For Rob Kaplan, vice chairman of Goldman Sachs and former president of the Federal Reserve Bank of Dallas, the government shutdown has been an unequivocal headwind for growth, one that led Fed officials to be more worried about the labor market weakening than about inflation staying far above its 2% target.
”As the Fed balances inflation and employment… it was pretty hard with the government shutdown to not be more inclined to worry about the labor market,” he says.
“I think getting the government shutdown resolved, making sure people get back to work, they get paid again, their incomes get restored, will be… a positive step in at least taking that headwind for growth off the table,” Rob says. “I think with this resolved maybe we’ll have a more balanced view as we come out of this fog.”
What won’t be vanquished by the government reopening is another headwind that has not been resolved: the long list of uncertainties hanging over the economy, from what’s next for tariffs and immigration policy to next steps for the Affordable Care Act, which he hears about constantly in his conversations with business leaders and people in economic circles.
”The uncertainty is a headwind and I hear that from businesses, big and small, every day,” Rob says. “Those are all just uncertainties at a time when low, and moderate income workers have already lost purchasing power and are struggling to meet ends meet.”
So, speaking of lost purchasing power, what about inflation?, the other side of the Fed’s dual mandate coin. Now as Rob puts on his former Dallas Fed president hat, he says that he sees warning signs, and businesses do too.
”So…with the Fed approaching neutral and inflation running <as much as it is> above target it would give me a lot caution in doing further rate cuts.” Period. He also says that he does not agree with economists who are saying that with tariffs making up about half of a percentagle point of the recent rise in prices “maybe the underlying inflation is not so bad. “I’ve listened to <that arguement>…I’m not sure that many businesses would agree with that, that the bulk of tariff impact is behind us.”
Here’s Rob’s bottom line: the Fed could be making a mistake that it will regrest if it cuts the key rate now at its December meeting
”I have a funny feeling, my suspicion, my concern would be if I were at the Fed, yes. the numbers have looked weak. They don’t don’t debate that. However, they’re not falling off a cliff. And you’ve got some tailwinds coming. One of those tailwinds now I’d add, is the government reopening <which>> was a headwind will become a tailwind. So this is this makes the Fed’s job harder.
“And I’m afraid the data in the near term may not help them all that much because my concern is the weakness may be backward looking and you might see a firming into 2026. Then you’ve let’s say you cut rates in December. You’re now down to three and a half, three and three quarters. I could see where you might regret having made that move.”
So dive in and hear more about what the Fed is facing expecially when it comes to more and more people wondering if its members are wondering why it is still cutting rates with inflation so far above target. And much more: what AI boom means for the economy, how the Fed’s end of quantitative tightening is causing it adjust its “plumbing” and the fiscal questions policy makers and investors must face.
End of shutdown- good to get people back to work and paid 00:01:25.810
You’ve heard me say, tariffs in the short run are a headwind for growth. Immigration policy, lack of labor force growth. Unfilled jobs is a headwind for growth, and the government shutdown has been a headwind for growth. And I would say the combination of all three of those is a lot. I think getting the government shutdown resolved. Making sure people get back to work, they get paid again, their incomes get restored. That will be a positive step in at least taking that headwind for growth off the table. And so, as the Fed balances inflation and, employment, I think it was pretty hard with a government shutdown to not be more inclined to worry about the labor market. I think with this resolved, maybe we’ll have a more balanced view as we come out of this, fog.
Uncertainty is an ongoing impediment along with higher prices 00:02:56.510
The uncertainty is a headwind, and I hear that from businesses, big and small, every day. It’s just, I don’t know what the policies are going to be. And that could be anywhere from tariff policy to immigration policy to what are the… are we going to have a continuation of the subsidies for Affordable Care Act? Or, in fact, the premiums going to go up? Those are just all uncertainties at a time when low-modern-income workers have already lost 25% plus purchasing power and are struggling to make ends meet.
The Fed IS aware that inflation IS a real problem 00:04:06.090
Well, this is not new news to the Fed < that businesses cite inflation as a top issue> , and when I talk to businesses, that survey is completely consistent with what I’m hearing. Oh, by the way, cost of capital is not… in that survey <NFIB>, I didn’t see the survey, but I doubt it’s ranked very highly, except in, as relates to being able to obtain a mortgage. I don’t think cost of capital ranks very high right now. And so, I think the Fed’s aware inflation’s a real problem.
Tariffs and prices are a real conundrum for businesses 00:04:34.720
And on the tariffs. It depends what business you’re in, what I’m hearing. Certain businesses tell me there’s been a… there was pre-stocking. Before the tariffs went into effect, we’re now in the destocking phase, and so they expect more impact. Into next year. There are other businesses that tell me, that they’ve already tried to put some in price. Many have said they’ve already taken out a margin and will take the next year or two to regain price. But businesses are struggling to try to figure out how to limit, limit cost increases, and it is bleeding into services
So with inflation leaking in maybe inflation now is not so bad? 00:05:15.280
So, you’ve talked to me before, and I’ve said to you that with the Fed approaching neutral. And inflation running this much above target. It would give me a lot of caution in doing further rate cuts. Now, there’s one other comment. There are a number of economists who are out there saying, gee, we think the tariffs have already accounted for half a percentage point of inflation, and gee, with inflation at 3, 2 and 3 quarters to three, maybe the underlying inflation is not so bad. I don’t… I’ve heard that argument, I’ve listened to it, I’m not sure…many businesses would agree that, that the bulk of the tariff impact is behind us, but this just illustrates there’s confusion about this.
Inflation bleeds into many things 00:06:53.250
Yeah, so this is not so neat and clean as to raise prices on certain goods or certain inputs, and then it comes out very neatly and cleanly. It tends to bleed, and it affects psychology. And that, I do see that most of the places I go. And when I talk to service firms. Or, I talk to quasi-service firms, restaurants, food, you know, food service companies, they’re telling me clearly, inflation is bleeding into their business.
The Fed targets missed… and credibility lost 00:07:58.660
So when I sit in meetings with business leaders and people who, are in economic circles. There is a little bit more doubt about whether the Fed is targeting 2%. Now, I always pipe up in those meetings and say, nope, they’re not giving up on 2%, I assure you. And then the next thing is, but then why are they cutting rates then? And I said, well, they’re worried about the job market. And so, I think the point of it is…when you’re balancing weakness in the labor market and above-target inflation, Fed has got to be very careful here, in that people start to get confused about what the Fed is trying to do. And yes, I think that has seeped out there. There are some people who think that maybe the Fed is not targeting 2%, and I think there are some people, and you’ve heard them argue that maybe the Fed’s already lost credibility, and I think they’ve got to be, and I’m sure they are, they’ve got to be mindful of that.
Complex impacts from the shutdown 00:09:56.790
So, it would not surprise me that when the government numbers finally do come out, they’re going to be weak. However, and here’s why, companies I talk to, again, tariffs are slowing growth, <costs> they’re coming out of margin. Maybe some price < Price hikes>, but out of margin, and people are doing bell tightening to get the margin back. Every job that goes unfilled by a, undocumented immigrant, and there’s millions of them, there’s probably a multiplier effect, and that lost income causes a half of another job not to get created. The shutdown has weakened incomes, which should have had a ripple effect negative, again, on the job market. And so, what I hear from businesses… I haven’t talked to a single business that tells me business has fallen off a cliff. I don’t hear that anywhere. I do hear business is sluggish.
Will weak shutdown data fool Fed into making an unneeded rate cut...it will regret?
00:11:07.430
There’ll be a lag to see the effect of that <reopening>. And you’ve got tax incentives coming by, beginning of the year. You’ve got regulatory reform coming. You’ve got an AI data center power boom that we’re in the middle of. I have a funny feeling. My suspicion, my concern would be, if I were at the Fed, yes, the numbers have looked weak. Don’t debate that. However, they’re not falling off a cliff, and you’ve got some tailwinds coming. One of those tailwinds now, I’d add, is the government reopening. Was a headwind, will become a tailwind. So, this is… this makes the Fed job harder, and I’m afraid the data in the near term may not help them all that much, because my concern is the weakness may be backward-looking, and you might see a firming into 2026. Then, you’ve… let’s say you cut rates in December, you’re now down to 3.5, 3 and 3 quarters. I could see where you might regret having made that move, if inflation’s running hot into the first quarter, and the job market is firming, that’s a scenario that I wouldn’t rule out. So that’s why this is so difficult for the Fed.
A history of December goofs? 00:12:33.680
Well, there’s a… there’s a history of December regrets. If you go way back, remember the Fed was in raising cycle, and in December of 2018, they raised in December, and I think within 3 or 4 weeks, they kind of said, I wish we’d had that one back. I was there at the time. Yes, last December. I think it was a close call, and maybe they would have liked to have taken that one back. And so… there’s nothing you can do about that, but what I’d want to emphasize, this is a difficult decision. There are going to be a lot of people going into this who are 60-40, 55, 45. The reason I mention that People ask, what’s the role of the chair? The chair, if I’m 70-30, 80-20, I’m interested in what the chair thinks, but I’m going to assert my own view. Regardless. If I’m 55-45, 60-40, then I’m going to be very interesting… interested in what the chair thinks, because if I’m in that range, I might be inclined to side with the chair, even if I don’t love the decision. The Fed Chair will have a lot of sway, as he always does, he’ll have more in a period like this going into December.
Fed rate cut…A ’game-time’ decision 00:14:27.830
This’ll be a more peaceful decision if they cut rates in December. It’ll be much more controversial if they don’t. Having said that. I’m undecided, I’ll just tell you. I’ve thought about what would I do. There are times where I know 4 weeks in advance what I would do. This isn’t one of them. I… this is going to be, for me, a game-time decision. But it is possible that I would go into this meeting and not be willing to cut. Again, is it going to be 80-20, 70-30? Or is it 55-40, 60-40? And then again, as I said, I’d emphasize this, people don’t realize as much, I think… John Williams and Jay are not going to disagree. That, we know, is a certainty. I don’t think it’s ever happened where the New York Fed and the chair, I’m serious, in history, go back and look. I don’t think you’ll ever find a period where they ever disagreed. And so, that debate between the two of them. It’s going to matter a lot, because they’re not going to disagree. If they want to cut, we’re going to cut. If they don’t want to cut, I have a feeling we’re not going to cut, and they’ll, they’ll sweep up. the 55, 45, 60-40 types. And so this is a… this is a little bit of an unusual situation in that the dynamic, in my opinion, will matter a lot on those two people.
The Fed may be forced to a leap of faith 00:16:11.440
It may… so, let me put it a different way. I’m a business person. I’m used to making judgments about the future, being a risk manager, and I’m used to the fact that I’m wrong. We’re wrong. I mean, it’s just that comes with the territory. The Fed doesn’t love to make leaps into the unknown. It really doesn’t. I think the October cut I’m of the view, that wasn’t a straightforward decision, but I would have gone along with it, and I think I could sleep well at night. This one in December, I think, is really harder, because you’ve got weakness right now. Data’s not going to… I don’t think the data’s going to dispel that there isn’t weakness right now. There’s weakness. So then the question is, is it temporary? Are we about to head into a firming? And that requires a leap. They’re making the judgment, oh gee, inflation’s going to improve into next year. That requires a leap. I really hate to make that leap on inflation. I think the truth is, what I learned in my years at the Fed and since, I think there’s a much better grip on analyzing labor. Inflation is a much tougher thing to predict. It’s just harder. And it’s much harder to understand inflation. It’s a much fuzzier thing to try to get your arms around. And so that also makes this harder.|
‘AI’ many moving pieces and separate effects 00:18:12.150
So, when talking about AI, let’s separate the ecosystem. And, okay, there’s the chips company’s GPUs. There’s the infrastructure. There’s… that’s data centers and others. There’s power. Okay, that is going full bore. Then you’ve got applications. which, are going to happen downstream, industry by industry, and I would argue that is in the early innings. Okay? Most industries… I talked to are trying out use cases right now, and have not determined which use cases will work and which haven’t. They will figure it out over the next few years. The job market impact, the infrastructure part. is stimulative. It’s capex. It needs construction workers. It’s stimulative. The downstream part is the part that gobbles up workers. use cases that work means we can substitute technology capex for workers. And… and I think we’ve still got to go through that learning. And that’s why there’s a lot of uncertainty. Still, my guess will be, 5, 10 years from now, when we look back, it will have been transformative downstream. Certain use cases will be shocked, don’t work at all. Certain use cases are… work better than we thought, and there’ll be a whole range of new jobs we’re not even thinking about right now that will get created. But… but that’s where a lot of the uncertainty comes with… comes from. Downstream.
Technology: shock of the new 00:20:11.540
So I’ve just was… I was just at Harvard last week, I’ve been on campuses every… so my strong advice, it’s going to affect all of us. It’s going to affect me, it’s going to affect all of us. It’s going to affect the job a new hire does. A lot of the analytical work that new hires used to do, AI will substitute for it. That doesn’t mean there won’t be critical roles for junior people, but reading, writing, communicating, interpersonal skills, judgment. Those, I would argue, are going to be as important as ever. AI is not going to replace judgment. It’s not going to replace building a relationship. And I would say, so for those who are very heavy quantitative, and are on their device all the time, and don’t… aren’t as good at face-to-face relationships and communication. I’m urging students, you’re going to have to work on those things. You’re going to have to work on your other skills. Because at quant, you can automate, and analytical skills are still important. But it will be the review and the judgment part, and so there’ll be plenty of jobs again, but I would… I’d say students should be careful about not being too technical. or narrow, and the broader reading, the basics, reading, writing, analytical judgment skills, other skills are going to be more important. I don’t think that’s a bad thing. I think to be a junior person may be more fun than it was 25 years ago, because I don’t… I never enjoyed all the grunt work anyhow, so you can… you can… but you’re going to have to still understand it, but… but judgment’s not getting disrupted out of existence. Relationships won’t either.
A replacement for the Fed funds policy rate? 00:22:39.970
So this is… there’s been… we’ve been talking about this for at least 5 or 6 years. And so, just so… for the audience, Fed Funds rate is not a traded rate. It’s a, it’s a stated rate. Then the SOFR, the overnight, you know, financing rate, secured financing rate, is usually in the neighborhood of the midpoint of the Fed funds range. There’s a thing called the tri-party repo rate, secured rate, which is, narrower collateral, same thing, in the middle of the Fed funds rate. This is a technical issue. The thing I would say is it’s going to get debated out. I would guess it won’t get changed until you have a new chairman. What I would want to see come with it, is a review of the whole plumbing system. So right now, I would argue, you’ve got… you’ve got overnight rates, you’ve got reverse repo, you’ve got repo, reverse repo, to the point where most business people, and even people around the Fed, need to have it explained to them again every few months, because it’s so complicated. It makes me feel better. Well, and again, if you’re… if you’re an abundant reserves regime. Some of these things don’t matter. If you’ve got just more ample reserves, and you’re seeing this right now, frictions and overnight.
It’s about the plumbing 00:24:06.620
The plumbing… this is why the Fed struggles to predict how far they can do the balance sheet runoff, because they feel their way, because nobody quite understands how this plumbing works. So, I would say all this is going to get wrapped up into a broader discussion. It can wait for a new Fed chair. But they’ll either pick SOFR, or a tri-party rate, or stick with the Fed funds rate, and a lot of it will depend. Do you want ample reserves, abundant reserves? How tight are you going to run reserves, and are you going to make some changes to the plumbing? This all fits together, and I don’t know the answers yet. But I’m glad they’re discussing it. I think the plumbing is a bigger issue than the selection of rate at the moment. Yes, yes, exactly.
The fiscal stimulus was misjudged by the Fed 00:25:22.960
So, as you said, remember we had $6 trillion of extraordinary programs authorized. CARES during 2020, that was $2 trillion. American Rescue Act, another $2 trillion. Inflation Reduction Act, trillion. Infrastructure Act, bipartisan, trillion. So that’s $6 trillion in what was, at the time, a $27 trillion economy, let’s say. On average, we’re 30 today. Yeah, that stimulus is… stimulative as could be, and I argued with you, the Fed wasn’t sufficiently taking into account how big the stimulus was, and it needed to be backing off monetary stimulation sooner. And it was late in recognizing it. Okay, fair enough. So now what’s happening? The Trump administration is trying to roll back what’s left of the authorized money and not spending it. They’re trying to substitute in tax incentives. They’ve done something that should be a little bit of a headwind. They would be very upset to hear this, but some would argue, let’s put it this way, that the tariffs are a form of tax increase, which were intended to reduce offset some of the deficit. And so, the long and short of it, we just ran a $1.8 trillion deficit. Tariffs knocked that down a bit.
And not out of the fiscal woods 00:26:43.730
If the tariff regime stays in place, if they keep trying to control fiscal spending, And if growth… rebounds someI would think those $2 trillion deficits may be somewhat lower. If we grow nominally more than 4, 4.25%, based on the scoring of the recent legislation, I think you’ll see that we’ll start to deleverage some. But that’s the question. If growth is sluggish, and we don’t control spending, these deficits are going to get worse. If growth is stronger, which it may well be, I think labor force growth would help with that, by the way. Some more clarification, rationalization of the tariffs as well. If growth is stronger, and they keep controlling fiscal spending, I think you might see deficits actually improve. But we’re going to have to see which way this goes. That’s why the government standoff was not the be-all, end-all, but it was about, for one side, holding the line in their minds on spending. The counter is, you’re holding the line on spending, but for those who most need the assistance. But… but that’s the reason for that fight. They’re… they’re…determined on one side, and the administration, I think, to control spending, get more growth, and start to deleverage, and then be able to better sell the 10-year and longer Treasury, which they’re… which we’re struggling with right now.
Rob Kaplan
Rob Kaplan is Vice Chairman of Goldman Sachs and a member of the Management Committee. Previously, Mr. Kaplan served as President and CEO of the Federal Reserve Bank of Dallas. Before joining the Fed, he was the Martin Marshall Professor of Management Practice and Senior Associate Dean at Harvard Business School (HBS).
Mr. Kaplan 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, Mr. Kaplan 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.
Mr. Kaplan retired from the firm in 2006 to join HBS, becoming a Senior Director at that time.
Mr. Kaplan 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. He 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.
Mr. Kaplan 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.
