Rob Kaplan has worn many caps in his career. He started out at Goldman Sachs. In a 2017 interview he said that he considers himself a “centrist” on monetary matters. “As a former businessman, I’d say I’m a realist,” he says. “You have to face reality, or you’ll go out of business. a realist.”
He left to teach at he Harvard Busitness School and wrote three books on leadership. I first met him when he became president of the Federal Reserve Bank of Dallas succeeding Richard Fisher who had been seen as an ardent policy hawk.
From the day Rob arrived it was hard to characterize him as a dove or a hawk perhaps because he seemed more notable as someone who caught economic and business trends early and employed them in his assessment of the U.S. economy.
Now his views are closely watched as someone who “has been there, done that,” and is now vice chair at Goldman, Sachs.
So dive in and hear what Rob has to say about the US economy and inflation and where they are likely to head next. And what this means for the Fed’s next move on interest rates.
A Fed divided means spirited policy debates and better policy 00:01:39.462
What I heard yesterday is there's a disagreement within the fed that's a good thing, in my opinion, not a bad thing. There were 7 participants who thought we should do no cuts this year. That tells me they are very concerned about inflation. There's another group. a bigger size, who thinks we should do a couple. And so they're having probably good debate internally. and what you heard is they're going to take it one meeting at a time. Wait for the situation to clarify. And then you got further amplification from Waller today, which I can comment on.
Kaplan on Waller- 00:02:56.280
So <Chris Waller> has been saying for the last number of months that there was a case to be made, he wasn't advocating for it, but it was a case to be made for looking through the tariffs as a one-time cost shock. Okay, we didn't. To my ear he didn't press it further than that today. He went a step further, and he said, I think we're getting to the point where the pause has been going on for 6 months, and we're getting to the point where maybe we need to push ourselves to in the July meeting, and look through the tariffs. I think I don't agree with everything he said, but I actually think it's a good thing that he's advocating that point of view. My own view is that we're in a disinflating world. Meaning we've got goods over capacity globally. If it weren't for the tariffs I'm pretty confident the Fed would be cutting rates now. but we do have the tariffs and so my own caveat, if I were debating this with Chris, would be, I think that's a good argument; I get what you're saying. However, we don't know what the tariffs are going to be yet. If you told me with certainty that the tariffs are going to be close to 10%. Then I think that strengthens the argument that we should be pushing ourselves to look through it. But I don't know that. And I'm not going to know that. I may not know ‘til, at the earliest, July. There's a chance we will. And so why do I say, that's a big deal? If by chance the tariffs are set closer to 20% or higher than low, to low teens to 10%, it's going to be tougher for businesses to negotiate with suppliers. It's going to be tougher to take a hundred percent out of it out of what's left out of margin. It's more likely that people may have to pass it along in prices, and it makes it more likely they may have to pass it along in more than one price increase. So the level matters, and for those who say, Well, gee! Don't we already know what the level is? I don't, and I can tell you I cover businesses every day of the week. I assure you they don't.
Still a lot we need to know to make a good policy decision 00:05:19.130
They're hopeful (businesses), and they're making assumptions, but they don't know. So I actually thought Chris’ argument was constructive. However, I would need if I were in my old seat. I need to see the tariffs actually get set or provisionally set when I say, provisionally set- even if the Administration redoes their list of tariffs, you know, redoes their liberation day in July at a lower level and says we're going to keep talking - it's provisional, meaning it's still subject to change But it (would) give me a better idea, and secondly, I would prefer to be able to see what the Tax and Budget Bill is because that I had thought earlier in the year that the tax and the Budget Bill would likely be restrictive or contractionary for fiscal policy. I think now it's more likely to be neutral or expansionary. That's a factor. Also, I'd like to see both, and so I'd like to be patient. July might mean too soon. Certainly, I think for me it would likely mean too soon to be making judgments in the July meeting, but I I will keep an open mind. I think it's more likely that it'll give me more clarity, so I can make push myself in the September meeting. But, what it signals to me is the pause. Period is not at the end. but depending on how this unfolds, which we don't know, it could be nearing the end. But again I don't know that, and if I were at the Fed I'd be reluctant to prejudge it.
A good time to wait not act 00:07:49.550
<A July rate cut> doesn't... it doesn't square to your point < on Fed credibility and hitting a 2% inflation target>. If I actually thought inflation, was likely in the near term to move up to 3%. It would push <a rate-cut move> out for me. And so obviously for me to get, you know, geared up to try to do something. I would have to believe the close numbers closer to 2.7, and it might be a temporary bump that would recede but the fact that that for some it was as high as 3.1 that's consistent with doing nothing this year.
Labor market porridge is hot, medium, and cool 00:08:56.850
So here's what I'm saying for college graduates. The labor market is surprisingly weak, as weak as I can remember in a long time. Now, the question is, what's that about a lot of kids want programmer jobs? There aren't as many programmer jobs. I think those people will find jobs, but they may not love the jobs they find. I think there's a mismatch going on for college graduates, I think overall, though what I hear from business the overall labor market is very tight, and that means construction, agriculture services. We are very tight. The college graduate issue… it's not that there aren't jobs; it's just they're not the jobs that that group wants, fair enough. But I think the overall labor market is solid. And now last comment, that doesn't mean businesses are hiring. They're not. They're reluctant to hire, but I also see they're reluctant to fire. The reason they're reluctant to fire is, we don't have labor force growth. We've got these deportations. We've got 10 million plus workers who are undocumented, who are unsure of their status, and I think businesses are worried that if they fire a worker, particularly in the service sector, construction or agriculture, they're not going to find a replacement.
Trump’s tariffs: air keeps coming out of the tariff balloon- 00:10:48.120
So phase one early in the administration is this was about Fentanyl. It was about level, the playing field, and there was a thought based on some administration comments that maybe would involve 5 or 10 countries. Then Liberation Day happened, and instead it involved 100 countries at relatively high rates. I forget what the average is of those 100, but it might have been in the thirties or 40. It was in the thirties, very high for all the talk about gee! The tariffs may average 10. That's not what happened. And people bristled they recoiled. They stepped back, and it created all sorts of uncertainty, and lots of companies are trying to. Oh, my God, how we're going to deal! If we're if we're sourcing from Vietnam, how we're going to deal with a 40, some odd percent tariff. And also they were surprised that Mexico and Canada were not stabilized, meaning, we're talking about not importing natural gas and aluminum and lumber from Canada. That's all new. And so, okay, now, where are we still a lot of uncertainty? It feels like there was the pause, like the average tariff rate, will be well below. We don't know this, though. Well below the Liberation day levels. It feels like they're moving toward some resolution with Canada and Mexico, but we don't know yet. And so I think people are hopeful. But I must admit, in the business world we still don't know, so it's hard to look through something if you don't know what you're looking through, and I don't know what we're looking through, so I don't want to look if you tell me what it is, and I'll decide whether I can look through it.
Rob would have voted WITH the committee 00:13:40.440
If I were at the fed I would be, I would have agreed. No action in June. What would I have submitted in the dot plot probably 2, maybe one, but probably 2. And and in my and in my speech, in my comments outside the fed, I'd be saying exactly what I'm saying to you, which is, I want to wait to see where the tariffs are set, and I don't know where they're going to be set. I I'm sympathetic to Waller's argument, except it depends- that argument will have more or less weight, depending on where the tariffs are set, and I don't know where they're going to be set.
A lot of consumers under duress- 00:14:42.980
It does, it does matter. And here's why it matters. We've got you pick the number 80 million roughly workers in this country that make $55,000 a year or less. They've lost 25% plus or minus purchasing power in the last 4 years, and they are struggling to make ends meet, I can tell you. They do not tend to have financial assets. They're working 2 jobs if they can. Their kids are dropping out of school sometimes to help make ends meet, and this high inflation has been very stressful. If headline inflation is 2%, the low, moderate income family inflation rate, might be 3 or 4% because of the share of wallet they spend. And so I still think 2%'s a good number.
We are living in a disinflationary world 00:15:36.740
Why? Why have we been above target for so long? We had a supply shock. and then I would argue, and you know, from talking to me over the years. We had an excess demand shock, driven forcefully, historically, by excess fiscal spending. The Covid Gap was one and 3 quarters trillion, and we've authorized 6 trillion of extraordinary spending, and we're running extraordinarily high deficits. No wonder it's not a shock to me that we're above target. I would have if you told me those facts in advance, I'd say it's going to create. You know, it's going to heat up demand for workers and and maybe not goods but workers. And it's going to be service sector. Inflation is going to be sticky. And it has been, I would guess, if we can get this Government directed spending contained or reduced. I don't like the deficits where we're looking to run, but they're more money in people's pockets, you know, tax and overtime tax on tips etc. I still believe we're in a disinflationary world. I would like to see eventually a ramp up in legal immigration. So we get more labor, force, growth. And I think in a more equilibrium world, where, remember, technology and technology enabled disruption is highly AI highly disinflationary. I still think 2% is a good target, and I wouldn't be running away from it.
Labor market: tight is not strong 00:17:07.430
<wage pressure> tells you the labor market is tight. So to me there's a difference between strong and tight, strong means. Oh, my God employers just increasing their bid for workers that's not happening. But,<in this case>, they're not firing because they're worried about supply. And we don't have any immigration flows, or they've dwindled, and so we it tells me we’ve got a very tight labor force, and that's exactly what I'm seeing. Everywhere I go.
AI, AI…OH! Productivity and implied responsibility 00:17:56.570
As a business person, and I would say, this is reflected of most business people I talk to, I think business people are thinking that we may be embarking on a golden era of productivity growth. In other words, we're going to step up. Now, in order for that to happen. We've got to do a dramatically better job taking people who lose their jobs and improving early child education, skills, training digital divide. Maybe fewer people go to college more, go for skills training to get people into these new jobs and to repot them if they lose their jobs. But I think every business. I know it's mandatory, it's a priority to spend on, it's not optional. And if I don't think I can do it myself, I need to get bigger. I need to merge. I need to do something to do this because it could leave me in the dust if I don't. And so I'm optimistic. We're going see productivity improvements. But we're going have to work through helping people readjust to these positive improvements. And we've not been great at it. We've got to get better.
Adaptability: the key to weathering labor market shocks 00:19:24.230
Adaptability. You're going see more businesses disrupted out of existence. You're going see more functions, disrupted drivers disrupted. They're going to have to find new jobs in their career. And that means adaptability. And, by the way, adaptability sounds great until you're the one who has to do it. And then and then it's it's it's challenge. But we have to help people make the transition because it's going to be more and more frequent.
A tariff headwind for growth, but optimistic 00:20:11.580
Well, there's no getting around at this moment. Growth is sluggish in the United States. I think the tariffs are part of it. Labor force growth is lower is going to be a headwind for growth. We don't have the productivity jump up. So yeah, growth sluggish, no doubt. And then we've got a cost shock coming. Well, we have a cost shock that's partially here, and we don't know how much more is coming. And so I mean stagflation connotes that it's a more permanent condition. The tariffs I still think over the horizon… the world will be disinflating. But this disinflation has been interrupted by the by the tariffs for 6 or 9 months. This is why the ECB is cutting and the Fed is on hold. It's a different set of facts. And so in the near term, yes, slower growth, stickier prices over the horizon. I think we're going to be getting back to 2% inflation. And then it's going to be a function of can we settle down, create more business certainty, get these productivity improvements? The tax incentives will kick in. And you know I'm optimistic. We're going to get better growth into next year.
Kaplan relives the new framework SNAFU 00:22:18.050
Well, so you remember, back to the Framework Review… I agreed.with the last framework, subject to one essential condition, which I was very vocal about. I do not want to make any current commitments to future actions. Okay. (Kathleen: Yes, you had a dissent at the September meeting.) Well, and also, even on the framework. My vote for the framework was subject to no current commitments from here to future actions, because the world is changing. And what we went and did right out of the box is make a very bold commitment to keeping rates at 0, and then ultimately, a couple of months later, to buying bonds, basically until we hit full employment. And I just didn't agree with it because it tied us up while we were doing that the Administration passed. Then another 2 trillion of the American Rescue Act, another trillion of Inflation Reduction Act, a trillion of the infrastructure and Chips act so. What happened? Too much fiscal, too much monetary, and I think the fed a little bit handcuffed itself. We should have been tapering in sometime in 21 and starting to raise rates much sooner. And so, yeah, that was a mistake. Now we're in a different situation. So that was a mistake where the fed might have been off by a year or more.
Lesson learned? 00:23:46.330
< at the time> I said. We've missed it not by a little. We're off by a year, year and a quarter year and a half at least a year. I don't think the Fed's in that position right now. The Fed is either going to be a meeting or 2 meetings late. He isn’t going to be a year late this is going to be. If the Fed's late, it'll be a tactical mistake, not a strategic error. 2122 was a strategic error. meaning that was a multi-month multi-year which we're still digging out. I think the Fed will get it right. It's been in the transitory period, the ghost of transitory is alive and well. And what do I mean by the ghost of transitory? The move to predict in advance what's going to happen and jump in. The Fed got burned by that. And I don't blame them for doing what I'm about to say… They don't want to get burned again by jumping in front of these tariffs when they don't know. and saying oops! I didn't understand what I was jumping in front of, and shucks! I should have waited. That's a little bit people should understand. These are human beings, and these human beings, I think, are having a very rational reaction. They want to be a little more patient and not jump in front and make predictions. They want to be risk managers, not prognosticators. They didn't do that in 2021. They want to do it now, and I understand that.
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