Rob Kaplan has his feet in two worlds. He started is career in banking, rising to be vice-chair of Goldman Sachs and went on to be appointed president of the Federal Reserve Bank of Dallas. He’s been back at Goldman Sachs gauging the Fed’s latest meeting from the vantage point of a former monetary policy maker and a top Wall Street executive.
So as the new Fed chair Kevin Warsh holds his first policy meeting, where he commits fo pushing inflation lower by pursuing price stability, and the Fed’s Dot Plot sends a hawkish view by showing more FOMC members opening the door to rate hikes, I am eager to see what Rob thinks about impact on of Fed policy on the economy broadly and on the businesses and investors he communicates with daily.
The FOMC’s policy statement showed that it has dropped its policy easing bias, and its Dot Plot showed a shift toward tightening as a growing number of Fed officials see rate hikes ahead. And this kicked off a bond market sell-off; Warsh declined to offer his own Dot Plot as widely expected after he has criticized it repeatedly.
”The bond market thinks it's more likely the Fed is going to increase rates this year. And why do they think that? The Dot plot,” Rob says. noting there were nine members looking for rate incresaes this year. “And Kevin Warsh, as he should have, was very clear that we intend to meet our 2% inflation target, and he didn't provide any other interpretation.”
Given this metric, Rob says he sees a rate hike as early as July, and says it should be done no later than September if inflation keeps rising. But with a major caveat.
”You know, the war just has been in a different phase and oil prices have plummeted. And so it could be that those nine rate increases if inflation stays sticky, that those are still representative, he says. “But if I had been in my former seat at the Dallas Fed, I would be urging everyone to take my submission with a grain of salt because you had a massive structural change….I actually think this Dot Plot is going to have a shorter shelf life than most.”
And what is it that Rob sees changing the inflation landscape?
“We’re in the middle of a CapEx boom, historic CapEx boom related to AI and infrastructure. We’ve got some material constraints as well, like tariffs, labor constraints.” He notes that this surge is not just a temporary phenomenon but a structural shift that is straining labor and materials, and is distinct from traditional consumer-driven cycles.
He cautions that the usual tools of monetary policy may be less effective in this environment:“We have a CapEx boom that’s impervious to rates. You could raise rates and the curve is up 100 basis points. Is that going to slow this? I don’t know about that, I don’t think so. So raising rates at the front end of the curve… this is not… there’s not a demand problem.”
Rob argues that rate hikes, which typically dampen consumer demand, may have limited impact on corporate-led investment surges, especially when these are driven by technological transformation and infrastructure needs.
So dive in and hear why Rob urges Fed policymakers move beyond rigid rameworks to engage directly with buinesses to see how the economic landscape is evolving.
Spoiler alert: he sees this as something Fed folk need to be doing in their regular activities. “And this is where talking to context, understanding the economy, talking to businesses is essential. And that’s part of the day to day job of the Fed.”
Focus on inflation control spooks bonds 00:01:05:19
The bond market thinks it’s more likely the Fed is going to increase rates this year. And why do they think that? The dot plot there were nine members projecting rate increases. And Kevin Warsh, as he should have, was very clear that we intend to meet our 2% inflation target, and he didn’t provide any other interpretation.
Overreaction to Dot-Plot 00:01:38:03
If I were going to have added a couple of things that maybe the market’s overreacting to the dot plot, most likely the process for the dot plot is, I submit it the week before the meeting. I probably give it. I do work on drafts and by Friday it’s in. I get a chance early the next week, the week of the FOMC meeting, to change it. But I don’t really love to. I don’t really like to do that. This one is unusual in that the war ended over the weekend. All prices are down. You call it 15 to $20. That’s a big change. And so I think Kevin Warsh tried to hint at this when he said, everybody came in with pencils. He said with large erasers, I might have added one more sentence.
Did the Dots properly weigh the pending Iran- US deal? 00:02:29:19
You know, the war just has been in a different phase and oil prices have plummeted. And so it could be that those nine rate increases if inflation stays sticky, that those are still representative. But if I had been in my former seat at the Dallas Fed, I would be urging everyone to take my submission with a grain of salt because you had a massive structural change.
Inflation pressures ae more than just oil/less that dot plot fears 00:02:56:19
Now, oik is not the only thing driving inflation. We’re in the middle of a CapEx boom, historic CapEx boom related to AI and infrastructure. We’ve got some material constraints away from well, like tariffs, labor constraints. But all was a part of this story. And so I think the market took a little bit verbatim the dot plot. But I actually think this dot plot is going to have a shorter shelf life than most.
A calming price trend is quite possible 00:03:39:18
Don’t be shocked. And the short answer is I don’t know. But if you told me oil prices are coming down $15 to $20, it’s not the be all end all. But would it shock me that it may take a couple of months? That inflation readings, as we head through the summer start to calm a little bit? It’s possible.
But oil is not the only game in town 00:04:02:07
Now the counter to what I just said. I want to be open to it. The counter is we’re in the middle of a CapEx boom, as I just said, and it’s putting strain on labor and materials, but there’s a big structural change, and it will affect the timing of what I think on monetary policy. And it may affect my thinking on the appropriateness of monetary policy.
Rob would probably have put a Dot in for a rate hike this year 00:04:25:19
I probably would have submitted a rate increase this year. I would have if I were submitting, but I would also be in my speeches that I made, assuming that the Fed presidents are still going to, you know, give their views, I’d be cautioning, you know, I’m very attuned that the structural underpinnings are changing dramatically, and I think the markets may get warm up to that idea as the days and weeks go by that.
Markets took it all in at face value 00:04:54:22
This was the first reaction; we’ll see how this unfolds over the summer. But because there was no desire to filter this or frame it or anything like that, I think the market just said, fine, we’ll take the dot plot and this chair is saying, we’re going to achieve our price stability objectives.
Warsh: We will meet out price stability objectives… 00:05:25:12
And he said it ten times. And so okay fair enough. That will probably going to have a rate increase. If he doesn’t think that < it will take a rate increase> he should have said something different than what he said?
Dual mandate begone ( for now) 00:06:08:12
He likes brevity. I’ll give you brevity. If when you say in the sense we’re going to achieve price stability, we are committed to 2% target. We’ve been above target rightly for five years. And we are. And he didn’t even mention, I don’t know if he mentioned more than once or twice employment. It was clearly clear our priority right now was price stability.
The Fed can wait…but not past September 00:06:31:23
The message if you didn’t know any of the background, the message you take from that if inflation prints stay sticky over the summer, I don’t think they’re going to I don’t know that they’ll act in July, but I would guess if I were in my former chair, I would not wait beyond September to take action.
Focus on inflation with job situation stabilized 00:07:13:23
In fairness, listen, as the statement said, employment is solid. It’s not spectacular, but it’s solid. And I think he’s sending a message which I respect. As Fed chair, we’re going to meet this. We’re going to make this price stability mandate. We’re going to do it. And you should you know, I’m telling you we’re going to do it.
What Rob would have added 00:07:38:03
But the but the market reacted to that. The only thing I would have added if I were, but I don’t think he wants to do this is say we’re aware and cognizant that this is where my view versus others inflation is not 100% a monetary policy phenomenon. There are structural factors that affect inflation. Tariffs affect inflation, immigration affects inflation CapEx and the economy affects inflation or prices affect inflation.
The economic structure can change 00:08:11:05
The Fed does not set any of those<policies>. Okay. And I would have highlighted the fact that as the structural maybe we’re going to get a comprehensive trade deal with Canada and Mexico that will surprise people positively. We’re not going to turn to immigration. So you don’t need to worry about that changing. But the oil price is changing as we speak.
Fewer Press conferences? 00:09:33:12
I don’t know how many press conferences he’s going to do. Okay. And I think he said yesterday we should do a press conference when we have something to say. I think if your approach is going to be to say as little as possible. I think he may conclude what goes with that is fewer press conferences. So you’ll also see that. So you’re and I think around the table he’s a new chair. I would want to be able I would be very respectful of the desires of the new chair. I’d want to work with the new chair. I’d give him my own views.
The SEPS could go… 00:10:20:15
But if he wants to curtail the dot plot, I don’t personally have a problem with that, or change it or limit it. In some ways I do worry. I think the dot plot you’ve heard me say before, has got the shelf life and a carton of milk. Okay, the dot plot yesterday on 100 degree day. I would add that on the one yesterday. And so what it does is it can box you and that you guys said you were going to do this. So what the hell happened to what you said? And I think he, I actually I have sympathy for the argument. You can get yourself boxed and you want to you want to go meeting a meeting and have a clean sheet every meeting you go in and don’t box yourself rhetorically. So I think you’re going to see some changes there. And I think that’s fine. Just a question of is it over the summer, in the fall, certainly by the end of the year you’re going to see changes.
Had to drop the easing bias- 00:11:21:05
Much that. Was that that I strongly agree with that, that they had to do that. And I think that was a good that was a good move.
Balance sheet reduction and plans 00:12:27:18
But but at the moment, you remember the Fed is actually injecting a little every month to try to maintain overnight operations. I think the point of it is our may be constraints at the moment. On doing any further reducing of the balance sheet. That doesn’t mean that over the horizon they won’t be able to do it. I think with regulatory reform getting underway and further along, they might be able to. And the reason he said ‘ample reserves’ <in the policy statement>, I think that communicates I’m not going to do something ideological or reckless. If we have the if we have the ability to reduce reserves and maintain reduce the balance sheet and maintain ample reserves will do it. But we’re committed to ample reserves at the moment. I don’t know that they have any room to reduce the balance sheet.
Shrinking the balance sheet will come in time 00:13:41:07
I think they will, but not at the expense of having disruption in the overnight markets. Now, this task force he talked about on the balance sheet, I would hope part of their remit will be to look at all the overnight facilities and, you know, and the functioning of the plumbing, which is a little bit jerry rigged, and maybe make a few recommendations on how to rationalize that, clean that up a bit. He’s going to have to do that in conjunction with the Treasury. And I think that may give more ability for them to do further reductions in the balance sheet. But he’s not going to be ideological or rigid about or predetermined about that. That’s what I that’s that’s what that said. And I don’t think he needed any convincing to say that.
Task force gives recommendations only 00:15:42:15
I think any said it, but he could probably in the future say it more. We’re not we’re not running the fed by committees. We have one committee that’s the FOMC and the Board of governors, and that’s how we make decisions. But these task forces are giving us outside advice. They’re not decision making bodies. And he said it. But I think it bears saying 2 or 3 more times because you don’t want to make it sound like it’s, you know, a committee is set up five committees and it sounds a little bureaucratic.
Fed should open up to outside debate 00:16:17:00
So I think he’ll be he’ll I would guess in the future he’ll be a little he’ll be a little bit careful about emphasizing the decisions on all this are by the FOMC and where appropriate, the Board of Governors. That’s who’s deciding this. However the Fed should as it’s been it’s tradition as you know, open itself up to outside debate criticism sunlight. And that’s a healthy thing. And that’s what these task forces are about.
Price pressures from one source eventually bleed out 00:17:05:20
The bid and ask for me is I want to see. So great. All prices are down. Beautiful I hope it I hope the bleed that I sense from businesses was happening from higher oil. There was a bleed from tariffs, reduced labor force growth. The CapEx boom and the strain on materials... I’m hoping the bleed will calm a little bit.
Need to see inflation progress 00:17:37:06
If it doesn’t. Yes. I’m not prepared to wait a lot longer. I’m going to look at June. I’m going to look at July. I’m going to look at August. And by September I’m going to want to be in a position. And I’d be I’d be getting my team ready. We may have to act by December if it’s, excuse me, September if things com And there’s evidence that the oil price decline is having some positive effect and bleeding into other items and the readings start to come and head in the right direction, I’d be prepared to kick the can longer, but the bid and ask is to for me to act as soon as. Probably not July, although it’s live probably as soon as September for me, and be prepared to kick the can if I see we’re getting some relief.
Prepared to act, too 00:18:25:20
But I’m prepared. I’m prepared to act.
Warsh at Jackson Hole 00:18:45:13
He may choose to be more philosophical, you know, previous Fed chairs would use that opportunity to lay out the structural trade-offs that I just went through. That may not be his bent. He may not want to do that, but we’ll see.
The full plan is… 00:19:11:09
If you’re if you want to maintain credibility and you’ve said we’re hell bent to achieve the, the inflation goal and inflation doesn’t show any sign of easing between now and September, I think you’re going to want to take some action. Now, the only other caution I’d give is, does that mean one increase the Fed funds rate? You know as well as I do, The Fed almost never does something just once. It usually never just cuts once and it seldom raises once. It usually does things at least in twos and threes. And so that’s why the market, I don’t think, is far off saying if they raise in September. Don’t be shocked that they need to do a second one by March.
Buying insurance 00:20:39:02
So let’s go through the history, as you know, from when you and I spoke, I wouldn’t have done December of last year okay. I wouldn’t have done the third cut. Fine. That’s okay. They wanted to buy labor insurance, but it shows you how quickly these narratives change. Literally in the fall of last year. And I didn’t agree with it completely. But there was the committee worried more about employment and I think bought too much insurance. Fine. So then then we were in a pause mode. And then the war started and it seems like years ago, but it was only 100 and 150 days ago. And that’s when the Fed, the view was, well, the Fed is certainly not going to raise, but it ain’t going to cut either.
Fed narrative can change quickly 00:21:26:16
It’s going to have to kick the can longer. And now we’ve moved recently to the point we’re going to raise, okay? I’m just cautioning people that are watching this that three-months… that’s an eternity. That narrative could change. And if I’m at the Fed I’m aware of the narrative could change because the facts could change.
SEPS projections can box policy onto the wrong path 00:21:48:15 -
The strait opening is not the end all, but it is a fact. And I’m aware we could go back to the pre-war narrative, which was not talking about a hike. And so I just have that in the back of my mind. Just you got to keep. And maybe this is in fairness to Kevin Warsh, he’s saying, don’t get yourself boxed. Don’t be rigid and predetermined. Keep an open mind. We’ll take it a minute at a time. And I agree with that, especially in this case.
Get feedback; keep an open mind 00:22:35:07
I think it’s a little to me, based on what I see going on in the business community, which I spend my life 80% of my time with clients, I think it’s and what they’re telling me about what’s happening with costs. I think it’s less likely, but not impossible. And all I’m saying is I don’t get any brownie points for predicting the future at the Fed. I get brownie pints for making good decisions and taking it one meet at a time. And I do think it’s wise to keep an open mind.
Both sides want the same thing essentially 00:23:35:11
So, let me put it this way. There are 100 different things that have to happen. And I’ll defer to experts. And obviously, my firm would be talking to experts every day, including in the oil business, however, both sides Iran wants revenue, United States wants lower oil prices, wants the strait open. I do know the rest of it.
US oil execs always thought this would be settled ‘soon’ 00:24:01:20
It’s going to be, you know, twists and turns and but people, I can tell you in the oil business from the moment this started, there’s a reason rig count has not skyrocketed in the United States, meaning they’ve been. Most CEOs I talked to have been cautious about going whole hog to drill more because their expectation is over the horizon.
Oil price strength bled into other sectors 00:24:30:03
The oil price is coming back down into the 70s or lower. And so they’ve been reluctant. They’re making business decisions based on the assumption that all prices are coming down okay. Not that they’re going to stay high. And so I think that’s a good guide for this. Now, the other thing I would say, and this goes to the Dallas training, which I know and love and we live with for many, many, many, many years, even though the oil price is a spike that gets ‘X’ed out, I can tell you by talking to businesses for sure, I learned that the spike had begun to bleed into 20 or 30 other items.
Need to understand the dynamic of inflation spreading 00:25:14:15
The price spike lasted long enough. If it lasted two weeks, that’s one thing. But if it lasts over 100 days, it begins to bleed. And most clients I talked to were seeing that bleed. Then the question is, if it comes back down into the 70s, does the bleed stop and reverse? And that’s the thing. If I were at the Fed, I’d be saying to my team, let’s stay all over this and try to understand this dynamic.
Dallas Trimmed mean inflation Index, good but not perfect 00:26:18:06
At the Dallas Fed I looked at that and I looked at ten other measures including the one Cleveland does in Atlanta. Does I look at everything my caution and you’ve heard me. You heard me talk in the spring of 2021, spring of 21, the Dallas trimming was running at 1617. And I was cautioning actively, don’t let that give you any comfort. Sometimes it’s a leading indicator, but sometimes it’s a lagging indicator. And and again, we were on our way to 9%. The Dallas trim mean within six months was reading at five and a fraction percent. And we had we had we had warned of it. And why when a price spike is prolonged, it it shows up in the Dallas trimming as one item when it begins to bleed and broaden, which is what happens. Then it goes to 20 or 30 items. The spike in 21 when remember was it was new cars, used cars one or 2 or 3 items that gave us gave me no comfort at all. And so I don’t think the Dallas trimmed mean is a very good leading indicator right now.
Danger if the index lags! 00:27:36:09
The danger is be careful. It might be a lagging indicator because when the bleed starts, that’s when the Dallas trimmed mean starts to go up and the bleed usually takes a few months. So I’d say look at the Dallas trimming study it Jim Domas who does it as a brilliant guy. However Dallas Fed would be the first to Warren.Don’t over read the Dallas trimmed mean.
Not a consumer driven economy 00:28:32:14
Well, and I’ll give you my own view. It’s not black or white. So here’s an example. This is not a consumer driven economy right now. The median household income is $80 grand. That’s 67 million households. They have almost no financial assets. And I can tell you they’re struggling to make ends meet. I assure you. And every client I talk to tells me how they’re seeing it. Okay. And so they’re spending and they’re employed, but they’re being very careful. Too much of consumer spending is by disproportionately by affluent the upper half of the scale. This economy is right now on the margin driven instead by CapEx, corporate spending on building AI, compute power, data center infrastructure.
Non Phillips curve economy 00:29:28:19
That’s what’s driving growth. So that’s non Phillips curve. You know, and it’s not going to show up heavily in employment. And the truth is you need a lot of construction workers for data centers and power. But then once the center is built you don’t need that many workers. And so I think you’ve got to look at all the factors in the economy.
Not demand driven but investment driven 00:29:51:23
Should you be dismissing the Phillips curve? No, you should not be dismissing the Phillips curve. However, there are other dynamics going on, and this one’s unusual. Here’s why it matters to the Fed. Fed rate increases, in my opinion, disproportionately are potent on reducing demand. Okay. One of the questions I’d be asking if I were at the Fed, we have a CapEx boom that’s impervious to rates. You could raise rates and the curve is up 100 basis points. Is that going to slow this? I don’t know about I don’t think so. So raising rates at the front end of the curve this is not there’s not a demand problem. And oh by the way if you don’t believe me we think at Goldman Sachs in the second half of this year real GDP growth is going to be closer to one and three quarters, 1.7%, not even 2%.
Consumer is solid but not strong 00:30:49:23
GDP growth is not that great because the consumer is solid but not off the charts. Good unemployment is well behaved because we have low hiring but low firing. I think this is a corporate led CapEx led boom. And that’s different than other other inflationary situations we’ve seen in the past. And I think the fed has to analyze it differently.
Policy can’t wait on the task forces to get a determination 00:31:38:05
Well, I wouldn’t wait for the task force around the table. They should be hearing this right now. They need to be out talking to context. Now, here’s the reason why this is all so tricky. There’s the infrastructure part of the AI that’s probably overall inflationary, the adoption part, which is creating a lot of this market cap surge, is in the early innings. And that should be disinflationary. That should be productivity enhancing. So you can’t you got to separate these two and analyze them differently. And I’d be pretty shocked if around the FOMC table they’re not having this discussion. I’d be disappointed if they are not having this discussion. This is not something that task force is going to explain to you.
Outreach- more important than forecasting? 00:32:27:03
This is something you need to be doing in your regular activities. And this is where talking to context, understanding the economy, talking to businesses is essential. And that’s part of the day to day job of the fed. And this is there’s never been a time I’ve seen where you don’t need to be. You know, I’d be urging my teams, let’s get let’s all be all of us.
Is Warsh the right man or these times? 00:33:00:06
I would think so. And the Fed, the the others around the Fed presidents who have, you know, the regional outreach, I think enough of them are very sensitive to this. They should be all over this. And yes, in private sessions, if I were Kevin, I’d say, let’s make sure the fact that he’s got a task force on transformation, but the transformation is a little more complicated. There are two parts of it. One might be inflationary, one might be disinflationary. But I don’t need to wait for a task force to tell me this. I’m seeing it literally. I mentioned it before we got on this every day, everywhere I go, every industry, every client we’re in, this is going on live. Now, this is not a theory.
GDP is OK not greats but corporate earnings… 00:33:48:03
This is this is we’re seeing this in practice. And this is why, by the way, GDP growth in the United States is okay not great. But look what corporate earnings are doing. Double digit growth. That’s we’re seeing a divergence between the underlying economy and corporate. And what’s driving that labor share of GDP is declining or is lower. Profit share is higher. Productivity is higher. That’s why unit labor costs are pretty well behaved right now that the fed around the table and I mean now needs to be. And I guess they are analyzing this and discussing this.
Rob is vice chairman of Goldman Sachs and a member of the Management Committee. Previously, Rob served as president and CEO of the Federal Reserve Bank of Dallas. Before joining the Fed, Rob was the Martin Marshall Professor of Management Practice and senior associate dean at Harvard Business School (HBS).
Rob initially joined Goldman Sachs in 1983 and became a partner in 1990. In 2002, he became vice chairman of the firm with global responsibility for the Investment Banking and Investment Management Divisions. He also served as co-chair of the Partnership Committee and chair of the Goldman Sachs Pine Street Leadership Program. In 1998, Rob became global co-head of Investment Banking and a member of the Management Committee. His previous roles included serving as head of Asia Pacific Investment Banking, co-chief operating officer of global Investment Banking and head of the Americas Corporate Finance Department.
Rob retired from the firm in 2006 to join HBS, becoming a senior director at that time.
Rob is chairman of Project ALS and co-chairman of the Draper Richards Kaplan Foundation. He is a board member of Harvard Medical School and St. Mark’s School of Texas, and is a member of the George W. Bush Institute’s Advisory Council. Rob is also an Advisory Board member of the Baker Institute. He serves on the Bipartisan Policy Center President’s Council and on the Board of Directors at The Holdsworth Center.
Rob is the author of three books on leadership, What You Really Need to Lead, What You’re Really Meant To Do, and What to Ask the Person in the Mirror.
Rob earned a BS from the University of Kansas in 1979 and an MBA from HBS in 1983.
