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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm very pleased to

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Speaker 1: say joining us now is Robert Kaplan, vice chairman at

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Speaker 1: Goldwyn Sachs. Previously, of course, served as the president of

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Speaker 1: the Federal Reserve Bank of Dallas. Robert, very nice to

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Speaker 1: have you with us. Thank you so much for coming in.

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Speaker 1: So let's talk about the here and now in the

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Speaker 1: US economy and what you see weakening in the labor market.

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Speaker 1: Is it right that the market that the Fed should

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Speaker 1: focus on the weakness in the labor market right now?

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Speaker 2: There's no question that labor market is weaker and very sluggish.

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Speaker 2: There's three reasons why. Won Tariffs at least in the

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Speaker 2: short run, are slowing growth in the United States, and

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Speaker 2: they're affecting small business disproportionately. And you saw in this

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Speaker 2: recent job weakness while of the weakness was in small business.

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Speaker 2: That makes sense. Second, there's been constraints on labor force growth,

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Speaker 2: which reduces supply. But also there's a multiplier effect. When

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Speaker 2: jobs go unfilled, it creates other jobs that would have

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Speaker 2: been created. You know, there's another half a job that

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Speaker 2: would be creative for every job goes untilled. And then

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Speaker 2: the shutdown has been a headwind for growth, so it's

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Speaker 2: not surprising you're seeing some weakness. The trick for the

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Speaker 2: FED is, as you head into twenty six, we've got

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Speaker 2: a few tailwinds that may come to the four tax

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Speaker 2: and centers, tax on tips, tax and overtime, accelerated depreciation,

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Speaker 2: regulatory relief, getting more for getting further along, and then

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Speaker 2: still the AI data center power boom I think is underway.

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Speaker 2: So that's why they're balancing what's the here and now

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Speaker 2: versus the headwinds likely in twenty six.

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Speaker 1: And of course there's a lot of focus on who's

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Speaker 1: going to lead the FED and who is going to

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Speaker 1: be leading those conversations about the balance between inflation risks

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Speaker 1: and joblessness risks in the United States. What's your thinking

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Speaker 1: on the extent to which the market is concerned about

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Speaker 1: the person themselves. I mean, this is in the end

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Speaker 1: setting policy as a group. Activity share clearly has a

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Speaker 1: big voice at the table. What should we know about

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Speaker 1: the way these decisions are made and how much it

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Speaker 1: matters who needs.

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Speaker 2: So the FED is focused on full employment and meeting

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Speaker 2: a two percent inflation target. And the reason they're sticking

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Speaker 2: with the two percent inflation target is there's still eighty

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Speaker 2: five million workers in the United States that make fifty

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Speaker 2: or fifty five grand a year who are struggling to

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Speaker 2: make ends meet, So affordability is a big issue in

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Speaker 2: the US. I think any of the candidates mentioned have

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Speaker 2: the intellectual capability and leadership capability to balance those issues.

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Speaker 2: I think whoever's in the job, and I won't go

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Speaker 2: in through individual names, they will need to show that

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Speaker 2: while they may be from the administration or other sources,

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Speaker 2: they're going to be intellectually willing to balance those issues

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Speaker 2: and have that debate without regard to political pressure or

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Speaker 2: political considerations. And that's I think what the market wants

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Speaker 2: to see.

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Speaker 1: Yes, I mean, how nervous are you about political pressure

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Speaker 1: to get rates lower in the United States? Is this

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Speaker 1: something that should preoccupy market participants.

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Speaker 2: It is natural for administrations to want lower rates. Lower

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Speaker 2: rates mean higher real GDP growth, higher nominal growth. But

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Speaker 2: that's why the FED is a little bit has to

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Speaker 2: be independent and when necessary push against that. So I

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Speaker 2: think any of the candidates have the capability of doing it.

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Speaker 2: And my advice to any candidate would be, if you're

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Speaker 2: in the job, you want to reiterate that you're going

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Speaker 2: to respect and try to preserve the independence of the

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Speaker 2: FED at least on setting the FED funds rate.

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Speaker 1: If the White House even and if the FED wants

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Speaker 1: lower interest rates in the States, and if that's what

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Speaker 1: they deliver, if the market then worries about inflation, does

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Speaker 1: that mean that lower the lower rates the Fed sets

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Speaker 1: don't necessarily get passed on to the real economy. So

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Speaker 1: could lower rates actually be self defeating?

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Speaker 2: So the FED only controls the front end of the curve.

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Speaker 2: And so what you've seen the Fed is cut one

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Speaker 2: hundred and fifty basis points since September of twenty four,

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Speaker 2: has hardly budged. Okay, it's down just a touch, and

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Speaker 2: so the curve has gotten steeper. So, yeah, the market

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Speaker 2: sets rates along the curve, and the further out the curve,

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Speaker 2: the more of their market determined. And so the Fed's

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Speaker 2: got to be aware that has to have credibility for

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Speaker 2: its actions.

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Speaker 1: And are you concerned about overheating at all in the

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Speaker 1: US economy? Around the AI theme is that you talked

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Speaker 1: about how that there aren't going to be some tailwinds

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Speaker 1: around fiscal stimulus in the state's tax cuts. Also, the

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Speaker 1: AI build.

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Speaker 2: Out there is going to be a firming We believe

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Speaker 2: at Golden Sex we believe that in twenty six GDP

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Speaker 2: growth is likely to firm. I think there's clearly enormous

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Speaker 2: infrastructure spending for AI data center's power. We're in the

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Speaker 2: early stages of AI adoption. I think there's a lot

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Speaker 2: of worry geas the AI infrastructure build overdone. I don't

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Speaker 2: think it's overdone yet. We'll get to the point where

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Speaker 2: we will think it's overdone. But we're in the early

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Speaker 2: stage of downstream adoption, and so I think we see

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Speaker 2: firming growth. I don't see an overheating. But when you

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Speaker 2: have firming growth, you've got to be worried. Inflation is

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Speaker 2: running two and three quarters three percent, yes, and so

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Speaker 2: the FED just got to be very mindful of that.

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Speaker 1: And at the call face of the sort of news

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Speaker 1: flow around corporate adoption of AI, we get drip fed

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Speaker 1: little nuggets of information about these businesses adopting. Quickly hear

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Speaker 1: this and pushback, what's your big picture expectation about how

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Speaker 1: quickly this can change the productivity? Nar? It's it for

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Speaker 1: the US economy.

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Speaker 2: When we're sitting here talking five years from now, I

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Speaker 2: would guess that you're going to see productivity growth in

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Speaker 2: the United States and globally. But let's take the United

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Speaker 2: States as and that could be a half a percentage point.

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Speaker 2: We believe higher corporate margins could be better. That's on

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Speaker 2: the one hand. On the other hand, businesses are more

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Speaker 2: likely to get disrupted. They've got to spend on AI

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Speaker 2: in the short run that may come out of margin.

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Speaker 2: Over the long run, I think businesses who do it

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Speaker 2: well are going to be more productive. So I think

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Speaker 2: we're going to see the benefits. The surprise is going

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Speaker 2: to be which use cases work and which use cases

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Speaker 2: we thought would work but don't, And how does it

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Speaker 2: affect industry, and how does it affect labor. Yes, and

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Speaker 2: so we're early in that workers are going to get

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Speaker 2: disrupted out of functions, out of companies. They're going to

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Speaker 2: have to move to other functions and companies. This is

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Speaker 2: where early childhood, literacy, secondary education, skills, training, and adaptability

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Speaker 2: of the labor force is going to get more important,

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Speaker 2: and successful countries will invest in that.

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Speaker 1: So labor markets will need to adapt and policy what

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Speaker 1: should policy make as I suppose keep in mind when

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Speaker 1: it comes to labor markets and how quickly. We might

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Speaker 1: see the effects of AI on redundancies.

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Speaker 2: I think the thing about AI, and like other technological,

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Speaker 2: technological and other structural change, is how fast it's going

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Speaker 2: to happen. So policies need to be makers need to

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Speaker 2: be a where you're gonna have mismatches. You're gonna have

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Speaker 2: lots of people looking for jobs. You know, computer programmers

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Speaker 2: who used to have plentiful jobs now will need to

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Speaker 2: find other types of work. But there's lots of open jobs. Also,

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Speaker 2: window installers, automotive technicians, electricians, and we've got mismatches. I

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Speaker 2: would guess in the next two or three years you'll

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Speaker 2: see that continue. Those will get solved with the passage

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Speaker 2: of time, but I think we're gonna have to help

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Speaker 2: people make the adjustment. So there's cyclical issues where lack

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Speaker 2: of demand creates labor slowing, and then these structural mismatches.

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Speaker 2: I think we're going to see more structural mismatsages, maybe

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Speaker 2: even if cyclically we're firming.

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Speaker 1: And on that structural story, is it your sense then

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Speaker 1: that the negatives kick in more quickly than the positives,

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Speaker 1: So the job cuts come and then the productivity gains

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Speaker 1: come later.

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Speaker 2: I think human beings. Sometimes takes them a while to

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Speaker 2: change their aspirations, change their job goals. And I think

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Speaker 2: this is where we have to do a better job

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Speaker 2: educating workers, helping them adjust making that transition. But AI

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Speaker 2: is happening so fast the workforce may lag adopting, and

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Speaker 2: also worker mobility, geographic mobility is probably historically low. Right now,

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Speaker 2: you know the house, it's situation. You have already owned

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Speaker 2: your home, fixed rate mortgage. We're going to have to

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Speaker 2: help people adjust.

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Speaker 1: Okay, Robert, thank you very much. Thanks for joining us.

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Speaker 1: Roll Kaplan, vice chairman of Goldman Sachs and previously, of course,

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Speaker 1: of the Dallas FED. Thanks to Roll for joining us.

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Speaker 1: Very great, really great to get his perspective on the

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Speaker 1: AI up and down sides for the US economy and

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Speaker 1: the FED conversation. Of course,