Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm very pleased to
Speaker 1: say joining us now is Robert Kaplan, vice chairman at
Speaker 1: Goldwyn Sachs. Previously, of course, served as the president of
Speaker 1: the Federal Reserve Bank of Dallas. Robert, very nice to
Speaker 1: have you with us. Thank you so much for coming in.
Speaker 1: So let's talk about the here and now in the
Speaker 1: US economy and what you see weakening in the labor market.
Speaker 1: Is it right that the market that the Fed should
Speaker 1: focus on the weakness in the labor market right now?
Speaker 2: There's no question that labor market is weaker and very sluggish.
Speaker 2: There's three reasons why. Won Tariffs at least in the
Speaker 2: short run, are slowing growth in the United States, and
Speaker 2: they're affecting small business disproportionately. And you saw in this
Speaker 2: recent job weakness while of the weakness was in small business.
Speaker 2: That makes sense. Second, there's been constraints on labor force growth,
Speaker 2: which reduces supply. But also there's a multiplier effect. When
Speaker 2: jobs go unfilled, it creates other jobs that would have
Speaker 2: been created. You know, there's another half a job that
Speaker 2: would be creative for every job goes untilled. And then
Speaker 2: the shutdown has been a headwind for growth, so it's
Speaker 2: not surprising you're seeing some weakness. The trick for the
Speaker 2: FED is, as you head into twenty six, we've got
Speaker 2: a few tailwinds that may come to the four tax
Speaker 2: and centers, tax on tips, tax and overtime, accelerated depreciation,
Speaker 2: regulatory relief, getting more for getting further along, and then
Speaker 2: still the AI data center power boom I think is underway.
Speaker 2: So that's why they're balancing what's the here and now
Speaker 2: versus the headwinds likely in twenty six.
Speaker 1: And of course there's a lot of focus on who's
Speaker 1: going to lead the FED and who is going to
Speaker 1: be leading those conversations about the balance between inflation risks
Speaker 1: and joblessness risks in the United States. What's your thinking
Speaker 1: on the extent to which the market is concerned about
Speaker 1: the person themselves. I mean, this is in the end
Speaker 1: setting policy as a group. Activity share clearly has a
Speaker 1: big voice at the table. What should we know about
Speaker 1: the way these decisions are made and how much it
Speaker 1: matters who needs.
Speaker 2: So the FED is focused on full employment and meeting
Speaker 2: a two percent inflation target. And the reason they're sticking
Speaker 2: with the two percent inflation target is there's still eighty
Speaker 2: five million workers in the United States that make fifty
Speaker 2: or fifty five grand a year who are struggling to
Speaker 2: make ends meet, So affordability is a big issue in
Speaker 2: the US. I think any of the candidates mentioned have
Speaker 2: the intellectual capability and leadership capability to balance those issues.
Speaker 2: I think whoever's in the job, and I won't go
Speaker 2: in through individual names, they will need to show that
Speaker 2: while they may be from the administration or other sources,
Speaker 2: they're going to be intellectually willing to balance those issues
Speaker 2: and have that debate without regard to political pressure or
Speaker 2: political considerations. And that's I think what the market wants
Speaker 2: to see.
Speaker 1: Yes, I mean, how nervous are you about political pressure
Speaker 1: to get rates lower in the United States? Is this
Speaker 1: something that should preoccupy market participants.
Speaker 2: It is natural for administrations to want lower rates. Lower
Speaker 2: rates mean higher real GDP growth, higher nominal growth. But
Speaker 2: that's why the FED is a little bit has to
Speaker 2: be independent and when necessary push against that. So I
Speaker 2: think any of the candidates have the capability of doing it.
Speaker 2: And my advice to any candidate would be, if you're
Speaker 2: in the job, you want to reiterate that you're going
Speaker 2: to respect and try to preserve the independence of the
Speaker 2: FED at least on setting the FED funds rate.
Speaker 1: If the White House even and if the FED wants
Speaker 1: lower interest rates in the States, and if that's what
Speaker 1: they deliver, if the market then worries about inflation, does
Speaker 1: that mean that lower the lower rates the Fed sets
Speaker 1: don't necessarily get passed on to the real economy. So
Speaker 1: could lower rates actually be self defeating?
Speaker 2: So the FED only controls the front end of the curve.
Speaker 2: And so what you've seen the Fed is cut one
Speaker 2: hundred and fifty basis points since September of twenty four,
Speaker 2: has hardly budged. Okay, it's down just a touch, and
Speaker 2: so the curve has gotten steeper. So, yeah, the market
Speaker 2: sets rates along the curve, and the further out the curve,
Speaker 2: the more of their market determined. And so the Fed's
Speaker 2: got to be aware that has to have credibility for
Speaker 2: its actions.
Speaker 1: And are you concerned about overheating at all in the
Speaker 1: US economy? Around the AI theme is that you talked
Speaker 1: about how that there aren't going to be some tailwinds
Speaker 1: around fiscal stimulus in the state's tax cuts. Also, the
Speaker 1: AI build.
Speaker 2: Out there is going to be a firming We believe
Speaker 2: at Golden Sex we believe that in twenty six GDP
Speaker 2: growth is likely to firm. I think there's clearly enormous
Speaker 2: infrastructure spending for AI data center's power. We're in the
Speaker 2: early stages of AI adoption. I think there's a lot
Speaker 2: of worry geas the AI infrastructure build overdone. I don't
Speaker 2: think it's overdone yet. We'll get to the point where
Speaker 2: we will think it's overdone. But we're in the early
Speaker 2: stage of downstream adoption, and so I think we see
Speaker 2: firming growth. I don't see an overheating. But when you
Speaker 2: have firming growth, you've got to be worried. Inflation is
Speaker 2: running two and three quarters three percent, yes, and so
Speaker 2: the FED just got to be very mindful of that.
Speaker 1: And at the call face of the sort of news
Speaker 1: flow around corporate adoption of AI, we get drip fed
Speaker 1: little nuggets of information about these businesses adopting. Quickly hear
Speaker 1: this and pushback, what's your big picture expectation about how
Speaker 1: quickly this can change the productivity? Nar? It's it for
Speaker 1: the US economy.
Speaker 2: When we're sitting here talking five years from now, I
Speaker 2: would guess that you're going to see productivity growth in
Speaker 2: the United States and globally. But let's take the United
Speaker 2: States as and that could be a half a percentage point.
Speaker 2: We believe higher corporate margins could be better. That's on
Speaker 2: the one hand. On the other hand, businesses are more
Speaker 2: likely to get disrupted. They've got to spend on AI
Speaker 2: in the short run that may come out of margin.
Speaker 2: Over the long run, I think businesses who do it
Speaker 2: well are going to be more productive. So I think
Speaker 2: we're going to see the benefits. The surprise is going
Speaker 2: to be which use cases work and which use cases
Speaker 2: we thought would work but don't, And how does it
Speaker 2: affect industry, and how does it affect labor. Yes, and
Speaker 2: so we're early in that workers are going to get
Speaker 2: disrupted out of functions, out of companies. They're going to
Speaker 2: have to move to other functions and companies. This is
Speaker 2: where early childhood, literacy, secondary education, skills, training, and adaptability
Speaker 2: of the labor force is going to get more important,
Speaker 2: and successful countries will invest in that.
Speaker 1: So labor markets will need to adapt and policy what
Speaker 1: should policy make as I suppose keep in mind when
Speaker 1: it comes to labor markets and how quickly. We might
Speaker 1: see the effects of AI on redundancies.
Speaker 2: I think the thing about AI, and like other technological,
Speaker 2: technological and other structural change, is how fast it's going
Speaker 2: to happen. So policies need to be makers need to
Speaker 2: be a where you're gonna have mismatches. You're gonna have
Speaker 2: lots of people looking for jobs. You know, computer programmers
Speaker 2: who used to have plentiful jobs now will need to
Speaker 2: find other types of work. But there's lots of open jobs. Also,
Speaker 2: window installers, automotive technicians, electricians, and we've got mismatches. I
Speaker 2: would guess in the next two or three years you'll
Speaker 2: see that continue. Those will get solved with the passage
Speaker 2: of time, but I think we're gonna have to help
Speaker 2: people make the adjustment. So there's cyclical issues where lack
Speaker 2: of demand creates labor slowing, and then these structural mismatches.
Speaker 2: I think we're going to see more structural mismatsages, maybe
Speaker 2: even if cyclically we're firming.
Speaker 1: And on that structural story, is it your sense then
Speaker 1: that the negatives kick in more quickly than the positives,
Speaker 1: So the job cuts come and then the productivity gains
Speaker 1: come later.
Speaker 2: I think human beings. Sometimes takes them a while to
Speaker 2: change their aspirations, change their job goals. And I think
Speaker 2: this is where we have to do a better job
Speaker 2: educating workers, helping them adjust making that transition. But AI
Speaker 2: is happening so fast the workforce may lag adopting, and
Speaker 2: also worker mobility, geographic mobility is probably historically low. Right now,
Speaker 2: you know the house, it's situation. You have already owned
Speaker 2: your home, fixed rate mortgage. We're going to have to
Speaker 2: help people adjust.
Speaker 1: Okay, Robert, thank you very much. Thanks for joining us.
Speaker 1: Roll Kaplan, vice chairman of Goldman Sachs and previously, of course,
Speaker 1: of the Dallas FED. Thanks to Roll for joining us.
Speaker 1: Very great, really great to get his perspective on the
Speaker 1: AI up and down sides for the US economy and
Speaker 1: the FED conversation. Of course,