Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Our next guest used
Speaker 1: to be on the FED. He used to head the
Speaker 1: Dallas FED, and he says that investors should actually be
Speaker 1: watching for two things out of this meeting. Any potential
Speaker 1: foreshadowing for the fmc's pivotal September meeting, and any commentary
Speaker 1: around the fed's framework, particularly as it relates to Central
Speaker 1: banks independence, pleases say. Joining us right now is Robert Kaplan,
Speaker 1: former Dallas FED president and now vice chairman over at
Speaker 1: Goldman Sachs. Thanks for joining us here today, Robert. And
Speaker 1: of course before I ask you specifically about Jay Powell
Speaker 1: and what we're going to learn out of Jackson Hole,
Speaker 1: I do have to ask you about some of the
Speaker 1: allegations surrounding Lisa Cook, the political undertones that some people
Speaker 1: think that there is a concerted effort to try to
Speaker 1: reshape the FED board, and of course the general idea
Speaker 1: here of what FED independence even means in this current environment.
Speaker 2: Yeah, so I've obviously read the reports. I don't have
Speaker 2: anything to comment on there. I do think the main
Speaker 2: thing is it's critical for members of the FED to
Speaker 2: do their work without regard to political considerations or political
Speaker 2: influence and come to the best judgments they can, and
Speaker 2: I'm hopeful that will continue to be the case.
Speaker 1: I am curious about just the general process here, because
Speaker 1: I mean, there are a lot of allegations.
Speaker 3: That we know so little publicly.
Speaker 1: There has to be an investigation both by the FED internally,
Speaker 1: and it looks like at this point maybe potentially by
Speaker 1: the DOJ. But you were the subject of allegation several
Speaker 1: years ago when it came to trading, you decided to
Speaker 1: step down, in your words, to avoid that distraction. Only
Speaker 1: you know what was it maybe about three years later
Speaker 1: to have the FED come out and say, after doing
Speaker 1: an investigation, they found you actually did nothing wrong.
Speaker 3: Do you regret stepping down when you did?
Speaker 2: No. I made the best decision that I thought was
Speaker 2: the best interest to the institution. But I think I'm sympathetic.
Speaker 2: The situation that you're currently talking about has its own
Speaker 2: set of facts, and I don't want to comment or
Speaker 2: say anything about it. I think the people involved will
Speaker 2: do the best they can to deal with it, and
Speaker 2: I think I'll leave it at that.
Speaker 4: Thank you for sharing that, Robert. If you believe that
Speaker 4: President Trump is trying to secure a majority of the
Speaker 4: Federal Reserve Board, the seven member board, what would that
Speaker 4: really accomplish? And I asked that, Robert, because we know
Speaker 4: that the FMC is more than just the board itself, right,
Speaker 4: You have FED presidents who also vote on the FLMC.
Speaker 2: There are twelve votes in every meeting, and they're the
Speaker 2: governors as well as five of the presidents. And no
Speaker 2: one person makes the decision. That chaired doesn't make the decision.
Speaker 2: He or she has to form a consensus around the table.
Speaker 2: And I think you've got an ethic at the FED
Speaker 2: which is very strong of looking at all the available analysis,
Speaker 2: talking to businesses, understanding all the structural drivers in the economy,
Speaker 2: and trying to come to the very best judgment that
Speaker 2: you can, and then bring that to the meeting and
Speaker 2: debate it out. And I think it's very a healthy
Speaker 2: process and I'm very hopeful that that's the process that
Speaker 2: will continue.
Speaker 4: And of course, one of the things everyone will be
Speaker 4: debating about is what the economic data show about the
Speaker 4: state of the economy and what's in store for the economy.
Speaker 4: As a former FED official, as a former voting member
Speaker 4: at the FMC, how would you interpret the data that
Speaker 4: we've seen the last two weeks, which includes consumer and
Speaker 4: wholesale inflation. Seemingly at odds, you have rising jobless claims.
Speaker 4: You now have a rebound in manufacturing, at least according
Speaker 4: to surveys.
Speaker 2: Yeah. So here's the challenge for the Fed. On the
Speaker 2: one hand, we have a relatively sluggish jobs market and
Speaker 2: relatively sluggish GDP growth. We're at full and play employment.
Speaker 2: But the reason we're add full employment is because labor
Speaker 2: supply has been decelerating. Hiring has been very sluggish, and
Speaker 2: so I think the FED probably would like not to
Speaker 2: see a further weakening in the labor market. That's on
Speaker 2: the one hand. On the other hand, we're running inflation
Speaker 2: above target. We've been running inflation above target for the
Speaker 2: last three or four years. It's been primarily services. This
Speaker 2: is before we even talk about tariffs. Goods ironically have
Speaker 2: been disinflating. We'll have to understand how the tariffs flow
Speaker 2: through goods and what the FED is trying to balance
Speaker 2: is I think if the job market were stronger, I
Speaker 2: think it would be clearer to more be patient and
Speaker 2: wait to see how the inflation is going to unfold,
Speaker 2: and be more patient to see a trend further down
Speaker 2: toward target. But I think with this weakening the labor market,
Speaker 2: it's it's going to push the Fed I think, to
Speaker 2: be more forward leading and maybe do an adjustment in September.
Speaker 2: But the caution I would give if they do move
Speaker 2: in September, I don't think that's the start of a cycle.
Speaker 2: I think it's an individual decision then will wipe the
Speaker 2: slate clean and take the next six weeks try to
Speaker 2: understand these cross currents again, and so I think they'll
Speaker 2: shorten up the timeframe and take it one meeting at
Speaker 2: a time.
Speaker 1: I am curious as to what you think that debate's
Speaker 1: going to be. Like, we got the FMC minutes from
Speaker 1: the last meeting, and there was clear division there as
Speaker 1: to what the FED should do and when they should
Speaker 1: start doing it, if at all. And I assume that's
Speaker 1: going to intensify by the time we get to mid September,
Speaker 1: once we have now that we've had some additional economic data,
Speaker 1: having been in that room and knowing how those debates
Speaker 1: go out, does that debate is that going to center around,
Speaker 1: in your view, much more on the inflation side, or
Speaker 1: do you think it's going to lean a little bit
Speaker 1: more on the labor market side of the mandate.
Speaker 2: So while there's a lot of focus on Jpal's speech tomorrow,
Speaker 2: the reality is we're going to get at least one
Speaker 2: more inflation print, and we're going to get the jobs market.
Speaker 2: We're going to get the jobs numbers for August, and
Speaker 2: so that actually that job's number for August is going
Speaker 2: to be very telling and will shape the debate. But
Speaker 2: you're either going to see a job's number that shows
Speaker 2: a further weakening or continued sluggishness. I think that would
Speaker 2: tilt toward taking some action in the September meeting, or
Speaker 2: you may see something stronger. But the debate is going
Speaker 2: to be about the fact that we are at risk
Speaker 2: of not meeting either side of our dual mandate. We're
Speaker 2: already above target on inflation, and how serious is the
Speaker 2: threat that the job market is going to weaken further.
Speaker 2: That's what they're going to debate. And the reason there's
Speaker 2: a disagreement is for good reason. It's not clear, and
Speaker 2: I think the fact that there's debate and disagreement, I
Speaker 2: think is a good thing. I think there ought to
Speaker 2: be where there's these type of cross currents, So I
Speaker 2: think that's a good thing that they'll be disagreeing and debating.
Speaker 1: When it comes to where the inflation rate or where
Speaker 1: the inflation target should be. There's been a lot of
Speaker 1: talk about two percent or I guess now it's two
Speaker 1: percent ish. But the idea that the economy has been
Speaker 1: running relatively okay with at least headline inflation in the
Speaker 1: three percent range, core inflation in the high twos, is
Speaker 1: there an argument to be made Robed that longer term,
Speaker 1: maybe we can live with.
Speaker 3: A higher target rate, a higher neutral rate.
Speaker 2: Yeah, I would argue against that. And here's why. There
Speaker 2: are approximately eighty million workers in this country that make
Speaker 2: fifty or fifty five thousand dollars a year or less.
Speaker 2: They've lost twenty five percent plus purchasing power over the
Speaker 2: last three or four years. They are struggling to make
Speaker 2: ends meet. If headline inflation is three, headline inflation for them,
Speaker 2: based on share of wallet might be five or six
Speaker 2: or seven. And so I actually think it's very critical,
Speaker 2: particularly for low moderate income workers, that the FED continue
Speaker 2: to work on getting the headline inflation rate down to
Speaker 2: two and not be satisfied with three.
Speaker 4: Rob I got to get your sense as well about
Speaker 4: what we've learned from companies this earning season, particularly of
Speaker 4: late with the retailers reporting results. We already know Nike,
Speaker 4: SONOSP and g I've been mulling raising prices. Walmart said
Speaker 4: as much as well, that it would have to at
Speaker 4: some point start raising prices in the second half of
Speaker 4: the year. Dittover Home Depot as well. So how do
Speaker 4: you fold that into the thinking of inflation as we
Speaker 4: anticipate higher prices due to higher costs from presumably the teriffs.
Speaker 2: So there are four areas that are going to impact
Speaker 2: on the tariffs. One is, can you We've got a
Speaker 2: world of manufacturing over capacity, which tells you that companies
Speaker 2: here that are buying from overseas may have more leverage
Speaker 2: over suppliers. Dollar. Although it's weakened this year, the dollar
Speaker 2: could strengthen. That'll take a bite out of the terrace.
Speaker 2: They companies may take some of that out of margin,
Speaker 2: and yes, they may put some in prices, but you've
Speaker 2: got to remember the consumer has the ability to substitute.
Speaker 2: They can be very price sensitive. About twenty four to
Speaker 2: twenty five percent of the US economy is goods, seventy
Speaker 2: five percent of services. Consumers can decide not to buy
Speaker 2: a good and they can decide to go out to
Speaker 2: dinner or do something else instead. And so to the
Speaker 2: extent companies can pass on tariffs to consumers is going
Speaker 2: to depend a lot on their pricing power, how strong
Speaker 2: demand is. And so there's a lot of these things
Speaker 2: that companies I talk to still are uncertain about. They're
Speaker 2: feeling their way. They'll figure it out and they'll make
Speaker 2: it work. Where I'm more concerned is small businesses I
Speaker 2: talk to who don't have these levers to pull, and
Speaker 2: I think for them, for many they're actively to dating
Speaker 2: whether they can make it through the end of the
Speaker 2: year because they don't have the flexibility to manage tariffs
Speaker 2: the way big companies do.
Speaker 4: Yeah, they don't have as many options. And I really
Speaker 4: appreciate you bringing that up. I mean, all of that
Speaker 4: adds up to a very complicated economic picture where the
Speaker 4: economic indicators that we rely on and debate over don't
Speaker 4: always capture the cross currents and the nuances that are
Speaker 4: taking place underneath all this anecdotal insight from companies, particularly
Speaker 4: small companies as you put it around the country is
Speaker 4: incredibly valuable, and all that is encapitulated in something called
Speaker 4: the Beige Book. Do you feel like the Beige Book
Speaker 4: should be more valuable to the FMC than it has
Speaker 4: been up to this point. I mean, I know that
Speaker 4: as a reporter, we sometimes get the Bagebook and we
Speaker 4: kind of look at it and say, oh, that's backwards looking.
Speaker 4: It didn't really tell us anything.
Speaker 2: Yeah, the Beige Book for me is a critical part
Speaker 2: of the process. There's a whole there's a whole mosaic
Speaker 2: of things. You look at. You talk to businesses, you
Speaker 2: look at data that is published, you look at the
Speaker 2: Beige Book. You try to understand structural drivers and macro factors.
Speaker 2: But the Beige Book is very viable. It's one of
Speaker 2: the unique things that the FED is set up to
Speaker 2: do because it is distributed all over the United States
Speaker 2: and has relationships locally and we get these survey results.
Speaker 2: It's very informative, but it's a piece of the puzzle
Speaker 2: that's very helpful in periods like this where you have
Speaker 2: a number of structural changes going on. I think being
Speaker 2: closer to business that includes the Beige Book, it can
Speaker 2: be talking to businesses. I think that becomes more important
Speaker 2: because the data, again is backward looking, it's aggregated, it
Speaker 2: may be lagging, it gets revised, and so I think
Speaker 2: you have to look at the whole picture.
Speaker 1: And that's a good point, and I think a lot
Speaker 1: of people in the market have been trying to do
Speaker 1: that even prior to some of the recent developments. And
Speaker 1: it gets to this idea as to whether you see
Speaker 1: any opportunity to actually improve the government the official government data,
Speaker 1: the collection of that data, the timeliness of that data,
Speaker 1: more importantly, the accuracy of that data.
Speaker 3: I mean, what can we do to actually update that well.
Speaker 2: So there's been a lot of discussion. Got to I
Speaker 2: think I've mentioned you before. I remember I learned when
Speaker 2: I first got to the FED. The first piece of
Speaker 2: advice I got is don't over rely on anyone data
Speaker 2: print tends to be backward looking, it's aggregated, it's going
Speaker 2: to get revised. And so I think we also are
Speaker 2: aware of post COVID the survey response rates have declined.
Speaker 2: So I think in this world at AI high frequency data,
Speaker 2: a lot of private sources as well as public sources
Speaker 2: use of technology. I think the BLS will be well
Speaker 2: served and I'm confident they will do this to look
Speaker 2: at how to upgrade the accuracy of their data. Even
Speaker 2: with that, I would say the data is never going
Speaker 2: to be perfect, and I think you're always better off
Speaker 2: looking at the three to six month trend, not overreacting
Speaker 2: to anyone data print. And I think that ethic is
Speaker 2: always worth a reminder.
Speaker 3: When you're at the FED, I am curious.
Speaker 1: I mean, you sit in a very unique position, having
Speaker 1: of course worked in the government, at the FED and
Speaker 1: obviously a long career on Wall Street and now back
Speaker 1: there as vice chairman of Goldman Sachs. There is the
Speaker 1: idea that we have to be as a market I say,
Speaker 1: the we Royal we not necessarily relying on that data,
Speaker 1: but at least have some faith in it, in the data,
Speaker 1: faith in the independence of the FED, faith in the
Speaker 1: reliability of US government economic data. That faith is being
Speaker 1: tested right now, and I'm curious if that worries you
Speaker 1: at all.
Speaker 2: It's always a concern. It should be a concern. However,
Speaker 2: this is where I used to teach leadership, as you
Speaker 2: may know, at Harvard Business School for ten years. This
Speaker 2: is where people matter. It's up to the people involved
Speaker 2: to adhere to an ethic that they're going to make
Speaker 2: decisions based on their best available information without regard to
Speaker 2: political influence or political consideration. That ethic is very strong
Speaker 2: today at the FED. I'm very hopeful that that ethic
Speaker 2: will continue, and I'll be up to the leaders of
Speaker 2: the FED to make sure of that.
Speaker 4: All right, Thank you so much. Rob Kaplan is the
Speaker 4: former Dallas FED president and of course, current vice chair
Speaker 4: of Goldman Sachs