WEBVTT - Goldman Vice Chairman & Former Dallas Fed President Rob Kaplan Talks Fed Might Not Be Cutting Rates This Year

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Let's go go to the Goldman Sachs conference in California.

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<v Speaker 2>Shanali Busks standing by and.

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<v Speaker 1>Welcome to our Bloomberg television and radio audiences. I'm Shanali Bassik,

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<v Speaker 1>and I'm standing by with Robert Kaplan. You might know

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<v Speaker 1>him from his former time at the Dallas Fed. You

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<v Speaker 1>might know him now as Goldman Sachs as vice chairman,

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<v Speaker 1>and either direction. There's a lot to talk about in

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<v Speaker 1>this market from your macro hat as well as your

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<v Speaker 1>client facing hat. But let's start with the latter. What

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<v Speaker 1>are clients saying to you right now in the wake

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<v Speaker 1>of what you saw just less than twenty four hours ago,

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<v Speaker 1>with pressure on the Trump administration's tariff policy, Does it

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<v Speaker 1>actually clear anything up for clients?

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<v Speaker 2>Probably not. I think most clients are just now reacting,

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<v Speaker 2>and we're actually at Goldman piecing this through, and I

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<v Speaker 2>think our own judgment is the administration's more likely to

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<v Speaker 2>find other authorizations to continue to do what they're looking

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<v Speaker 2>to do. It's still our best guess that when this

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<v Speaker 2>is all said and done, the tariffs will settle out

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<v Speaker 2>in a load of mid teens that will create challenges

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<v Speaker 2>for companies, they'll adjust to it. It'll create bigger challenges

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<v Speaker 2>for small business who don't have the levers to adjust.

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<v Speaker 1>So what's the key advice. What are businesses preparing to

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<v Speaker 1>do for those tariffs?

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<v Speaker 2>Well, if you're a bigger company, you're reviewing all your

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<v Speaker 2>logistics and supply chains. And the reason they're in the

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<v Speaker 2>middle of doing this this happened abruptly, and so given

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<v Speaker 2>six or twelve months, most companies I talk to can reshift,

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<v Speaker 2>but not overnight. It'll take six months to a year.

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<v Speaker 2>And then the thing they're telling me is they're also

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<v Speaker 2>in light of this, they're gonna pressure suppliers. They're gonna

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<v Speaker 2>take some out of margin, they'll put some in price,

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<v Speaker 2>they don't know how much yet, And they're also looking

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<v Speaker 2>how to tighten their bell a little bit because they

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<v Speaker 2>realize if they're taking some margin, they may need to

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<v Speaker 2>find other ways to pay for it in their company.

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<v Speaker 1>So I was listening to your chief economist Jian Hatias

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<v Speaker 1>a little earlier. He reiterated that thirty five percent probability

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<v Speaker 1>of a recession, saying that's still quite material, it's an

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<v Speaker 1>elevated level. What could make that worse? What are you

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<v Speaker 1>most concerned about right now in terms of the economy

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<v Speaker 1>slowing down.

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<v Speaker 2>So there's a couple of big structural issues that are

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<v Speaker 2>probably reducing the probability of recession. Maybe very sluggish growth,

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<v Speaker 2>but not a recession. First of all, we started the

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<v Speaker 2>year thinking we were going to do deficit reduction, and

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<v Speaker 2>the sense on the tax bill was it will be

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<v Speaker 2>primarily extending the Trump tax cuts. It now appears that

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<v Speaker 2>we haven't done as much cost cutting, and the tax

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<v Speaker 2>package is more expansive not done yet, so fiscal policy

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<v Speaker 2>may be more expansionary or neutral, not contractionary. We've got

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<v Speaker 2>labor force growth decelerating because of changing immigration policy. It

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<v Speaker 2>means the labor forces tighter, means the probability of unemployment

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<v Speaker 2>spiking up rather than just drifting up, is less likely.

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<v Speaker 2>You need to have a severe downturn you normally would

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<v Speaker 2>have a spike up in unemployment. And then the other

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<v Speaker 2>thing going on is obviously tariffs, which have been well articulated.

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<v Speaker 2>Those tend to slow growth and raise prices. But when

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<v Speaker 2>you put all that together, I think we're going to

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<v Speaker 2>have sluggish growth, probably not a recession, but probably sluggish

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<v Speaker 2>growth at least for the remainder this year with that worry.

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<v Speaker 1>About sluggish growth as well as potential inflation on the

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<v Speaker 1>heels of these tariffs. A lot of concerns about at

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<v Speaker 1>least the dual mandate for the FED, which direction the

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<v Speaker 1>FED goes in if not stabflation outright. If you were

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<v Speaker 1>still at the FED, what would you do this year

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<v Speaker 1>in terms of cuts.

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<v Speaker 2>I've been counseling for the last number of months to

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<v Speaker 2>be patient. You have a lot of uncertainty, big structural changes.

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<v Speaker 2>Let them unfold. The thing that would force the Fed's hand.

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<v Speaker 2>If you saw an unemployment start to spike up, then

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<v Speaker 2>the FED might have to lean in more and take

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<v Speaker 2>more risk. But that doesn't appear to be happening, and

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<v Speaker 2>I think the tight labor force makes that less likely.

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<v Speaker 2>So what they're waiting for is to see, and I'd

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<v Speaker 2>be waiting for how will these tariffs feed through the economy.

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<v Speaker 2>We'll have a better sense of that through the summer

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<v Speaker 2>and into the fall, and so I think you're going

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<v Speaker 2>to see them take it one mellion at a time.

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<v Speaker 2>Be patient. There's an SEP summary of economic projections they

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<v Speaker 2>have to submit in June. If I were in my

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<v Speaker 2>former seat, I would probably say one to two cuts,

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<v Speaker 2>probably more likely one. That's less than the market had

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<v Speaker 2>been expecting. But I think you're going to see them

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<v Speaker 2>take a patient, wait and see approach, and it's the

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<v Speaker 2>right approach.

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<v Speaker 1>I think the big frustration from our viewers here is

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<v Speaker 1>that the market is pricing in two or less rate cuts.

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<v Speaker 1>There is Morgan Stanley, which Mike Wilson believes could have

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<v Speaker 1>seven rate cuts by the end of next year. Now

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<v Speaker 1>our audience is really wondering whether there are no rate

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<v Speaker 1>cuts this year. Is there a chance that the the

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<v Speaker 1>Fed does not have room to cut?

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<v Speaker 2>Yes, And the Fed thing is, I don't know. And

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<v Speaker 2>then more importantly, the Fed doesn't know, and why don't

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<v Speaker 2>they know? Because we haven't decided on what the tear

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<v Speaker 2>freights are going to be. We're still in the middle

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<v Speaker 2>of negotiating a tax bill. I don't know what the

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<v Speaker 2>tax bill is going to say. We have a lot

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<v Speaker 2>of uncertainty, and so when you're in a period like this,

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<v Speaker 2>sort of shorten up the prognostications, be more of a

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<v Speaker 2>risk manager, take it one met at a time, and

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<v Speaker 2>so I think that's what they'll do, and so there'll

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<v Speaker 2>be people prognosticating out there, I would say the Fed's

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<v Speaker 2>reaction function is going to be more immediate at a time.

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<v Speaker 1>Now, how much control does the FED really have when

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<v Speaker 1>it comes to long end rates? You're looking at the

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<v Speaker 1>bond market start to hiccop here and there. We have

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<v Speaker 1>not seen alarming levels yet. We have not seen that

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<v Speaker 1>five percent level on the ten year that a lot

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<v Speaker 1>of investors are looking out for. How big of a

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<v Speaker 1>risk is there that we get there?

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<v Speaker 2>So the FED doesn't have a lot of influence over

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<v Speaker 2>the ten yeared fed FED decides on the FED funds.

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<v Speaker 2>I actually think my focus, and I think to some extent,

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<v Speaker 2>our client's focus is more on the ten year than

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<v Speaker 2>on the FED funds, right, And the reason is the deficit. Again,

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<v Speaker 2>we went into this year with six in a fraction

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<v Speaker 2>close to seven percent deficits. We've been outgrowing the world

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<v Speaker 2>the last few years because of excess fiscal I think

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<v Speaker 2>people thought, Okay, now we're going to reckon with this

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<v Speaker 2>and we're going to start reducing these deficits, and it

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<v Speaker 2>may not be materializing. And so I think you're seeing

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<v Speaker 2>the back end inch up. Maybe the term premium inch

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<v Speaker 2>up makes it harder to be a duration buyer and

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<v Speaker 2>I still think we're going to be wrestling that with

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<v Speaker 2>that for the rest of the year.

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<v Speaker 1>Robert Kaplan of course, Now Goldman Sachs vice chairman, you

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<v Speaker 1>might have known him previously as president of the Dallas Fed.

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<v Speaker 1>Of course, weighing in here on these bond markets and

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<v Speaker 1>what the Fed might do next. Back to you, Jim

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<v Speaker 1>back Shinai busset with Goldman Sachs Vice chairman Rob Kaplan,