a revamp of bank regulation, I
Speaker 4: think are constructive and I think those are good moves.
Speaker 4: And then to the points that have been made, I
Speaker 4: think it's always a good idea to take a look
Speaker 4: at the FED. How can we operate better? There's twelve
Speaker 4: reserve banks, there's a big board of governors. Are there
Speaker 4: operations that could be integrated? Could there be more efficiencies
Speaker 4: created to make it more economical. Sure, there are opportunities
Speaker 4: there and kind of review, though, is healthy and constructive
Speaker 4: and I think should be expected, and I think it
Speaker 4: is a positive thing for the FED.
Speaker 2: Rob forgive me for going back to kind of where
Speaker 2: we started, and I think about man, I would be
Speaker 2: super rich and living probably on Anguilla if I had
Speaker 2: a buff for every time I said we were living
Speaker 2: in unusual and times. But watching yesterday, Tim's been doing
Speaker 2: this a long time. I've been doing this a long time.
Speaker 2: To see a president with a FED share touring the
Speaker 2: Federal Reserve, I think it's fair to say that was
Speaker 2: super unusual.
Speaker 1: That has happened in two decades.
Speaker 2: So tell me someone who understands the FED the importance
Speaker 2: of FED independence. You know, your conversations are the things
Speaker 2: you were being asked around that, and what you think
Speaker 2: is the productive takeaway from seeing that? Or were you
Speaker 2: as shocked as kind of we all were.
Speaker 4: Yeah, well, I thought I thought Jpalll handled it very
Speaker 4: well and I really think that as a leader of
Speaker 4: the FED, and I would guess what they're saying inside
Speaker 4: the FED. Please screen this out. Let's focus on the
Speaker 4: job at hand. We've got a big job to do.
Speaker 4: The job is not finished. Let's make sure we're focused
Speaker 4: on the July meeting, the September meeting, our role in
Speaker 4: bank supervision, and all the other.
Speaker 3: Community activities we do.
Speaker 4: That has got to be the overwhelming focus to me,
Speaker 4: watching the events of yesterday, it reminds me.
Speaker 3: Back to what I said earlier.
Speaker 4: We are much more highly leveraged than we were pre COVID,
Speaker 4: whether we like it or not. Now it's spurred economic
Speaker 4: growth in the last three or four years, but some
Speaker 4: of that was due to excess fiscal spending. I do
Speaker 4: think the big looming issue for the country, and I'm
Speaker 4: optimistic generally, we are going to have to find ways
Speaker 4: to moderate our debt growth, to be aware of the
Speaker 4: fact we're running historically high deficit at a time of
Speaker 4: full employment. We tend to run big deficits at when
Speaker 4: we have high unemployment, not low unemployment. So this sensitivity
Speaker 4: to the cost of everything, I think that part of it,
Speaker 4: I think is a constructive development, and we're going to
Speaker 4: have to do more to find ways to de leverage
Speaker 4: and moderate idead growth for the good of our kids
Speaker 4: and our grandkids and to have a healthier economy.
Speaker 3: Do you think fed Shair J.
Speaker 1: Powell concludes his term in May twenty twenty six as
Speaker 1: Chair of the Federal Reserve and then serves until January
Speaker 1: twenty twenty eight on the Board of Governors.
Speaker 4: I'll leave it to Jay to talk about what he
Speaker 4: does after he's done being FED Shair. I would guess
Speaker 4: I believe strongly he will finish out his term as chair.
Speaker 4: It wouldn't surprise me if he made the decision then
Speaker 4: to step down at that time.
Speaker 3: But he'll make that decision.
Speaker 4: But I'd be optimistic that he will finish out his
Speaker 4: term is chair.
Speaker 2: Do you think wait, I got to just add because
Speaker 2: Professor Judge asked this, you know when the President might
Speaker 2: take any more steps to put more pressure on FED
Speaker 2: Chier J.
Speaker 3: Powell.
Speaker 2: Do you think it's just going to be the same
Speaker 2: drum beat or do you think you could take it
Speaker 2: even further?
Speaker 4: So listen, I will say this, The sequence of events
Speaker 4: over the last several months have meant that the next
Speaker 4: FED chair will have a onus on him or her
Speaker 4: to demonstrate that they are divorced from political pressure and
Speaker 4: political considerations. Very critical to the leadership of the FED
Speaker 4: that they demonstrate that, and I think it's critical to
Speaker 4: people in the economy and the financial markets, not just
Speaker 4: here but around the world, that that person demonstrate that.
Speaker 3: And I think this just.
Speaker 4: Increases the emphasis on their need to demonstrate that, and
Speaker 4: I'm hopeful they will.
Speaker 2: All Right, don't tell anybody, Rob but I know we're
Speaker 2: not supposed to have favorite interviews of the week, but
Speaker 2: this was definitely a fave. Robert Kaplan, have a great weekend.
Speaker 2: He is former president and CEO of the Federal Warzer
Speaker 2: Bank of Dallas, and of course vice chairman at Goldman Sachs.
Speaker 2: Joining us from Dallas