Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's go go to the Goldman Sachs conference in California.
Speaker 2: Shanali Busks standing by and.
Speaker 1: Welcome to our Bloomberg television and radio audiences. I'm Shanali Bassik,
Speaker 1: and I'm standing by with Robert Kaplan. You might know
Speaker 1: him from his former time at the Dallas Fed. You
Speaker 1: might know him now as Goldman Sachs as vice chairman,
Speaker 1: and either direction. There's a lot to talk about in
Speaker 1: this market from your macro hat as well as your
Speaker 1: client facing hat. But let's start with the latter. What
Speaker 1: are clients saying to you right now in the wake
Speaker 1: of what you saw just less than twenty four hours ago,
Speaker 1: with pressure on the Trump administration's tariff policy, Does it
Speaker 1: actually clear anything up for clients?
Speaker 2: Probably not. I think most clients are just now reacting,
Speaker 2: and we're actually at Goldman piecing this through, and I
Speaker 2: think our own judgment is the administration's more likely to
Speaker 2: find other authorizations to continue to do what they're looking
Speaker 2: to do. It's still our best guess that when this
Speaker 2: is all said and done, the tariffs will settle out
Speaker 2: in a load of mid teens that will create challenges
Speaker 2: for companies, they'll adjust to it. It'll create bigger challenges
Speaker 2: for small business who don't have the levers to adjust.
Speaker 1: So what's the key advice. What are businesses preparing to
Speaker 1: do for those tariffs?
Speaker 2: Well, if you're a bigger company, you're reviewing all your
Speaker 2: logistics and supply chains. And the reason they're in the
Speaker 2: middle of doing this this happened abruptly, and so given
Speaker 2: six or twelve months, most companies I talk to can reshift,
Speaker 2: but not overnight. It'll take six months to a year.
Speaker 2: And then the thing they're telling me is they're also
Speaker 2: in light of this, they're gonna pressure suppliers. They're gonna
Speaker 2: take some out of margin, they'll put some in price,
Speaker 2: they don't know how much yet, And they're also looking
Speaker 2: how to tighten their bell a little bit because they
Speaker 2: realize if they're taking some margin, they may need to
Speaker 2: find other ways to pay for it in their company.
Speaker 1: So I was listening to your chief economist Jian Hatias
Speaker 1: a little earlier. He reiterated that thirty five percent probability
Speaker 1: of a recession, saying that's still quite material, it's an
Speaker 1: elevated level. What could make that worse? What are you
Speaker 1: most concerned about right now in terms of the economy
Speaker 1: slowing down.
Speaker 2: So there's a couple of big structural issues that are
Speaker 2: probably reducing the probability of recession. Maybe very sluggish growth,
Speaker 2: but not a recession. First of all, we started the
Speaker 2: year thinking we were going to do deficit reduction, and
Speaker 2: the sense on the tax bill was it will be
Speaker 2: primarily extending the Trump tax cuts. It now appears that
Speaker 2: we haven't done as much cost cutting, and the tax
Speaker 2: package is more expansive not done yet, so fiscal policy
Speaker 2: may be more expansionary or neutral, not contractionary. We've got
Speaker 2: labor force growth decelerating because of changing immigration policy. It
Speaker 2: means the labor forces tighter, means the probability of unemployment
Speaker 2: spiking up rather than just drifting up, is less likely.
Speaker 2: You need to have a severe downturn you normally would
Speaker 2: have a spike up in unemployment. And then the other
Speaker 2: thing going on is obviously tariffs, which have been well articulated.
Speaker 2: Those tend to slow growth and raise prices. But when
Speaker 2: you put all that together, I think we're going to
Speaker 2: have sluggish growth, probably not a recession, but probably sluggish
Speaker 2: growth at least for the remainder this year with that worry.
Speaker 1: About sluggish growth as well as potential inflation on the
Speaker 1: heels of these tariffs. A lot of concerns about at
Speaker 1: least the dual mandate for the FED, which direction the
Speaker 1: FED goes in if not stabflation outright. If you were
Speaker 1: still at the FED, what would you do this year
Speaker 1: in terms of cuts.
Speaker 2: I've been counseling for the last number of months to
Speaker 2: be patient. You have a lot of uncertainty, big structural changes.
Speaker 2: Let them unfold. The thing that would force the Fed's hand.
Speaker 2: If you saw an unemployment start to spike up, then
Speaker 2: the FED might have to lean in more and take
Speaker 2: more risk. But that doesn't appear to be happening, and
Speaker 2: I think the tight labor force makes that less likely.
Speaker 2: So what they're waiting for is to see, and I'd
Speaker 2: be waiting for how will these tariffs feed through the economy.
Speaker 2: We'll have a better sense of that through the summer
Speaker 2: and into the fall, and so I think you're going
Speaker 2: to see them take it one mellion at a time.
Speaker 2: Be patient. There's an SEP summary of economic projections they
Speaker 2: have to submit in June. If I were in my
Speaker 2: former seat, I would probably say one to two cuts,
Speaker 2: probably more likely one. That's less than the market had
Speaker 2: been expecting. But I think you're going to see them
Speaker 2: take a patient, wait and see approach, and it's the
Speaker 2: right approach.
Speaker 1: I think the big frustration from our viewers here is
Speaker 1: that the market is pricing in two or less rate cuts.
Speaker 1: There is Morgan Stanley, which Mike Wilson believes could have
Speaker 1: seven rate cuts by the end of next year. Now
Speaker 1: our audience is really wondering whether there are no rate
Speaker 1: cuts this year. Is there a chance that the the
Speaker 1: Fed does not have room to cut?
Speaker 2: Yes, And the Fed thing is, I don't know. And
Speaker 2: then more importantly, the Fed doesn't know, and why don't
Speaker 2: they know? Because we haven't decided on what the tear
Speaker 2: freights are going to be. We're still in the middle
Speaker 2: of negotiating a tax bill. I don't know what the
Speaker 2: tax bill is going to say. We have a lot
Speaker 2: of uncertainty, and so when you're in a period like this,
Speaker 2: sort of shorten up the prognostications, be more of a
Speaker 2: risk manager, take it one met at a time, and
Speaker 2: so I think that's what they'll do, and so there'll
Speaker 2: be people prognosticating out there, I would say the Fed's
Speaker 2: reaction function is going to be more immediate at a time.
Speaker 1: Now, how much control does the FED really have when
Speaker 1: it comes to long end rates? You're looking at the
Speaker 1: bond market start to hiccop here and there. We have
Speaker 1: not seen alarming levels yet. We have not seen that
Speaker 1: five percent level on the ten year that a lot
Speaker 1: of investors are looking out for. How big of a
Speaker 1: risk is there that we get there?
Speaker 2: So the FED doesn't have a lot of influence over
Speaker 2: the ten yeared fed FED decides on the FED funds.
Speaker 2: I actually think my focus, and I think to some extent,
Speaker 2: our client's focus is more on the ten year than
Speaker 2: on the FED funds, right, And the reason is the deficit. Again,
Speaker 2: we went into this year with six in a fraction
Speaker 2: close to seven percent deficits. We've been outgrowing the world
Speaker 2: the last few years because of excess fiscal I think
Speaker 2: people thought, Okay, now we're going to reckon with this
Speaker 2: and we're going to start reducing these deficits, and it
Speaker 2: may not be materializing. And so I think you're seeing
Speaker 2: the back end inch up. Maybe the term premium inch
Speaker 2: up makes it harder to be a duration buyer and
Speaker 2: I still think we're going to be wrestling that with
Speaker 2: that for the rest of the year.
Speaker 1: Robert Kaplan of course, Now Goldman Sachs vice chairman, you
Speaker 1: might have known him previously as president of the Dallas Fed.
Speaker 1: Of course, weighing in here on these bond markets and
Speaker 1: what the Fed might do next. Back to you, Jim
Speaker 1: back Shinai busset with Goldman Sachs Vice chairman Rob Kaplan,