1
00:00:02,520 --> 00:00:07,080
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

2
00:00:07,280 --> 00:00:09,600
Speaker 2: Let's go go to the Goldman Sachs conference in California.

3
00:00:09,640 --> 00:00:11,440
Speaker 2: Shanali Busks standing by and.

4
00:00:11,440 --> 00:00:15,000
Speaker 1: Welcome to our Bloomberg television and radio audiences. I'm Shanali Bassik,

5
00:00:15,040 --> 00:00:17,439
Speaker 1: and I'm standing by with Robert Kaplan. You might know

6
00:00:17,560 --> 00:00:19,800
Speaker 1: him from his former time at the Dallas Fed. You

7
00:00:19,840 --> 00:00:22,560
Speaker 1: might know him now as Goldman Sachs as vice chairman,

8
00:00:23,000 --> 00:00:26,520
Speaker 1: and either direction. There's a lot to talk about in

9
00:00:26,560 --> 00:00:28,880
Speaker 1: this market from your macro hat as well as your

10
00:00:28,880 --> 00:00:31,360
Speaker 1: client facing hat. But let's start with the latter. What

11
00:00:31,440 --> 00:00:34,160
Speaker 1: are clients saying to you right now in the wake

12
00:00:34,200 --> 00:00:37,400
Speaker 1: of what you saw just less than twenty four hours ago,

13
00:00:37,720 --> 00:00:41,720
Speaker 1: with pressure on the Trump administration's tariff policy, Does it

14
00:00:41,760 --> 00:00:43,839
Speaker 1: actually clear anything up for clients?

15
00:00:44,280 --> 00:00:50,360
Speaker 2: Probably not. I think most clients are just now reacting,

16
00:00:50,440 --> 00:00:53,880
Speaker 2: and we're actually at Goldman piecing this through, and I

17
00:00:53,880 --> 00:00:57,080
Speaker 2: think our own judgment is the administration's more likely to

18
00:00:57,160 --> 00:01:02,240
Speaker 2: find other authorizations to continue to do what they're looking

19
00:01:02,280 --> 00:01:04,920
Speaker 2: to do. It's still our best guess that when this

20
00:01:05,080 --> 00:01:08,040
Speaker 2: is all said and done, the tariffs will settle out

21
00:01:08,080 --> 00:01:11,320
Speaker 2: in a load of mid teens that will create challenges

22
00:01:11,800 --> 00:01:15,399
Speaker 2: for companies, they'll adjust to it. It'll create bigger challenges

23
00:01:15,880 --> 00:01:19,120
Speaker 2: for small business who don't have the levers to adjust.

24
00:01:19,240 --> 00:01:21,760
Speaker 1: So what's the key advice. What are businesses preparing to

25
00:01:21,840 --> 00:01:23,720
Speaker 1: do for those tariffs?

26
00:01:23,920 --> 00:01:27,679
Speaker 2: Well, if you're a bigger company, you're reviewing all your

27
00:01:27,720 --> 00:01:30,840
Speaker 2: logistics and supply chains. And the reason they're in the

28
00:01:30,880 --> 00:01:34,119
Speaker 2: middle of doing this this happened abruptly, and so given

29
00:01:34,200 --> 00:01:38,160
Speaker 2: six or twelve months, most companies I talk to can reshift,

30
00:01:39,080 --> 00:01:43,240
Speaker 2: but not overnight. It'll take six months to a year.

31
00:01:44,200 --> 00:01:48,040
Speaker 2: And then the thing they're telling me is they're also

32
00:01:48,960 --> 00:01:52,400
Speaker 2: in light of this, they're gonna pressure suppliers. They're gonna

33
00:01:52,440 --> 00:01:54,880
Speaker 2: take some out of margin, they'll put some in price,

34
00:01:54,880 --> 00:01:57,520
Speaker 2: they don't know how much yet, And they're also looking

35
00:01:57,560 --> 00:01:59,920
Speaker 2: how to tighten their bell a little bit because they

36
00:02:00,080 --> 00:02:02,360
Speaker 2: realize if they're taking some margin, they may need to

37
00:02:02,400 --> 00:02:04,400
Speaker 2: find other ways to pay for it in their company.

38
00:02:04,560 --> 00:02:07,400
Speaker 1: So I was listening to your chief economist Jian Hatias

39
00:02:07,400 --> 00:02:10,440
Speaker 1: a little earlier. He reiterated that thirty five percent probability

40
00:02:10,440 --> 00:02:13,240
Speaker 1: of a recession, saying that's still quite material, it's an

41
00:02:13,280 --> 00:02:16,480
Speaker 1: elevated level. What could make that worse? What are you

42
00:02:16,560 --> 00:02:19,160
Speaker 1: most concerned about right now in terms of the economy

43
00:02:19,160 --> 00:02:19,720
Speaker 1: slowing down.

44
00:02:20,120 --> 00:02:24,000
Speaker 2: So there's a couple of big structural issues that are

45
00:02:24,040 --> 00:02:28,280
Speaker 2: probably reducing the probability of recession. Maybe very sluggish growth,

46
00:02:28,280 --> 00:02:30,799
Speaker 2: but not a recession. First of all, we started the

47
00:02:30,880 --> 00:02:34,040
Speaker 2: year thinking we were going to do deficit reduction, and

48
00:02:34,080 --> 00:02:36,240
Speaker 2: the sense on the tax bill was it will be

49
00:02:36,280 --> 00:02:40,000
Speaker 2: primarily extending the Trump tax cuts. It now appears that

50
00:02:40,040 --> 00:02:43,440
Speaker 2: we haven't done as much cost cutting, and the tax

51
00:02:43,480 --> 00:02:48,040
Speaker 2: package is more expansive not done yet, so fiscal policy

52
00:02:48,080 --> 00:02:53,440
Speaker 2: may be more expansionary or neutral, not contractionary. We've got

53
00:02:53,680 --> 00:03:00,160
Speaker 2: labor force growth decelerating because of changing immigration policy. It

54
00:03:00,160 --> 00:03:03,520
Speaker 2: means the labor forces tighter, means the probability of unemployment

55
00:03:03,600 --> 00:03:07,040
Speaker 2: spiking up rather than just drifting up, is less likely.

56
00:03:07,120 --> 00:03:10,880
Speaker 2: You need to have a severe downturn you normally would

57
00:03:10,880 --> 00:03:13,119
Speaker 2: have a spike up in unemployment. And then the other

58
00:03:13,160 --> 00:03:16,880
Speaker 2: thing going on is obviously tariffs, which have been well articulated.

59
00:03:17,160 --> 00:03:21,880
Speaker 2: Those tend to slow growth and raise prices. But when

60
00:03:21,919 --> 00:03:24,679
Speaker 2: you put all that together, I think we're going to

61
00:03:24,760 --> 00:03:29,200
Speaker 2: have sluggish growth, probably not a recession, but probably sluggish

62
00:03:29,200 --> 00:03:31,880
Speaker 2: growth at least for the remainder this year with that worry.

63
00:03:31,600 --> 00:03:34,600
Speaker 1: About sluggish growth as well as potential inflation on the

64
00:03:34,600 --> 00:03:38,360
Speaker 1: heels of these tariffs. A lot of concerns about at

65
00:03:38,440 --> 00:03:41,080
Speaker 1: least the dual mandate for the FED, which direction the

66
00:03:41,080 --> 00:03:44,320
Speaker 1: FED goes in if not stabflation outright. If you were

67
00:03:44,320 --> 00:03:45,800
Speaker 1: still at the FED, what would you do this year

68
00:03:45,840 --> 00:03:46,560
Speaker 1: in terms of cuts.

69
00:03:47,280 --> 00:03:49,840
Speaker 2: I've been counseling for the last number of months to

70
00:03:49,920 --> 00:03:53,840
Speaker 2: be patient. You have a lot of uncertainty, big structural changes.

71
00:03:54,120 --> 00:03:58,160
Speaker 2: Let them unfold. The thing that would force the Fed's hand.

72
00:03:58,320 --> 00:04:01,240
Speaker 2: If you saw an unemployment start to spike up, then

73
00:04:01,280 --> 00:04:03,480
Speaker 2: the FED might have to lean in more and take

74
00:04:03,520 --> 00:04:06,280
Speaker 2: more risk. But that doesn't appear to be happening, and

75
00:04:06,360 --> 00:04:08,640
Speaker 2: I think the tight labor force makes that less likely.

76
00:04:09,000 --> 00:04:11,080
Speaker 2: So what they're waiting for is to see, and I'd

77
00:04:11,120 --> 00:04:14,280
Speaker 2: be waiting for how will these tariffs feed through the economy.

78
00:04:14,560 --> 00:04:16,520
Speaker 2: We'll have a better sense of that through the summer

79
00:04:16,560 --> 00:04:19,080
Speaker 2: and into the fall, and so I think you're going

80
00:04:19,080 --> 00:04:20,960
Speaker 2: to see them take it one mellion at a time.

81
00:04:21,440 --> 00:04:26,359
Speaker 2: Be patient. There's an SEP summary of economic projections they

82
00:04:26,440 --> 00:04:28,680
Speaker 2: have to submit in June. If I were in my

83
00:04:28,800 --> 00:04:32,040
Speaker 2: former seat, I would probably say one to two cuts,

84
00:04:32,120 --> 00:04:35,280
Speaker 2: probably more likely one. That's less than the market had

85
00:04:35,320 --> 00:04:37,960
Speaker 2: been expecting. But I think you're going to see them

86
00:04:38,080 --> 00:04:40,200
Speaker 2: take a patient, wait and see approach, and it's the

87
00:04:40,279 --> 00:04:40,839
Speaker 2: right approach.

88
00:04:40,880 --> 00:04:43,760
Speaker 1: I think the big frustration from our viewers here is

89
00:04:43,760 --> 00:04:47,239
Speaker 1: that the market is pricing in two or less rate cuts.

90
00:04:47,600 --> 00:04:51,000
Speaker 1: There is Morgan Stanley, which Mike Wilson believes could have

91
00:04:51,160 --> 00:04:54,720
Speaker 1: seven rate cuts by the end of next year. Now

92
00:04:54,800 --> 00:04:58,000
Speaker 1: our audience is really wondering whether there are no rate

93
00:04:58,040 --> 00:05:00,040
Speaker 1: cuts this year. Is there a chance that the the

94
00:05:00,080 --> 00:05:01,520
Speaker 1: Fed does not have room to cut?

95
00:05:02,400 --> 00:05:05,560
Speaker 2: Yes, And the Fed thing is, I don't know. And

96
00:05:05,600 --> 00:05:07,840
Speaker 2: then more importantly, the Fed doesn't know, and why don't

97
00:05:07,839 --> 00:05:10,719
Speaker 2: they know? Because we haven't decided on what the tear

98
00:05:10,760 --> 00:05:12,800
Speaker 2: freights are going to be. We're still in the middle

99
00:05:12,839 --> 00:05:14,760
Speaker 2: of negotiating a tax bill. I don't know what the

100
00:05:14,800 --> 00:05:17,400
Speaker 2: tax bill is going to say. We have a lot

101
00:05:17,400 --> 00:05:20,240
Speaker 2: of uncertainty, and so when you're in a period like this,

102
00:05:20,880 --> 00:05:23,960
Speaker 2: sort of shorten up the prognostications, be more of a

103
00:05:24,040 --> 00:05:27,040
Speaker 2: risk manager, take it one met at a time, and

104
00:05:27,120 --> 00:05:30,760
Speaker 2: so I think that's what they'll do, and so there'll

105
00:05:30,760 --> 00:05:34,120
Speaker 2: be people prognosticating out there, I would say the Fed's

106
00:05:34,520 --> 00:05:37,120
Speaker 2: reaction function is going to be more immediate at a time.

107
00:05:37,480 --> 00:05:39,560
Speaker 1: Now, how much control does the FED really have when

108
00:05:39,600 --> 00:05:42,440
Speaker 1: it comes to long end rates? You're looking at the

109
00:05:42,440 --> 00:05:45,359
Speaker 1: bond market start to hiccop here and there. We have

110
00:05:45,480 --> 00:05:47,760
Speaker 1: not seen alarming levels yet. We have not seen that

111
00:05:47,839 --> 00:05:49,840
Speaker 1: five percent level on the ten year that a lot

112
00:05:49,880 --> 00:05:52,240
Speaker 1: of investors are looking out for. How big of a

113
00:05:52,360 --> 00:05:53,960
Speaker 1: risk is there that we get there?

114
00:05:54,279 --> 00:05:56,360
Speaker 2: So the FED doesn't have a lot of influence over

115
00:05:56,440 --> 00:05:59,880
Speaker 2: the ten yeared fed FED decides on the FED funds.

116
00:06:00,480 --> 00:06:04,000
Speaker 2: I actually think my focus, and I think to some extent,

117
00:06:04,120 --> 00:06:07,000
Speaker 2: our client's focus is more on the ten year than

118
00:06:07,040 --> 00:06:10,400
Speaker 2: on the FED funds, right, And the reason is the deficit. Again,

119
00:06:10,440 --> 00:06:13,000
Speaker 2: we went into this year with six in a fraction

120
00:06:13,160 --> 00:06:16,400
Speaker 2: close to seven percent deficits. We've been outgrowing the world

121
00:06:16,440 --> 00:06:19,800
Speaker 2: the last few years because of excess fiscal I think

122
00:06:19,839 --> 00:06:22,080
Speaker 2: people thought, Okay, now we're going to reckon with this

123
00:06:22,480 --> 00:06:25,680
Speaker 2: and we're going to start reducing these deficits, and it

124
00:06:25,720 --> 00:06:29,240
Speaker 2: may not be materializing. And so I think you're seeing

125
00:06:29,279 --> 00:06:33,080
Speaker 2: the back end inch up. Maybe the term premium inch

126
00:06:33,200 --> 00:06:36,560
Speaker 2: up makes it harder to be a duration buyer and

127
00:06:36,640 --> 00:06:38,599
Speaker 2: I still think we're going to be wrestling that with

128
00:06:38,720 --> 00:06:39,719
Speaker 2: that for the rest of the year.

129
00:06:40,480 --> 00:06:43,880
Speaker 1: Robert Kaplan of course, Now Goldman Sachs vice chairman, you

130
00:06:44,400 --> 00:06:47,279
Speaker 1: might have known him previously as president of the Dallas Fed.

131
00:06:47,320 --> 00:06:49,640
Speaker 1: Of course, weighing in here on these bond markets and

132
00:06:49,640 --> 00:06:52,080
Speaker 1: what the Fed might do next. Back to you, Jim

133
00:06:52,120 --> 00:06:55,080
Speaker 1: back Shinai busset with Goldman Sachs Vice chairman Rob Kaplan,