WEBVTT - Robert Kaplan Talks Trump's Fed Pressure

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Our next guest used

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<v Speaker 1>to be on the FED. He used to head the

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<v Speaker 1>Dallas FED, and he says that investors should actually be

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<v Speaker 1>watching for two things out of this meeting. Any potential

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<v Speaker 1>foreshadowing for the fmc's pivotal September meeting, and any commentary

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<v Speaker 1>around the fed's framework, particularly as it relates to Central

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<v Speaker 1>banks independence, pleases say. Joining us right now is Robert Kaplan,

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<v Speaker 1>former Dallas FED president and now vice chairman over at

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<v Speaker 1>Goldman Sachs. Thanks for joining us here today, Robert. And

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<v Speaker 1>of course before I ask you specifically about Jay Powell

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<v Speaker 1>and what we're going to learn out of Jackson Hole,

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<v Speaker 1>I do have to ask you about some of the

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<v Speaker 1>allegations surrounding Lisa Cook, the political undertones that some people

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<v Speaker 1>think that there is a concerted effort to try to

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<v Speaker 1>reshape the FED board, and of course the general idea

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<v Speaker 1>here of what FED independence even means in this current environment.

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<v Speaker 2>Yeah, so I've obviously read the reports. I don't have

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<v Speaker 2>anything to comment on there. I do think the main

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<v Speaker 2>thing is it's critical for members of the FED to

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<v Speaker 2>do their work without regard to political considerations or political

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<v Speaker 2>influence and come to the best judgments they can, and

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<v Speaker 2>I'm hopeful that will continue to be the case.

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<v Speaker 1>I am curious about just the general process here, because

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<v Speaker 1>I mean, there are a lot of allegations.

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<v Speaker 3>That we know so little publicly.

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<v Speaker 1>There has to be an investigation both by the FED internally,

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<v Speaker 1>and it looks like at this point maybe potentially by

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<v Speaker 1>the DOJ. But you were the subject of allegation several

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<v Speaker 1>years ago when it came to trading, you decided to

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<v Speaker 1>step down, in your words, to avoid that distraction. Only

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<v Speaker 1>you know what was it maybe about three years later

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<v Speaker 1>to have the FED come out and say, after doing

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<v Speaker 1>an investigation, they found you actually did nothing wrong.

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<v Speaker 3>Do you regret stepping down when you did?

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<v Speaker 2>No. I made the best decision that I thought was

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<v Speaker 2>the best interest to the institution. But I think I'm sympathetic.

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<v Speaker 2>The situation that you're currently talking about has its own

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<v Speaker 2>set of facts, and I don't want to comment or

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<v Speaker 2>say anything about it. I think the people involved will

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<v Speaker 2>do the best they can to deal with it, and

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<v Speaker 2>I think I'll leave it at that.

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<v Speaker 4>Thank you for sharing that, Robert. If you believe that

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<v Speaker 4>President Trump is trying to secure a majority of the

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<v Speaker 4>Federal Reserve Board, the seven member board, what would that

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<v Speaker 4>really accomplish? And I asked that, Robert, because we know

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<v Speaker 4>that the FMC is more than just the board itself, right,

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<v Speaker 4>You have FED presidents who also vote on the FLMC.

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<v Speaker 2>There are twelve votes in every meeting, and they're the

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<v Speaker 2>governors as well as five of the presidents. And no

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<v Speaker 2>one person makes the decision. That chaired doesn't make the decision.

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<v Speaker 2>He or she has to form a consensus around the table.

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<v Speaker 2>And I think you've got an ethic at the FED

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<v Speaker 2>which is very strong of looking at all the available analysis,

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<v Speaker 2>talking to businesses, understanding all the structural drivers in the economy,

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<v Speaker 2>and trying to come to the very best judgment that

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<v Speaker 2>you can, and then bring that to the meeting and

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<v Speaker 2>debate it out. And I think it's very a healthy

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<v Speaker 2>process and I'm very hopeful that that's the process that

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<v Speaker 2>will continue.

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<v Speaker 4>And of course, one of the things everyone will be

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<v Speaker 4>debating about is what the economic data show about the

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<v Speaker 4>state of the economy and what's in store for the economy.

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<v Speaker 4>As a former FED official, as a former voting member

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<v Speaker 4>at the FMC, how would you interpret the data that

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<v Speaker 4>we've seen the last two weeks, which includes consumer and

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<v Speaker 4>wholesale inflation. Seemingly at odds, you have rising jobless claims.

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<v Speaker 4>You now have a rebound in manufacturing, at least according

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<v Speaker 4>to surveys.

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<v Speaker 2>Yeah. So here's the challenge for the Fed. On the

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<v Speaker 2>one hand, we have a relatively sluggish jobs market and

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<v Speaker 2>relatively sluggish GDP growth. We're at full and play employment.

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<v Speaker 2>But the reason we're add full employment is because labor

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<v Speaker 2>supply has been decelerating. Hiring has been very sluggish, and

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<v Speaker 2>so I think the FED probably would like not to

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<v Speaker 2>see a further weakening in the labor market. That's on

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<v Speaker 2>the one hand. On the other hand, we're running inflation

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<v Speaker 2>above target. We've been running inflation above target for the

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<v Speaker 2>last three or four years. It's been primarily services. This

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<v Speaker 2>is before we even talk about tariffs. Goods ironically have

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<v Speaker 2>been disinflating. We'll have to understand how the tariffs flow

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<v Speaker 2>through goods and what the FED is trying to balance

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<v Speaker 2>is I think if the job market were stronger, I

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<v Speaker 2>think it would be clearer to more be patient and

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<v Speaker 2>wait to see how the inflation is going to unfold,

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<v Speaker 2>and be more patient to see a trend further down

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<v Speaker 2>toward target. But I think with this weakening the labor market,

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<v Speaker 2>it's it's going to push the Fed I think, to

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<v Speaker 2>be more forward leading and maybe do an adjustment in September.

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<v Speaker 2>But the caution I would give if they do move

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<v Speaker 2>in September, I don't think that's the start of a cycle.

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<v Speaker 2>I think it's an individual decision then will wipe the

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<v Speaker 2>slate clean and take the next six weeks try to

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<v Speaker 2>understand these cross currents again, and so I think they'll

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<v Speaker 2>shorten up the timeframe and take it one meeting at

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<v Speaker 2>a time.

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<v Speaker 1>I am curious as to what you think that debate's

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<v Speaker 1>going to be. Like, we got the FMC minutes from

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<v Speaker 1>the last meeting, and there was clear division there as

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<v Speaker 1>to what the FED should do and when they should

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<v Speaker 1>start doing it, if at all. And I assume that's

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<v Speaker 1>going to intensify by the time we get to mid September,

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<v Speaker 1>once we have now that we've had some additional economic data,

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<v Speaker 1>having been in that room and knowing how those debates

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<v Speaker 1>go out, does that debate is that going to center around,

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<v Speaker 1>in your view, much more on the inflation side, or

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<v Speaker 1>do you think it's going to lean a little bit

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<v Speaker 1>more on the labor market side of the mandate.

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<v Speaker 2>So while there's a lot of focus on Jpal's speech tomorrow,

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<v Speaker 2>the reality is we're going to get at least one

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<v Speaker 2>more inflation print, and we're going to get the jobs market.

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<v Speaker 2>We're going to get the jobs numbers for August, and

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<v Speaker 2>so that actually that job's number for August is going

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<v Speaker 2>to be very telling and will shape the debate. But

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<v Speaker 2>you're either going to see a job's number that shows

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<v Speaker 2>a further weakening or continued sluggishness. I think that would

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<v Speaker 2>tilt toward taking some action in the September meeting, or

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<v Speaker 2>you may see something stronger. But the debate is going

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<v Speaker 2>to be about the fact that we are at risk

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<v Speaker 2>of not meeting either side of our dual mandate. We're

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<v Speaker 2>already above target on inflation, and how serious is the

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<v Speaker 2>threat that the job market is going to weaken further.

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<v Speaker 2>That's what they're going to debate. And the reason there's

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<v Speaker 2>a disagreement is for good reason. It's not clear, and

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<v Speaker 2>I think the fact that there's debate and disagreement, I

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<v Speaker 2>think is a good thing. I think there ought to

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<v Speaker 2>be where there's these type of cross currents, So I

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<v Speaker 2>think that's a good thing that they'll be disagreeing and debating.

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<v Speaker 1>When it comes to where the inflation rate or where

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<v Speaker 1>the inflation target should be. There's been a lot of

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<v Speaker 1>talk about two percent or I guess now it's two

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<v Speaker 1>percent ish. But the idea that the economy has been

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<v Speaker 1>running relatively okay with at least headline inflation in the

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<v Speaker 1>three percent range, core inflation in the high twos, is

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<v Speaker 1>there an argument to be made Robed that longer term,

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<v Speaker 1>maybe we can live with.

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<v Speaker 3>A higher target rate, a higher neutral rate.

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<v Speaker 2>Yeah, I would argue against that. And here's why. There

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<v Speaker 2>are approximately eighty million workers in this country that make

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<v Speaker 2>fifty or fifty five thousand dollars a year or less.

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<v Speaker 2>They've lost twenty five percent plus purchasing power over the

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<v Speaker 2>last three or four years. They are struggling to make

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<v Speaker 2>ends meet. If headline inflation is three, headline inflation for them,

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<v Speaker 2>based on share of wallet might be five or six

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<v Speaker 2>or seven. And so I actually think it's very critical,

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<v Speaker 2>particularly for low moderate income workers, that the FED continue

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<v Speaker 2>to work on getting the headline inflation rate down to

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<v Speaker 2>two and not be satisfied with three.

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<v Speaker 4>Rob I got to get your sense as well about

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<v Speaker 4>what we've learned from companies this earning season, particularly of

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<v Speaker 4>late with the retailers reporting results. We already know Nike,

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<v Speaker 4>SONOSP and g I've been mulling raising prices. Walmart said

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<v Speaker 4>as much as well, that it would have to at

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<v Speaker 4>some point start raising prices in the second half of

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<v Speaker 4>the year. Dittover Home Depot as well. So how do

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<v Speaker 4>you fold that into the thinking of inflation as we

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<v Speaker 4>anticipate higher prices due to higher costs from presumably the teriffs.

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<v Speaker 2>So there are four areas that are going to impact

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<v Speaker 2>on the tariffs. One is, can you We've got a

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<v Speaker 2>world of manufacturing over capacity, which tells you that companies

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<v Speaker 2>here that are buying from overseas may have more leverage

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<v Speaker 2>over suppliers. Dollar. Although it's weakened this year, the dollar

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<v Speaker 2>could strengthen. That'll take a bite out of the terrace.

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<v Speaker 2>They companies may take some of that out of margin,

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<v Speaker 2>and yes, they may put some in prices, but you've

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<v Speaker 2>got to remember the consumer has the ability to substitute.

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<v Speaker 2>They can be very price sensitive. About twenty four to

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<v Speaker 2>twenty five percent of the US economy is goods, seventy

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<v Speaker 2>five percent of services. Consumers can decide not to buy

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<v Speaker 2>a good and they can decide to go out to

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<v Speaker 2>dinner or do something else instead. And so to the

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<v Speaker 2>extent companies can pass on tariffs to consumers is going

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<v Speaker 2>to depend a lot on their pricing power, how strong

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<v Speaker 2>demand is. And so there's a lot of these things

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<v Speaker 2>that companies I talk to still are uncertain about. They're

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<v Speaker 2>feeling their way. They'll figure it out and they'll make

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<v Speaker 2>it work. Where I'm more concerned is small businesses I

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<v Speaker 2>talk to who don't have these levers to pull, and

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<v Speaker 2>I think for them, for many they're actively to dating

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<v Speaker 2>whether they can make it through the end of the

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<v Speaker 2>year because they don't have the flexibility to manage tariffs

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<v Speaker 2>the way big companies do.

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<v Speaker 4>Yeah, they don't have as many options. And I really

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<v Speaker 4>appreciate you bringing that up. I mean, all of that

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<v Speaker 4>adds up to a very complicated economic picture where the

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<v Speaker 4>economic indicators that we rely on and debate over don't

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<v Speaker 4>always capture the cross currents and the nuances that are

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<v Speaker 4>taking place underneath all this anecdotal insight from companies, particularly

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<v Speaker 4>small companies as you put it around the country is

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<v Speaker 4>incredibly valuable, and all that is encapitulated in something called

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<v Speaker 4>the Beige Book. Do you feel like the Beige Book

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<v Speaker 4>should be more valuable to the FMC than it has

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<v Speaker 4>been up to this point. I mean, I know that

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<v Speaker 4>as a reporter, we sometimes get the Bagebook and we

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<v Speaker 4>kind of look at it and say, oh, that's backwards looking.

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<v Speaker 4>It didn't really tell us anything.

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<v Speaker 2>Yeah, the Beige Book for me is a critical part

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<v Speaker 2>of the process. There's a whole there's a whole mosaic

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<v Speaker 2>of things. You look at. You talk to businesses, you

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<v Speaker 2>look at data that is published, you look at the

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<v Speaker 2>Beige Book. You try to understand structural drivers and macro factors.

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<v Speaker 2>But the Beige Book is very viable. It's one of

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<v Speaker 2>the unique things that the FED is set up to

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<v Speaker 2>do because it is distributed all over the United States

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<v Speaker 2>and has relationships locally and we get these survey results.

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<v Speaker 2>It's very informative, but it's a piece of the puzzle

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<v Speaker 2>that's very helpful in periods like this where you have

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<v Speaker 2>a number of structural changes going on. I think being

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<v Speaker 2>closer to business that includes the Beige Book, it can

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<v Speaker 2>be talking to businesses. I think that becomes more important

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<v Speaker 2>because the data, again is backward looking, it's aggregated, it

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<v Speaker 2>may be lagging, it gets revised, and so I think

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<v Speaker 2>you have to look at the whole picture.

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<v Speaker 1>And that's a good point, and I think a lot

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<v Speaker 1>of people in the market have been trying to do

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<v Speaker 1>that even prior to some of the recent developments. And

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<v Speaker 1>it gets to this idea as to whether you see

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<v Speaker 1>any opportunity to actually improve the government the official government data,

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<v Speaker 1>the collection of that data, the timeliness of that data,

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<v Speaker 1>more importantly, the accuracy of that data.

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<v Speaker 3>I mean, what can we do to actually update that well.

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<v Speaker 2>So there's been a lot of discussion. Got to I

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<v Speaker 2>think I've mentioned you before. I remember I learned when

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<v Speaker 2>I first got to the FED. The first piece of

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<v Speaker 2>advice I got is don't over rely on anyone data

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<v Speaker 2>print tends to be backward looking, it's aggregated, it's going

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<v Speaker 2>to get revised. And so I think we also are

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<v Speaker 2>aware of post COVID the survey response rates have declined.

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<v Speaker 2>So I think in this world at AI high frequency data,

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<v Speaker 2>a lot of private sources as well as public sources

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<v Speaker 2>use of technology. I think the BLS will be well

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<v Speaker 2>served and I'm confident they will do this to look

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<v Speaker 2>at how to upgrade the accuracy of their data. Even

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<v Speaker 2>with that, I would say the data is never going

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<v Speaker 2>to be perfect, and I think you're always better off

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<v Speaker 2>looking at the three to six month trend, not overreacting

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<v Speaker 2>to anyone data print. And I think that ethic is

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<v Speaker 2>always worth a reminder.

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<v Speaker 3>When you're at the FED, I am curious.

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<v Speaker 1>I mean, you sit in a very unique position, having

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<v Speaker 1>of course worked in the government, at the FED and

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<v Speaker 1>obviously a long career on Wall Street and now back

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<v Speaker 1>there as vice chairman of Goldman Sachs. There is the

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<v Speaker 1>idea that we have to be as a market I say,

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<v Speaker 1>the we Royal we not necessarily relying on that data,

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<v Speaker 1>but at least have some faith in it, in the data,

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<v Speaker 1>faith in the independence of the FED, faith in the

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<v Speaker 1>reliability of US government economic data. That faith is being

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<v Speaker 1>tested right now, and I'm curious if that worries you

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<v Speaker 1>at all.

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<v Speaker 2>It's always a concern. It should be a concern. However,

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<v Speaker 2>this is where I used to teach leadership, as you

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<v Speaker 2>may know, at Harvard Business School for ten years. This

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<v Speaker 2>is where people matter. It's up to the people involved

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<v Speaker 2>to adhere to an ethic that they're going to make

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<v Speaker 2>decisions based on their best available information without regard to

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<v Speaker 2>political influence or political consideration. That ethic is very strong

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<v Speaker 2>today at the FED. I'm very hopeful that that ethic

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<v Speaker 2>will continue, and I'll be up to the leaders of

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<v Speaker 2>the FED to make sure of that.

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<v Speaker 4>All right, Thank you so much. Rob Kaplan is the

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<v Speaker 4>former Dallas FED president and of course, current vice chair

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<v Speaker 4>of Goldman Sachs