Previewing the Fed Meeting and AI IPOs

SPEAKER_1 (0:02)

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Tom Keene (0:27)

Truly appreciate that. I'm supposed to give them some lofty introduction. We have Gary Gensler and then Robert Kaplan for an extensive conversations. What it's about the former head of the Dallas Fed with all of his work. The only equivalent I can say to Robert Kaplan is Michael Spence with all he did in academics at Stanford and what he did across all of economics. But I got it. Can I do an audible start? I mean, it's closing, but I have to. Alexis just mentioned Coca-Cola.

You grew up in the Dr. Pepper belt. Were you weaned on Dr. Pepper?

Robert S. Kaplan (1:01)

I'm Dr. Pepper in Kansas City. It's Texas drink, but I drank it in Kansas City. Yes.

Tom Keene (1:07)

You have no idea how foreign that was when I was a kid.

SPEAKER_4 (1:10)

I liked Dr. Pepper.

Tom Keene (1:11)

And we'd get a can and a bottle.

SPEAKER_1 (1:14)

You'd have to split it. It's yummy.

SPEAKER_4 (1:16)

It's a little medicinal tasting for me, but I just don't send me hateful X.

Tom Keene (1:21)

Mrs. King calls her Roba Tussin.

SPEAKER_1 (1:22)

Yeah.

SPEAKER_4 (1:24)

I'm with your wife.

Tom Keene (1:25)

Robert Kaplan with us, always of Kansas and Goldman Sachs, and of course, his public service at the Dallas Fed. I look at the moment we're at, and what I want to say, Dr. Kaplan, is we want to get back to basics. What are basics for Robert Kaplan out of the election, given the news flow that's mind-numbing?

How do we get back to Robert Kaplan basics?

Robert S. Kaplan (1:52)

Two or three points.

I'd say this economy is, if it's anything AI related or defense spending related, super strong. If it's related to housing, autos, serving low modern income consumers, sluggish. Government, historically highly leveraged, and we're seeing that play out in the Treasury curve, and while that's going on, we've got a historic demand for capital to fund this AI infrastructure boom, and we're seeing that play out in rates. And on the inflation side, you got to say some of this, some of this inflation and maybe the bulk of it is structural, not necessarily cyclical. I don't know that there's an overheating of this economy. So those are some of the things that we're looking at.

Paul Sweeney (2:42)

How does the Fed put all that together over the next couple of days, do you think?

Robert S. Kaplan (2:48)

I think they should be spending, I would be spending most of my time debating how much of this is supply, how much of this is demand.

Tom Keene (2:59)

Torsten Slock's note this morning.

Robert S. Kaplan (3:01)

Yeah, and I saw his note and it's based on a paper from the San Francisco Fed and I always read Torsten Slock.

I don't know that they know. They say some of it's supply, some of it's demand, some of it's ambiguous. I think that would be where I'd be digging in a lot more. And I don't think the data is going to help you as much as being out there talking to companies.

Tom Keene (3:21)

I'm going to interrupt here because folks, you just heard the Kaplan distinction there. You got a lot of PhDs who are really trained not to say, I don't know, but this is your heritage at the Fed where you'd say, wait, we don't know, is it? There's a lot we don't know right now.

Robert S. Kaplan (3:36)

And here's why it's confusing. Diesel bleeds when diesel goes up. Turns out it's embedded in 50 other items. And so a broadening of inflation is not a surprise when diesel is this elevated. But the issue is I could raise the Fed funds rate if diesel does not come down.

The impact of raising too far too fast may be to slow already sluggish parts of the economy and it may not make a dent in inflation. And so that's the kind of thing that's the reason to skip today and raise rates but do it deliberately.

There are pros and cons to that. If I thought this was a cyclical overheating, I'd say let's get moving faster.

Paul Sweeney (4:22)

AI impact on just economic growth. A lot of folks would say if you take a look at maybe 2% real GDP growth, half of that may be related to AI.

I guess that's good as long as it's working. But boy, if it rolls over to any degree, that could be really rough for the overall economy. Do you think the Fed thinks about that?